Looming shortages fail to drive earnings

FUND FOCUS: COMMODITY FUNDS:Best performer YTD:

Irish Life Commodities Index +6.3%

Worst performer YTD:

JP Morgan Commodity IGAR-Cond Index – 11.5%

WHILE THE price of wheat may be soaring due to droughts in Russia, commodity funds, which invest in a wide range of assets ranging from agricultural products to precious metal and livestock, are nonetheless posting less than stellar returns.

According to Moneymate, so far this year Irish gross domestic funds invested in commodities were flat on average, while over the 12 months to August 13th, commodity funds returned 3.5 per cent on average.

Irish Life’s Commodities Index was the strongest performing fund, up by 6.3 per cent so far this year. It has returned 12.2 per cent over the 12 months to August 13th. An index fund, Irish Life’s commodities fund targets a return of 50 per cent of the Goldman Sachs Commodity Total Return Index and 50 per cent of the Goldman Sachs Non-Energy Total Return Index.

While the fund may be up so far this year, Anthony MacGuinness, head of financial engineering with Irish Life Investment Managers, says that on a dollar basis the fund is actually in the red, indicating that returns are due to an appreciating dollar.

At the end of July, 35 per cent of the fund was invested in energy, 31 per cent in agriculture and 17 per cent in industrial metals, with precious metals and livestock making up the remainder.

According to MacGuinness, the typical bullish view on commodity funds is based on growing demand from emerging markets combined with constrained supply.

While energy markets have not performed strongly of late, agricultural products have been boosted by the bounce in wheat prices, while gold, which accounts for 6.29 per cent of the fund, has also being strong of late, having come back due to growing investor risk aversion.

But, given the traditional volatility of commodities, MacGuinness notes there are still risks on the horizon, particularly from a macroeconomic perspective. “There are a lot of risks at present, and a lot of uncertainty in the market,” MacGuinness says.

At the other end of the scale, JP Morgan’s Commodity IGAR-Cond Index is down by 11.5 per cent year to date, while over the past year it has lost some 8.2 per cent.