Fund Ideas - Commodities
Investing in commodities can be a bit of a rollercoaster ride. While probably not for the more cautious investor, there’s a good argument to be made for incorporating a bit of commodity exposure within your portfolio. James Davies offers an insight to commodity investing in this article and some fund options for interested investors.
Because the price of raw materials is a factor in driving up the cost of living, investing in commodities can be a good way of hedging against the effects of inflation.
Of course it’s difficult to store significant quantities of aluminium or lean hogs in your garage (and probably a touch smelly in the case of the latter), so the easiest and best way to invest into commodities is either through an Exchange Traded Commodity (ETC) fund or a fund that invests into the shares of companies involved in commodity related industries (such as mining or agricultural fertilisers).
An ETC is a share linked to the performance of a particular commodity index – often a single commodity. It is the cheapest way of getting exposure to commodities; however, ETC’s can be more volatile than straight forward funds that invest into natural resources stocks.
Most people will not be looking for particular exposure to one commodity (with the possible exception of gold), so the ‘stocks and shares’ fund route is probably the best route for most investors when allocating to commodities.
While there are plenty of funds that invest into the commodities sector, there are relatively few that are readily accessible to UK investors. The three general commodity funds that I believe it’s worth highlighting are the First State Global Resources, Investec Enhanced Natural Resources and the JPM Natural Resources. All of these funds are available for purchase through Chartwell Direct at 0% initial charge.
Over 1 year to 1 August 2009 the funds delivered the following returns (data quoted is net of charges with any dividends reinvested):
Investec Enhanced Natural Resources + 12.9%
JPM Natural Resources - 13.6%
First State Global Resources - 18.6%
Source: Financial Express Analytics. Past performance is not a guide to future returns.
Investec Enhanced Natural Resources Fund
This fund draws on one of the largest resource and commodity teams in the world and is able to potentially deliver returns whatever the market conditions. The managers may use shorting, as well as the use of a range of derivatives, to control risk within the fund and protect the fund during a falling market.
The broad remit the managers have to invest across the full commodities spectrum (i.e. raw materials and agricultural), as well as the use of commodity equity stocks combined with ETC’s, has allowed the fund to post positive returns in one of the most challenging environments for commodity funds in recent times.
While commodity funds are high risk, the Investec Enhanced Natural Resources Fund arguably is as much about controlling risk and volatility, as it is adding returns through stock selection.
If you would like to invest in any of these funds, either within or outside of an ISA, please do not hesitate to contact our Investment Helpdesk on 01225 823915 or alternatively click here to access our literature library for application forms.
N.B. The above article does not represent a personal recommendation or financial advice of any kind. If you are unsure of your investment please contact us as above to discuss our advisory services.