If you go into a forest, don’t forget the chainsaw
“Commodities are a safe haven against inflation,” and, “speculators have a big influence on their market price”: these are two of the biggest myths about natural resources like oil, gold and copper. Dr Peter Oertmann says that we shouldn’t over-simplify, because reality is a bit more complicated than that. The managing partner of the asset management boutique Vescore was guest speaker at a conference organised by LB Lux in Luxembourg.
Stocks and bonds have plunged because of the euro crisis and a general stock market uncertainty. “At times like these, it is even more important for investors to diversify their portfolios,” Peter Oertmann underlines in his introduction. According to him, there are different ways of investing in commodities. “Buying a forest is an ideal hedge against inflation.
Unfortunately, you need some expertise to manage it, so you’d better not forget the chainsaw when you a walk through your forest,” he explains. Buying oil in a tank is another way of investing. This is a genuine commodity investment. The downside is that it only offers a modest return and is expensive to store.
But Peter Oertmann of Vescore came to Luxembourg with a solution in his bag: “Investing in commodities via the futures market is a clever way of doing it. The correlation with classic assets is pretty low, you find transparent prices and illiquid markets.”
He added a caveat, however. It is very important to do commodity picking. Natural resources are often cited as an inflation hedge when interest rates are rising, but they all react differently to risks like inflation, the dollar or the latest trends in emerging markets.
Don’t try to gamble
Copper, palladium, refined oil and are the only safe havens against inflation. What’s more, many of the commodities such as sugar and natural gas have a life of their own. They don’t react that much to market trends or macroeconomic changes. The investors in the room got the message: it is very important to diversify broadly.
Returns and volatility are a mixed bag too. While the volatility of bonds is a one-digit number, the one of stocks varies between 16 and 20%. For commodities, the volatility in many cases goes beyond 20%; the maximum being 54% for natural gas.
Investors will be disappointed to read that the return is often not worth the risk taken: “for some commodities the stakes are too high. If you look at coffee, the return has been 0.70% on an annual basis since 1980 with a volatility of 35%. The same assessment is true for wheat and silver.” However, there are high flyers too. Crude oil (8.32%) and copper (5.58%) come out on top of the commodities with highest returns.
The impact of speculators on commodity prices is a topic that is widely discussed in the media. Peter Oertmann thinks that we shouldn’t overestimate their influence. “The effect of speculators is quite low. You shouldn’t forget that the futures market is about pure hedging. Besides, buying grains on the future market doesn’t necessarily increase prices and cause the starvation of people in Africa.”
Amongst the lessons learned from Peter Oertmann’s presentation, we conclude with the most obvious one. When investing in commodities in order to hedge against inflation or other risks, don’t forget to broadly diversify. When comparing the different risk and returns, it is worth taking a closer look. CW