Commodities have traditionally been regarded as something of a “niche”
investment. They were seen as rather too exotic for run-of-the-mill
investors and mention of the word “commodity” tended to conjure up images of
large men in stripey jackets trading pork belly futures.
But the picture has now completely changed. You can, if you want, still buy
pork bellies, but they are just one of dozens of commodities on offer in
what is now a much more sophisticated market. Today commodities are used
much more extensively in the wealth management industry and are more readily
accessible to the ordinary investor thanks to a rapid growth in
exchange-traded funds (ETFs), which replicate the rise and fall of a
commodity, or basket of commodities, and can be placed in individual savings
accounts (Isas).
Mike Horseman of Cockburn Lucas, an independent financial adviser, says:
“Commodities are definitely going to play a bigger part in people’s
investment decisions in the future. Until now most private investors have
been underweight in commodities but that’s all set to change. There’s a
general move to realign portfolios and include more commodity-based
investments in them. We would say individuals should allocate as much as 10
to 15 per cent of their portfolios to commodities.”
He identifies two principal reasons why commodities are poised to do well in
the coming years. “First of all emerging markets are becoming massive
consumers of commodities of all kinds. They require things like iron ore,
timber and copper for their huge infrastructure projects. Second, the growth
in the world’s population means that there will be increasing pressure on
scarce global resources. There will be a rising demand for agricultural
commodities and also water, which is set to become a highly valuable
commodity in its own right.”
Commodities can be broken down into four basic categories: energy, precious
metals, base metals and agricultural products. Virtually all did well in
2009 thanks to the large amounts of money pumped into the global economy.
But in the past month many sectors experienced a setback, with industrial
metals, energy and agriculture all falling by 7 or 8 per cent. Nicholas
Brooks, head of research and strategy at ETF Securities, which offers a
range of commodity ETFs, says: “We are now at a crossroads, with no clear
direction in commodity markets.”
In the case of energy, he says, the price of oil rose quite sharply in the
final part of last year to about $75 (£47) a barrel. But now there is a
plentiful supply of both oil and gas, which has resulted in a steadying of
prices. However, the outlook for oil and gas is good, with big demand for
energy-related products in emerging economies such as India and China.
He thinks that agricultural commodities look attractive. He points out that
demand is less affected by the business cycle than other commodity sectors,
because people still have to eat, whatever the financial situation. He says:
“We are seeing a structural increase in global demand for meat as people
become wealthier, especially in places such as China. The same process is
pushing up consumption of coffee and cocoa. Cereals also look attractive,
both because of increased demand for products such as bread and because
cereals play a big part in supplying animal feed for meat production. Large
amounts of the US cereal crop are now going towards production of ethanol to
power vehicles.”
Precious metals performed impressively last year, with silver up 57 per cent
and palladium up 114 per cent. But since metals are priced in dollars, any
strengthening of the currency could hit metal prices in the short term with
any rise in the dollar giving investors less metal for their buck. Base
metals performed even more spectacularly than precious metals last year,
with copper and lead both rising by about 130 per cent in 12 months. But now
Mr Brooks thinks they may be vulnerable after their rapid upward move.
“Stocks of metals are now very high so there is no scarcity factor to
support prices. They could be hit if the economy stalls. Aluminium looks
especially vulnerable because its inventory levels are particularly high.
Copper too could be vulnerable in the short term, but its long-term
prospects look good with all the continuing demand from China.”
Overall, says Mr Brooks, caution is the best policy for 2010. “The easy gains
of last year are behind us and the next 18 months will be more difficult.
However, on a three-to-five-year view I am quite optimistic. Right now
agricultural commodities and precious metals look the best defensive bet
while on a medium-term view energy prices are supported by solid demand.”
Adrian Lowcock of Bestinvest, the independent financial adviser, says that
investors should be on their guard against the possibility of a commodities
bubble. He says: “With more ETFs being launched every day to provide
individual investors with direct exposure to individual commodities and with
billions of pounds being poured into these new funds, growth in these
investments will certainly lead to further speculation that a bubble is
forming.
He adds: “Those looking for exposure to commodities should take a close look
at the ETF they are planning to invest in, find out what the investment is
collateralised against and make sure that they understand the risks.”
