There will be no letup in 2006 in the investment flow into commodities, which were a fringe asset class just five years ago but are now more of a conventional, if tiny, allocation in portfolios, said the global head of commodities at Barclays Capital.
Benoit de Vitry, managing director at Barclays Capital, a leading issuer of securities derived from physical commodities, said in an interview on Monday that the total investment in commodity products by pension funds, hedge and other funds should exceed $100 billion next year.
He estimated that $70 billion is currently benchmarked to commodity indexes like the Goldman Sachs Commodity Index and the Dow Jones AIG Index.
Perhaps another $10 billion is invested in commodity-linked notes and other hybrid structured products, he added. "We would expect growth next year in excess of 40 percent," de Vitry told Reuters. "For example, if you had just a few large pension funds changing a couple percent of their allocation, that would be significant." That is up from barely $10 billion five years ago.
De Vitry said investors were attracted to commodities to diversify traditional stock and bond portfolios because of their stellar performance as an asset class in recent years.
In real, noninflation-adjusted terms, commodities look cheap, having underperformed for decades. Plus, with strong demand from Asia and years of underinvestment in infrastructure to produce and bring raw materials to market, the macroeconomic fundamentals are extremely enticing.
"I have never seen the markets be so tight in supply across a vast number of commodities for ... the last 18 months," he said. "It's going to be very tight for the next five years."
Many fund managers are looking at adding some commodity exposure to enhance portfolio returns. Commodities tend to correlate negatively with equities over time, and so provide gains when stocks are falling or trending sideways.
But more sophisticated investors, with greater appetite for risk, can play commodities from the long or the short side. "If you look at a large portion of the hedge fund business, the net impact on the market in term of macro-position has been small," he said.
De Vitry said Barclays Capital, which is the investment banking division of Barclays Group, had issued about $2 billion in structured commodity notes and estimated that five or six other banks could have similar numbers.
"We're still very small. How much money is invested in the stock market? About $40 trillion," de Vitry said. "You are still talking about a ratio of one for a thousand, compared to other asset class.
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