Commodity investors race to adapt on fear of supercycle end
NEW YORK (Reuters) - Investors who have plowed some $400 billion into raw materials markets over the past 10 years are accelerating efforts to change their strategies, if not their allocations, on the growing belief the commodities 'supercycle' has come to an end.
While pension funds and other institutional investors have been quick to bail on gold as bullion fell deeper into bear market territory in the second quarter, they have yet to abandon other markets like oil and metals en masse, asset allocation experts and analysts say.
Instead, more and more funds are changing tack, abandoning the passive, buy-and-hold strategies that held sway in the previous decade to embrace a more active approach to picking winners and losers within the commodities sphere.
While the shift toward 'active' investing has been growing for several years, the pressure to adapt is mounting.
The 19-commodity Thomson Reuters-Jefferies CRB index .TRJCRB fell 7 percent in the second quarter and 25 percent from a second-quarter 2011 peak, entering bear market territory.
Among individual commodities, the second quarter was gold's worst on record due to fear the U.S. Federal Reserve will curb stimulus money crucial to bullion prices. Brent oil had its third quarterly loss in a row for the first time in 15 years and copper, its biggest quarterly in almost 2 years.
Correlations between raw material markets are also deteriorating amid seismic fundamentals shifts in many markets.
'Removing outright directional risk is important in a market where there are so many unknowns,' said commodities portfolio manager Nic Johnson at PIMCO, the world's top bond fund, which also has a $30 billion commodities portfolio.
In the next six months, PIMCO will look for relative value trades between gold versus silver and soybeans versus corn, among others, he said.
Those who have watched these markets for years, from hedge fund legend Stan Druckenmiller to Marius Klopper, head of giant miner BHP Billiton (BLT.L), believe that the commodities supercycle - which heralded a decade-long rally in oil, metals and crop prices since 2004 - is over.
Bankers who sell to the buy side are also feeling the heat to develop more investment vehicles and add to the growing suite of long-short, spread-based or volatility indices that have sprung up in the past few years to help boost returns.
'I think we're close to an inflection point here,' said Oscar Bleetstein, head of Credit Suisse's Institutional Commodity Sales for the Americas. 'We're not seeing people exit, but they are looking for new toys, new strategies, and they're putting pressure on the banks to deliver.'
CHALLENGES ON ALL FRONTS
Nearly 10 years after commodities began taking shape as a mainstream asset class alongside stocks and bonds, the sector heads into the second half of the year facing one of its most challenging phases in a decade.
Total commodities assets under management hit an 11-month low of $385 billion in April after a $9 billion outflow, the second largest on record, caused almost entirely by gold, a Barclays estimate said. The figure stoked concerns about the possibility of a mass investor exodus that could destabilize markets.
For one, the winding down of the Federal Reserve campaign to boost growth with easy money threatens to drain liquidity from the commodities market, which has been broadly seen as one of the larger beneficiaries of the policy in place since the financial crisis.
Market fundamentals are also on shaky ground, with giant consumer China showing signs of economic cooling and the U.S. and European recovery still fragile. The supply-side dynamic has shifted from shortage to glut, with U.S. shale oil production booming and global grain inventories rebounding.
'It's going to be a tough trade with too much risk, until we get some real supply-demand drivers out there,' said Christian Wagner, chief investment officer at Longview Capital Management, a Wilmington, Delaware, fund that manages some $250 million, including in commodities.
Commodities have underperformed equity markets since early 2012, and have diverged increasingly since the start of this year. While the S&P .SPX is up 14 percent this year, the CRB index is down 6 percent year to date.
Calpers, the largest U.S. pension with $260 billion in assets, switched most of its commodity holdings to inflation-protected bonds last year due to poor returns. Other investors who were hoping for diversification have also been disappointed.
'Some institutional investors are throwing in the towel, saying ‘If I cannot diversify my portfolio via commodities, then why do I need commodities?' said Marcus Storr, head of hedge funds at Feri, an asset manager in Bad Homburg, Germany, which manages $21 billion euros mostly from institutional clients.
And yet as a group, there is little sense that investors are bolting as a whole.
Fearing a low turnout at its annual New York commodities client conference last week, Credit Suisse had removed the last four rows of chairs. They were forced to put them back in at the last minute as a capacity crowd of 300 hedge fund managers, investors and corporate clients gathered.
The $237 billion ING Investment Management in Netherlands has a neutral rating on commodities but says that might change if global growth improves.
'We would probably be looking to go overweight, but for the fact that we see weakness (and) policy uncertainty in China, and a more broad-based risk of a negative feedback loop in emerging markets,' says Valentijn van Nieuwenhuijzen, head of strategy.
'It's a bit of a balancing act.'
