March 7, 2005
By Tim Wood
TORONTO (ResourceInvestor.com) -- Ingrid Sternby, commodities analyst for Barclays Capital in London, says “unconventional investors” are playing an important price supportive role in commodity markets as the cycle matures.
Speaking at the PDAC 2005 mining jamboree { Listen to Ingrid Sternby}, Sternby said that historically high metal prices, at least in nominal terms, were discouraging further hedge fund participation. “There is a much less attractive risk-reward ratio and hedge funds are now mainly involved in protective option trades.
She also said that technically driven commodity trading advisor fund activity had also “dried up” as prices for copper, nickel, lead and even zinc have hit multi-year highs, but more especially after extreme volatility in the past year.
That hasn’t spooked “unconventional” investors in commodities such as pension and mutual funds which Sternby said are more active through indices and structured products.
“Mutual funds have seen a massive increase in interest in commodity investment,” she explained, adding that total funds under management among the three largest US houses interested in the sector had risen from $280 million two years ago, to almost $6 billion today.
“This is only a fraction of the total funds under management.”
Assessing the impact of this fund activity on metals prices, Sternby said it was still quite muted. That’s because the funds account for less than 5% of total commodity turnover every month, and perhaps 15% in base metals.
“The interest among these funds to buy commodities as an alternative investment shows no signs of stopping; rather the opposite,” she said, attributing it to the upside risk for inflation and uncertainty over equity market performances.
Sternby said: “Inversely correlated commodity markets are regarded as an attractive portfolio diversifier. This interest has been improved by very attractive returns, not least given the backwardations.”
At a recent Barclays commodity conference in London, two thirds of funds attending admitted no exposure to the sector. However, two thirds did say that over the next two years they were likely to have more than 5% of their portfolios geared to commodities.
“In other words, there’s huge potential for more investment money flowing into copper from these type of funds, which are longer-term in nature,” she said.
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