Cerulli Asia Monthly Product Trends: commodity funds

Cerulli – Asia Monthly Product Trends, June 2012

For several years now, world investors have looked to commodity funds as a sure-fire bet in uncertain times. Gold has been the obvious inflation hedge: a transparent market, clear supply and demand dynamics, widely held by central banks, and a metal that rises when all around it falls.Contact Cerulli for charts

But recently, investors have looked at a wide range of metals, soft commodity and energy funds, believing these asset classes will continue to perform in the darkest of world economies. According to data compiled by Cerulli Associates, an interesting shift has taken place. Whereas from August to December 2011, gold funds attracted ample new inflows while money fled from other commodity funds, in January the situation turned around (see chart), with $68.9 million of net new flows into commodity ex-gold funds, and $58 million of outflows from gold. ETFs, on a smaller scale, showed a similar pattern (chart 1c).

LipperFMI data shows that the commodity picture is considerably broader than just gold. While in January gold accounted for an impressive $3.385 billion of assets under management – up well over a billion dollars in a year – raw materials and energy funds are still bigger, at $3.973 billion, and four other areas – renewable energy/climate change; agriculture; commodity-ex-gold; and environment – each have over $1 billion in AUM. Water funds, too, have assets of over $500 million, although interest in that asset class has waned over the last 12 months.

The problem for investors in deciding what to do with commodity and energy is that it depends very much on the behaviour of a deeply uncertain world economy. Poor performance in Europe and the US reduces demand for energy and commodities, which suggests they are bad investments right now. A hard landing in China, whose demand for commodities has kept the world economy (and entire individual western economies, notably Australia) afloat over the last five years, would be especially bad news. On top of that, if oil prices go on another upward spike – Bank of America Merrill Lynch, for example, thinks a peak of $140 per barrel is plausible this year – then, apart from those who hold oil ETFs, the news gets worse, as it will be harder still to maintain global growth.

On the other hand, if the mildly encouraging data from the US really is pointing to recovery, then commodities and energy stocks ought to benefit. If China’s growth slows to ‘only’ 8%, and stays there, then that’s still plenty of momentum to sustain demand. And despite temporary jitters, emerging markets are going to continue to show strong appetite for raw materials in order to fuel their industrial growth.

On top of all of that, inflation has to be considered – commodities are widely used as a hedge against inflationary pressure – and the fact that world stock markets remain exceptionally volatile.

It’s perhaps because of this divergence of signals that fund flows look schizophrenic when studied closely. As chart 1bi shows, in Asia net new flows into commodity and energy funds varied from a $101.3 million inflow in Japan to a $79.1 million outflow from Thailand, leading to a near-flat aggregate of $10.9 million inflows. And as chart 1bii shows, the experience of individual funds is equally dichotomous, despite broadly similar mandates: while the Industrial Green Investment Equity Fund, an environmental product from Aegon-Industrial Fund Management in mainland China, received an enormous $234.5 million in net new flows in 2011 – despite only having opened for investment in May – the Cathay Global Resources Fund in Taiwan saw $137.9 million of outflows. And it’s not a question of green products being in and raw materials being out: four of the 10 funds in Asia with the worst outflows in 2011 were environmentally focused. It’s also interesting to note that five of the best funds for inflows in 2011 were launched in the course of the year, some as late as June; particularly in China, there is a great deal of appeal in something that looks new.

The IMF tackled this debate in April, stating that the near-term prospects for commodity exporters, who have benefited so much from the run up in commodity prices in the last decade, is a concern. The IMF advised exporters to save fiscal windfalls during commodity price upswings; at a market level it calls for improved institutional capabilities to incorporate new information about commodity price persistence while building fiscal buffers to respond to temporary shocks.

The problem for fund managers is working out whether this level of prudence has actually been implemented in the good times. Whether portfolio managers are buying commodities themselves, or individual stocks that are exposed to them, the signals are going to continue to be difficult to read all year, and inflow data is likely to continue to be unpredictable.

UOB Asset Management

• UOB’s China asset management venture, Ping An UOB, demonstrates the point about how Chinese investors tend to embrace anything new. As chart 2 below shows, a new product launch – the Ping An UOB Industry Leaders Equity Fund – raised RMB3.2 billion during its IPO, placing it third among Greater China equity raisings in 2011. (Notably, the top one was called “Booming Industrial Equity Fund” – there’s a lot of power in marketing, it seems.)
• The fund aims to achieve consistent long term performance through active allocation by sector, based on the investment clock process, in which an industry and business cycle is analysed for opportunities. This has proven a popular approach in China this year. Crucially, it had more than 30 distributors, led by Bank of China.
• UOB has very much set itself up as a Singapore-based gateway for regional investors to access opportunities in China and India. In January 2010 it set up the United China-India Dynamic Growth Fund, investing into China and India-related equities. It has also enjoyed success with a China ETF based on the SSE 50.  This was the first China A-shares ETF to be denominated and traded in Singapore dollars.
• As of July 31, UOB Asset Management had 52 unit trusts in Singapore with total assets of S$3.33 billion.
• UOB is also notable for its partnership model. In Malaysia it has a joint venture for Islamic fund management with OSK-UOB Unit Trust Management, which in turn is 70/30 owned by Malaysia’s OSK and UOB itself. It also has a strategic alliance with South Korea’s HI Asset Management, and has operations in Thailand.