Our experts pick their investment performers
Best funds
Mike Horseman, of Cockburn Lucas, the independent financial adviser,
recommends the Marlborough ETF Commodity Fund as a good generalist
exchange-traded fund. “It gives broad exposure to all sectors of the
commodity market, including industrial and precious metals, energy and
agriculture, and the managers are free to switch between them as they
choose.”
For a more specialised option, he goes for Sarasin Agrisar Fund, which invests
in agricultural or food-related companies, providing exposure to the entire
length of the food chain. His third choice is Thames River Agriculture and
Water Fund, concentrating, as the name implies, on agricultural and
water-related stocks.
Mick Gilligan, of Killik & Co, the stockbroker, likes BlackRock World
Mining investment trust. “It invests in mining companies around the globe,
producing both base and precious metals. There is a bias towards larger
companies and the trust stands at a 15 per cent discount to net asset value.”
For a mix of metals and oil, he selects the City Natural Resources investment
trust. “It is focused more on medium and smaller companies, including some
mining of very specialised metals, and stands at a 17 per cent discount.”
His third choice is PowerShares Global Agriculture ETF. This tracks the Nasdaq
Agriculture Index, which includes companies such as Monsanto, the chemicals
company, and John Deere, the tractor manufacturer.
Isa surgery
How does a stocks and shares Isa work?
We invest in cash Isas but are missing out on stocks and shares Isas. As older
people we do not understand what they are or how to buy them. Can we just
invest in shares and then call them equity Isas or do we have to pay someone
to manage the operation, thus reducing the amount available to invest? Can
we invest for this year and last year?
Simeone Salik If you want to invest in a stocks and shares Isa, you first have
to apply to an Isa manager and then put your money in. You can use your
money to buy shares, investment trusts or unit trusts, or a combination of
all three, depending on what your Isa manger permits. It is a good idea to
check in advance what the manager offers. You will almost always have to pay
your manager for administering your Isa although the charges are not
normally excessive. If you buy shares you will also have normal sharedealing
costs.
You cannot carry over annual Isa allowances from one year to another so you
cannot invest anything now for the 2008-09 tax year. However over-fifties
can invest a total of £10,200 in Isas in the current financial year. So
subtract from £10,200 what you have put into a cash Isa this year and the
resulting figure can be invested in a stocks and shares Isa by April 5.
I recently noticed that the money in my Alliance & Leicester Direct Isa
issue 4 was earning virtually no interest. After trying unsuccessfully to
contact an adviser at my local branch I am now considering moving the money
to another bank or building society. Can I do so without losing the
tax-protected status of the money?
Alistair Higgins Yes you can, although you will need to check two things.
First that your existing Isa provider does not impose a penalty on
transfers. Alliance & Leicester imposes an interest penalty for
transferring on notice accounts and you would need to weigh the cost of any
penalty against the benefit to be obtained by a transfer. Then you need to
ensure that your intended new provider allows you to transfer. Most do, but
a few don’t.
What can you do to limit losses from a stocks and shares Isa? If you suddenly
feel that the market is heading south can you cash in your funds without
losing the Isa wrapper protection?
Steve Mack This is a very good question as people rarely pay as much attention
to selling shares as to buying them.
If you have a self-select Isa, where you are free to buy and sell as you wish,
there will be no problem. You simply sell up and then hold the cash in your
Isa until you are ready to reinvest it.
However, the picture is different if you have bought a couple of funds from a
fund manager who has also provided the Isa wrapper. Peter Shipp, of the Tax
Incentivised Savings Association, says that most fund managers who also act
as Isa managers are not allowed to hold cash in these Isas. So if you wanted
to cash in your holdings you would have to come out of the Isa wrapper along
with your cash.
Mr Shipp adds: “To keep your money within the Isa umbrella, you could try to
switch your cash to a money market fund either with the same fund manager
(if it has one) or another manager. Or you could transfer to a self-select
Isa where you could leave your cash untouched for as long as you want. ”
Send your questions to Mark Atherton at Times Money, 1 Pennington Street,
London E98 1TB or e-mail: mark.atherton@thetimes.co.uk
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