Hot commodities or one-hit wonders?
Are commodities the Terry Jacks of the investment world or, like the Rolling Stones, do they have many ‘Seasons in the Sun’ to come?
Over the past year, the commodity and energy sector has trounced developed countries’ equity markets. The only other sector that came close performance-wise was emerging markets, which is not surprising when you consider how much of the world’s supply and demand is driven by emerging economies like China and India.
Perhaps more interesting is the fact that, while the developed countries’ equity
markets have struggled to break even over the past year (the only one to
do so was Europe ex UK) commodities have stormed on regardless. The weak
relationship between commodities and other sectors makes them an excellent
diversifier within your portfolio. Mixing assets that don’t react the same way in
a crisis guards you against losing on all fronts. Surprisingly, volatile as this sector
is, making commodities a modest part of your portfolio could potentially help you
achieve steadier overall returns over the long term.
Source: Lipper. Produced using Hindsight 5 by AEGON Scottish Equitable. ABI sector averages were
used to represent the equity markets shown. Past performance is no guide to future performance.
Reasons why this sector is not just a one-hit wonder
At a recent teleconference, Ian Henderson, manager of the highly successful JPMorgan Natural Resources fund, outlined his reasons for believing that the natural resources sector will continue to grow.
The main ones were:
- Credit crunch
The recent financial crisis has seen governments in the western world propping up the financial sector by effectively printing money. This is normally a tactic associated with third world countries, not the European or US economies, and has the effect of debasing their currencies, increasing inflation and thereby strengthening the case for hard, real assets like gold. - Sector undervalued
Despite the fact that companies involved in commodities and natural resources have seen phenomenal profits, share prices still don’t reflect this so there’s still tremendous value in this sector as well as considerable scope for growth. - Demand far outstrips supply
For a number of reasons, supply still falls well short of demand for most commodities. The voracious appetite of emerging market economies such as India and China has meant that the demand for major commodities such as oil, coal, iron ore, grain and base metal has gone through the roof. - Weather patterns hit supply
Commodities in general are highly sensitive to factors affecting supply. One such factor is severe weather. If you believe that global warming is a real threat then you may also agree with Ian Henderson that recent, severe flooding and cold patterns affecting grain and coal production in areas of the world like Ukraine, Australia and China will continue to affect supplies of key commodities. This inevitably results in soaring prices, such as we’ve seen in food prices globally.
Scottish Equitable JPMorgan Natural Resources fund
The Scottish Equitable JPMorgan Natural Resources fund invests in commodities in markets throughout the world and it’s one of the leading funds in the commodities sector. It’s managed by Ian Henderson, who has over 30 years’ experience in the sector and is A-rated by Citywire*. The fund is also rated AA by OBSR* *Source: as at 31 March 2008.
If you agree that commodities are more than just a flash in the pan and you can afford to commit to a longer-term investment, why not ask your financial adviser how to invest through an AEGON Scottish Equitable pension or investment bond.
Please remember that past performance is no guide to future performance and the value of investments can go down as well as up. We’ve given this fund a rating of ‘higher’ in terms of risk, meaning it may experience significant fluctuations in value from day to day. Please note that the risk rating for each of our funds is based on its risk relative to other funds within our full fund range. It’s not its risk compared against industry benchmarks.
