By Jade Hemeon –
Commodities have been making big headlines lately. Tight supply and surging global demand fuelled by China and India are boosting the prices of a range of products from energy and metals to coffee and orange juice. The Commodity Research Bureau (CRB) Index is hitting heights not seen in 24 years, and at March 31 was up 10.5% on a yearly basis. Investors who have limited their portfolios to stocks and bonds are taking notice of commodities as a viable asset class. Many want to dip their toe into commodities markets, but don’t know how to go about it, and in many cases, neither do their financial advisors.
Commodity traders use highly leveraged futures contracts and options to buy and sell assets such as gold, silver, grain, oil, pork bellies and cocoa. Commodity prices react to a variety of supply-and-demand factors, as well as the influence of speculators. Those who don’t fancy taking a flier on a futures contract themselves can gain diversified exposure through a handful of funds available in Canada. The AGF Managed Futures Fund is one of the few pure commodities funds listed by the Investment Funds Institute of Canada. Friedberg Diversified also invests in commodity futures, as does the Asset Logics Managed Futures Fund. The latter fund was sold last September by its former sponsor, Dynamic Mutual Funds Ltd., to the fund’s long-time manager, Doug Sereda, president of Asset Logics Capital Management Inc. in Vancouver.
In addition, a variety of hedge funds and related structured notes invest in commodities along with other sophisticated investments. For example, Tricycle Asset Management Corp. offers a series of structured notes where the return is based on a diversified portfolio of managed futures contracts managed by a handful of different professional traders. The traders are diversified by trading style and market sector, and investments include commodities, currencies, interest rates and stock indices. The minimum initial investment is $2,000.
AGF Managed Futures, which also requires a minimum investment of $2,000, diversifies across a broad mix of physical commodities, including grain, precious metals and energy, as well as the soft commodities such as coffee, sugar, cocoa and orange juice, also known as “tropical” or “breakfast” commodities. Unlike most alternative-strategy hedge funds or structured notes, it holds no financial futures, which means no overlap with stock, bond and currency markets.
“The fund may employ both long and short strategies in commodities markets, which means it can potentially make gains in up, down or sideways markets,” says portfolio manager Zoran Vojvodic. “Right now we are in a bit of a sideways market, which is a normal corrective process while the market digests earlier gains. The market is reacting to some uncertainty about the pace of global growth, but I expect commodity prices to push higher and break into new territory either later this year or early next year.”
The AGF Managed Futures Fund shows an average annual return of 28.5% for the three years ended March 31, although it has acted like a bucking bronco along the way. Mr. Vojvodic took over the reins in March, 2002, and rode the fund to a 71.7% gain that year. In 2003, the fund dropped 41.8%, and in 2004 it soared back with a 47.5% gain. Mr. Vojvodic says restrictions have recently been put in place that will temper some of the volatility on both the upside and downside.
New York-based Investment guru Jim Rogers, perhaps best known as co-founder with George Soros of the Quantum Fund, has made a vast fortune by spotting trends early and wading in when others had no interest. He became seriously interested in commodities around the time the technology bubble was moving into high gear. He devised his own commodities index and investment fund to track it. Both are up about 190% since inception in August, 1998. Mr. Rogers predicts there are many years of gains ahead, not withstanding the inevitable dips and corrections along the way.
“I am convinced that value and strength in the commodities markets will continue for years to come — that we are, in fact, in the midst of a long-term secular bull market,” writes Mr. Rogers in his recently published book, Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market (Random House, 272 pp., $25.17). He has repeated a similar message in recent speaking engagements in Toronto, noting that the 20th century saw three long commodities bull markets, each lasting a little more than 17 years. According to his figuring, the latest boom began in early 1999, which means it has legs to last another 12 years or so.
The Diapason Rogers Commodity Index Fund, which replicates the Rogers index, is available to investors willing to put up the US$100,000 minimum investment. An open-end mutual fund, it is managed and distributed by Diapason Commodities Management SA of Switzerland (www.diapason-cm.com) and registered in the Cayman Islands.
The commodities boom will likely bring a flood of new investment vehicles out of the woodwork if it continues to gather force. On April 1, the Dynamic Diversified Real Asset Fund was launched, with a mandate to invest in hard assets such as real estate, precious metals and natural resources. Designed as an inflation hedge, the fund will invest in stocks, commodities and real-return fixed income securities. Also moving on the trend is Criterion Investments, a subsidiary of VenGrowth Asset Management, which filed a preliminary prospectus in April for the Criterion Dow Jones-AIG Commodity Index Fund, designed to track its namesake index.
Source: National Post