The world of commodity investing Go compare with our comparison table

The world of commodity investing

31 May 2011 / by Paul Dicken

Whether it’s petrol prices, energy bill increases, or in the case of recent weeks, a high profile stock market flotation, commodities and natural resources are frequently on people’s agendas.

When it comes to investing, there is a constant debate around individual commodities such as oil, gold, silver and platinum as investment assets.

Opinions differ on what leads to price rises; some believe the price of gold to be an unfounded asset bubble while others see it as demand for what is a dependable store of value.

Meanwhile, other commodities from oil to copper can see prices go up and down based on seasonal affects, global demand factors or political events.

Despite this, over time the price of finite commodities has increased. The finite nature of some materials and resources, and sustained demand for them, is seen as a lasting investment theme, which can yield returns.

The team behind the JP Morgan Natural Resources Fund believe the ‘long term demand/supply situation in many commodities’ makes the area an attractive investment proposition.

Volatility

Prices of most commodities can change rapidly – upwards and downwards. Glencore, which trades, mines and produces commodities, went straight into the FTSE 100 Index of the largest listed companies when it floated on the London Stock Exchange on 24 May.

Glencore is a global firm which dates back to the 1970s and has profited from the demand for and supply of commodities.

But when it comes to directly trading commodities, the volatility of the market may mean it is best left to professionals, not least because they are more likely to have the margins to absorb losses.

Investment funds

Through the Fair Investment Company ISA and Investment Account and SIPP, you can invest in  Select 100 funds offering exposure to commodities. These funds invest in the equity of companies in this sector, such as mining firms.

The advantage of this is that the funds are investing in a more diverse and liquid market, though still potentially volatile.

BlackRock Gold and General Fund

The Gold and General fund invests specifically in gold and other precious metals such as platinum. Its holdings are primarily mining companies which are exposed to the change in the price of gold.

Gold is generally seen as a defensive investment that does well when other assets are seen to be carrying excessive risk.

So in the last monthly report for the fund, the fund manager Evy Hambro said high levels of inflation in Asia and Europe, coupled with concerns over on-going issues in the Middle East and North Africa, provided a supportive backdrop for the price of gold.

In this context the price of gold is quite sensitive, or correlated, to other assets but inversely. So, if interest rates are low, making cash an unattractive investment option, demand for gold will often increase.

Because of the potential for volatility, it is seen as a fund suitable for helping to diversify a larger investment portfolio that is also investing in other areas.

First State Global Resources Fund

This is a fund with exposure to precious metals but a more diversified portfolio with investments in general mining firms, and areas like oil exploration.

Still sensitive to changing commodity prices, the Global Resources Fund has a diverse exposure to different metals and natural resources, meaning it can benefit from different economic circumstances, which could be supportive of some companies but not others.

In a recent investment report the fund pointed to the correlation that exists between commodity demand and emerging markets. “There are concerns that Chinese inflation will prompt authorities to introduce further tightening measures which could negatively impact resource companies,” the fund managers said.

Merger and acquisitions activity is anticipated in the resources sector during 2011 which may prove a boost to some investors. The First State team said in April the Brazilian mining firm Vale had made a bid for an African base metals producer Metorex, while mining giant Rio Tinto now has a majority stake in South African coal mining company Riversdale.

In terms of sectors this is also a specialist fund and is likely to experience greater volatility than funds exposed to a variety of sectors and assets.

JP Morgan Natural Resources Fund

Investing in similar areas to the First State Fund, the JP Morgan Natural Resources Fund, like the BlackRock and First State funds, is a growth fund.

The fund’s holdings are focussed around mining stocks, with holdings including Xstrata, Anglo American and Rio Tinto – all global miners of various metals and resources, such as coal.

The fund is also exposed to precious metals. At the end of March this year the fund managers said its exposure to gold was important as a ‘defensive position’ against deterioration in the market situation in the Middle East or Europe, as well as protection against inflation.

Performance

Over the long term all three funds have delivered capital growth for investors; although, as funds with complete exposure to stocks and shares, they suffered significant losses in late 2008 to 2009 during the financial crisis.

Ups and downs in the performance of the funds in the first five months of 2011 also illustrates the volatility commodity funds can experience along the way as they aim to return capital growth.

Invest in all Select 100 funds as ISA, general investment or SIPP investments at 0.00% initial charge »

No news, feature article or comment should be seen as a personal recommendation to invest.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.

Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.


© Fair Investment Company Ltd

Commodity Funds
Fund ManagerFundSectorFactsheetMore info
BlackRock Gold & GeneralSpecialistFactsheetMore Info >
This is a specialist unit trust which aims to achieve long term capital growth by investing in gold mining and precious metal-related shares. It tends to be volatile and is particularly suitable for diversification in a larger portfolio. See latest fund factsheet for details.
First State Global Resources Fund SpecialistFactsheetMore Info >
Aims to achieve capital growth by investing in the natural resources and energy sectors globally. Save 100% on initial fund charges.
JP Morgan Natural ResourcesSpecialistFactsheetMore Info >
The Fund aims to invest primarily in the shares of companies throughout the world engaged in the production and marketing of commodities. The fund aims to provide capital growth over the long term.See latest fund factsheet for details.
Fidelity Multi Asset Strategic Cautious ManagedFactsheetMore Info >
The Fund aims to provide moderate long-term capital growth by investing in a range of global assets providing exposure to bonds, equities, commodities, property and cash. See latest fund factsheet for details.
Multi Manager DiversityCautious Managed FactsheetMore Info >
The Fund aims to achieve long-term capital growth in excess of inflation through investment in a portfolio which gives exposure to a wide range of asset classes and geographic regions. See latest fund factsheet for details.

The value of investments and any return from them can fall as well as rise and you may not get back the full amount invested. Please ensure that you read the Important Risk Information below.