BT Financial Group has opened up its in-house commodities investment fund to the institutional marketplace, broadening its alternatives product range beyond it hedge funds-of-funds business

The commodities fund, which has about $100 million invested, seeded in 2002 with $20 million by the former Rothschild Australia, is designed to track the Dow Jones AIG commodities index. The futures contracts are managed by US-based Banque AIG, while the collateral – cash deposits – is managed by BT. Richard Keary, the head of BT’s alternative investments unit, said the investment is as much about portfolio diversification and reducing overall risk, as the expected future returns from the asset class. However, both he and AIG’s Richard Gibson said at a press briefing last Friday, that the commodities story was a solid one and was not dependent on the spot price for oil, which is still hovering near record levels. Unlike the Goldman Sachs commodities index, which currently has about a 70 per cent weighting to energy (mainly oil), the Dow Jones AIG index is rebalanced each January, with no sector accounting for more than 33 per cent and no single commodity more than 15 per cent – at least at the start of the year. Commodities futures have three components to their total returns: the collateral yield, risk premium or rolling yield, and unexpected spot price movements. As a result, for instance, oil futures rose by 87 per cent between 1983 and 1993, when the spot price for oil declined 53 per cent. The risk/return profile of futures is similar to that of US equities, however, they are inversely correlated and represent a better hedge against inflation and interest rates – hence the reduced risk at a total portfolio level. It is therefore a different investment decision than deciding to overweight resources stocks, based on the fundamental drivers of commodities prices. Resources stocks are much more closely correlated with broad market equities over time. On the returns side, Gibson said there had been some fundamental changes in commodities markets in recent years, which suggested that they were not at cyclical peaks. With oil, there was a declining supply cushion and little or no increase in refining capacity, while major producing countries still suffered from political instability. Partly because of surging demand from China and India, there had been no drop-off in consumption despite higher prices. With gold, also hovering at near record prices, there had been a structural change in the market whereby surging demand for jewellery and other consumption had more than replaced the fall-off from central banks, which no longer need to stockpile gold. In base metals, demand from China in particular, continued to rise. China had gone from being a net exporter of zinc, for instance, to being a net importer. There has been a surge of institutional investment in commodities futures in recent years. Gibson said there was about $US55 billion invested in the two main commodities indices worldwide, which compared with only about $US10 billion three or four years ago. Several Australian asset consultants are known to have formed positive views about commodities futures, including Watson Wyatt and Frontier, after recent research in the area. BT’s Strategic Commodity Index Fund is long-only with no gearing.

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