NEW YORK (Reuters) - Investors who have plowed some $400 billion into raw materials markets over the past 10 years are accelerating efforts to change their strategies, if not their allocations, on the growing belief the commodities 'supercycle' has come to an end.
While pension funds and other institutional investors have been quick to bail on gold as bullion fell deeper into bear market territory in the second quarter, they have yet to abandon other markets like oil and metals en masse, asset allocation experts and analysts say.
Instead, more and more funds are changing tack, abandoning the passive, buy-and-hold strategies that held sway in the previous decade to embrace a more active approach to picking winners and losers within the commodities sphere.
While the shift toward 'active' investing has been growing for several years, the pressure to adapt is mounting.
The 19-commodity Thomson Reuters-Jefferies CRB index .TRJCRB fell 7 percent in the second quarter and 25 percent from a second-quarter 2011 peak, entering bear market territory.
Among individual commodities, the second quarter was gold's worst on record due to fear the U.S. Federal Reserve will curb stimulus money crucial to bullion prices. Brent oil had its third quarterly loss in a row for the first time in 15 years and copper, its biggest quarterly in almost 2 years.
Correlations between raw material markets are also deteriorating amid seismic fundamentals shifts in many markets.
'Removing outright directional risk is important in a market where there are so many unknowns,' said commodities portfolio manager Nic Johnson at PIMCO, the world's top bond fund, which also has a $30 billion commodities portfolio.
In the next six months, PIMCO will look for relative value trades between gold versus silver and soybeans versus corn, among others, he said.
Those who have watched these markets for years, from hedge fund legend Stan Druckenmiller to Marius Klopper, head of giant miner BHP Billiton (BLT.L), believe that the commodities supercycle - which heralded a decade-long rally in oil, metals and crop prices since 2004 - is over.
Bankers who sell to the buy side are also feeling the heat to develop more investment vehicles and add to the growing suite of long-short, spread-based or volatility indices that have sprung up in the past few years to help boost returns.
'I think we're close to an inflection point here,' said Oscar Bleetstein, head of Credit Suisse's Institutional Commodity Sales for the Americas. 'We're not seeing people exit, but they are looking for new toys, new strategies, and they're putting pressure on the banks to deliver.'
CHALLENGES ON ALL FRONTS
Nearly 10 years after commodities began taking shape as a mainstream asset class alongside stocks and bonds, the sector heads into the second half of the year facing one of its most challenging phases in a decade.
Total commodities assets under management hit an 11-month low of $385 billion in April after a $9 billion outflow, the second largest on record, caused almost entirely by gold, a Barclays estimate said. The figure stoked concerns about the possibility of a mass investor exodus that could destabilize markets.
For one, the winding down of the Federal Reserve campaign to boost growth with easy money threatens to drain liquidity from the commodities market, which has been broadly seen as one of the larger beneficiaries of the policy in place since the financial crisis.
Market fundamentals are also on shaky ground, with giant consumer China showing signs of economic cooling and the U.S. and European recovery still fragile. The supply-side dynamic has shifted from shortage to glut, with U.S. shale oil production booming and global grain inventories rebounding.
'It's going to be a tough trade with too much risk, until we get some real supply-demand drivers out there,' said Christian Wagner, chief investment officer at Longview Capital Management, a Wilmington, Delaware, fund that manages some $250 million, including in commodities.
Commodities have underperformed equity markets since early 2012, and have diverged increasingly since the start of this year. While the S&P .SPX is up 14 percent this year, the CRB index is down 6 percent year to date.
Calpers, the largest U.S. pension with $260 billion in assets, switched most of its commodity holdings to inflation-protected bonds last year due to poor returns. Other investors who were hoping for diversification have also been disappointed.
'Some institutional investors are throwing in the towel, saying ‘If I cannot diversify my portfolio via commodities, then why do I need commodities?' said Marcus Storr, head of hedge funds at Feri, an asset manager in Bad Homburg, Germany, which manages $21 billion euros mostly from institutional clients.
And yet as a group, there is little sense that investors are bolting as a whole.
Fearing a low turnout at its annual New York commodities client conference last week, Credit Suisse had removed the last four rows of chairs. They were forced to put them back in at the last minute as a capacity crowd of 300 hedge fund managers, investors and corporate clients gathered.
The $237 billion ING Investment Management in Netherlands has a neutral rating on commodities but says that might change if global growth improves.
'We would probably be looking to go overweight, but for the fact that we see weakness (and) policy uncertainty in China, and a more broad-based risk of a negative feedback loop in emerging markets,' says Valentijn van Nieuwenhuijzen, head of strategy.
'It's a bit of a balancing act.'
