BT: Commodities bull has 'a long way' more to run (20 Feb 2008)

Business Times - 20 Feb 2008


Commodities bull has 'a long way' more to run

Investment guru says demand/supply imbalance dogging range of resources. GENEVIEVE CUA reports

CELEBRATED investor Jim Rogers said yesterday that he believes the bull market in commodities still has 'a long way to go'.

Speaking at a luncheon during the Investment Management Association of Singapore's annual conference, Mr Rogers said that commodities continue to be an under-invested and misunderstood asset class.

'Most people need a secular bull market to make money,' he said. 'We have a bull market in raw materials. I try to explain this, but most people are very confused. They have no idea.

'There are over 70,000 mutual funds invested in stocks and bonds, and fewer than 50 funds for commodities. So few people are invested in it that it gives an idea of how gigantic this asset class is.'

Money, however, is surging into indices. Based on Barclays Capital data in a January report, the combined value of assets tracking commodity indices, exchange traded products and commodity structures now exceeds US$175 billion, after a rise of US$40 billion in 2007 alone.

Schroders Investment Management recently announced a soft closing of its agriculture fund, for instance, which has raked in US$4.3 billion in just about 18 months since its inception. The fund was only just launched in Singapore for about a week and has so far raised $11 million.

Says Christopher Wyke, Schroders product manager (emerging markets debt and commodities): 'It is necessary to close to protect the interests of our investors. The agricultural markets still have limited capacity and we need to close to maintain the integrity of the product and to be able to offer daily liquidity in all market conditions.'

The fund receives daily inflows of US$50 million to US$60 million and is likely to reach the US$5 billion mark in the first quarter. A letter to distributors said: 'Even though liquidity in the agricultural markets has risen significantly in the past six to 12 months ... we have decided to hard-close the fund at US$5 billion. We believe that this action is necessary to ensure that the fund's ability to achieve its performance objectives are not compromised by its size.' The Agriculture Fund has delivered a total return between October 2006 and January 2008 of 35 per cent.

Schroders also runs a Commodity Fund which has about US$1.9 billion in assets. The firm said that it 'saw no constraint in capacity in the foreseeable future for our broader commodity play'.

Based on data by Barclays, while energy prices like gasoil and crude rose 71 and 77 per cent respectively, the most robust rises are seen in agricultural prices. Soybean prices, for instance rose 91 per cent and wheat 98 per cent over 12 months to January 9. In the case of wheat, demand has exceeded production in six out of the past seven years, and reserves are low.

Recession-proof

Even a US recession is unlikely to dent commodities' trajectory. In a February report, Merrill Lynch said that aggregate commodity demand growth will remain firm, as there is evidence that the resources markets have decoupled from the United States. US consumption, it said, has hardly contributed to global demand growth over the last years.

In the case of oil, the US contributed just 10 per cent to global growth in the last five years, compared to an average contribution of 20 per cent in the 1990s. In contrast, emerging markets' share of global oil demand growth has averaged 92 per cent in the last five years, compared to 20 per cent in the 1990s.

Mr Rogers said that commodities bull cycles have historically lasted between 15 and 23 years. 'If history is any guide, the current bull market will probably last until 2020. We have a long way to go.' The fundamental driver, he added, was the demand/supply imbalance that dogs a wide range of commodities in energy, metals and agriculture.

Mr Rogers set up his Rogers International Commodities Index in 1998 to represent that value of a basket of commodities consumed in the global economy. Since inception until January 2008, it has returned 354 per cent on a cumulative basis, compared to 93 per cent from the Lehmans Long Term Treasuries Index and 43 per cent from the S&P500 index.

Mr Rogers said that the correlation of resources to traditional asset classes is low. This is often cited as a reason to include it in a diversified portfolio. Mr Rogers himself, however, does not diversify. 'You never get rich if you diversify. That is not something I do. But (commodities) are an anchor that will not do what other assets do.'

He pointed to a number of industries which he expects to fare well. These include water treatment, agriculture, tourism - in particular those catering to Chinese tourists, and power generation.


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