NEW YORK (Reuters) - Investors who have plowed some $400 billion into raw materials markets over the past 10 years are accelerating efforts to change their strategies, if not their allocations, on the growing belief the commodities 'supercycle' has come to an end.
While pension funds and other institutional investors have been quick to bail on gold as bullion fell deeper into bear market territory in the second quarter, they have yet to abandon other markets like oil and metals en masse, asset allocation experts and analysts say.
Instead, more and more funds are changing tack, abandoning the passive, buy-and-hold strategies that held sway in the previous decade to embrace a more active approach to picking winners and losers within the commodities sphere.
While the shift toward 'active' investing has been growing for several years, the pressure to adapt is mounting.
The 19-commodity Thomson Reuters-Jefferies CRB index .TRJCRB fell 7 percent in the second quarter and 25 percent from a second-quarter 2011 peak, entering bear market territory.
Among individual commodities, the second quarter was gold's worst on record due to fear the U.S. Federal Reserve will curb stimulus money crucial to bullion prices. Brent oil had its third quarterly loss in a row for the first time in 15 years and copper, its biggest quarterly in almost 2 years.
Correlations between raw material markets are also deteriorating amid seismic fundamentals shifts in many markets.
'Removing outright directional risk is important in a market where there are so many unknowns,' said commodities portfolio manager Nic Johnson at PIMCO, the world's top bond fund, which also has a $30 billion commodities portfolio.
In the next six months, PIMCO will look for relative value trades between gold versus silver and soybeans versus corn, among others, he said.
Those who have watched these markets for years, from hedge fund legend Stan Druckenmiller to Marius Klopper, head of giant miner BHP Billiton (BLT.L), believe that the commodities supercycle - which heralded a decade-long rally in oil, metals and crop prices since 2004 - is over.
Bankers who sell to the buy side are also feeling the heat to develop more investment vehicles and add to the growing suite of long-short, spread-based or volatility indices that have sprung up in the past few years to help boost returns.
'I think we're close to an inflection point here,' said Oscar Bleetstein, head of Credit Suisse's Institutional Commodity Sales for the Americas. 'We're not seeing people exit, but they are looking for new toys, new strategies, and they're putting pressure on the banks to deliver.'
CHALLENGES ON ALL FRONTS
Nearly 10 years after commodities began taking shape as a mainstream asset class alongside stocks and bonds, the sector heads into the second half of the year facing one of its most challenging phases in a decade.
Total commodities assets under management hit an 11-month low of $385 billion in April after a $9 billion outflow, the second largest on record, caused almost entirely by gold, a Barclays estimate said. The figure stoked concerns about the possibility of a mass investor exodus that could destabilize markets.
For one, the winding down of the Federal Reserve campaign to boost growth with easy money threatens to drain liquidity from the commodities market, which has been broadly seen as one of the larger beneficiaries of the policy in place since the financial crisis.
Market fundamentals are also on shaky ground, with giant consumer China showing signs of economic cooling and the U.S. and European recovery still fragile. The supply-side dynamic has shifted from shortage to glut, with U.S. shale oil production booming and global grain inventories rebounding.
'It's going to be a tough trade with too much risk, until we get some real supply-demand drivers out there,' said Christian Wagner, chief investment officer at Longview Capital Management, a Wilmington, Delaware, fund that manages some $250 million, including in commodities.
Commodities have underperformed equity markets since early 2012, and have diverged increasingly since the start of this year. While the S&P .SPX is up 14 percent this year, the CRB index is down 6 percent year to date.
Calpers, the largest U.S. pension with $260 billion in assets, switched most of its commodity holdings to inflation-protected bonds last year due to poor returns. Other investors who were hoping for diversification have also been disappointed.
'Some institutional investors are throwing in the towel, saying ‘If I cannot diversify my portfolio via commodities, then why do I need commodities?' said Marcus Storr, head of hedge funds at Feri, an asset manager in Bad Homburg, Germany, which manages $21 billion euros mostly from institutional clients.
And yet as a group, there is little sense that investors are bolting as a whole.
Fearing a low turnout at its annual New York commodities client conference last week, Credit Suisse had removed the last four rows of chairs. They were forced to put them back in at the last minute as a capacity crowd of 300 hedge fund managers, investors and corporate clients gathered.
The $237 billion ING Investment Management in Netherlands has a neutral rating on commodities but says that might change if global growth improves.
'We would probably be looking to go overweight, but for the fact that we see weakness (and) policy uncertainty in China, and a more broad-based risk of a negative feedback loop in emerging markets,' says Valentijn van Nieuwenhuijzen, head of strategy.
'It's a bit of a balancing act.'
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Commodity investors race to adapt on fear of supercycle end
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