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Even for an adventurous investor, I’m ambivalent about commodities, despite many claiming the asset class is at the start of a new market super cycle.
Over the past decade, returns have been anaemic at best. Look at the performance of various asset classes since 1915, and you’ll see that commodities come near the bottom, with average annualised returns of less than 1 per cent a year.
As for the great inflationary surge of the last few years, some commodities have done well — gold stands out, as do uranium and cocoa — but others have had a dismal time, not least lithium (after a huge run-up), nickel and iron ore. Blame China’s faltering economy for woeful returns for some industrial metals.
What about mining equities? Large-cap European miners in the Stoxx 600 index are collectively down by about 1.5 per cent the past 12 months but up 20 per cent over the past five years. The equivalent returns for tech stocks in the European Stoxx 600 (hardly Nasdaq) are up 23 per cent and over 70 per cent, respectively.
Even fund managers with a glittering record of picking the right mining stocks have had a tough few years. Take BlackRock World Mining Trust, in which I am invested. It boasts an impressive performance relative to its benchmark, but the share price is still down about 4 per cent over the past year, and up 12 per cent in the past three.
To be fair, mergers and acquisitions in the sector are on the rise — M&A activity is now at its highest level in 12 years. But many small-cap miners are still struggling, and fund managers like Baker Steel that invest in early-stage mining firms are still nursing price return losses over the past five years.
I think we can say that the jury’s out on the supercycle claim. But that doesn’t mean commodities are a complete non-starter. One area where I see some potential is in energy transition.
Jeff Currie, formerly strategist at Goldman Sachs and now at private equity outfit Carlyle, also reminds us that potential incremental copper demand from US data centre construction alone could range between 0.5 per cent and 1.5 per cent of global demand.
“Although this might seem insignificant,” he says, “even a 1 per cent shortage could plunge the market into a significant deficit”. (And copper is up nearly 9 per cent so far this year.)
The big investment banks are lining up behind the new narrative of re-industrialisation via electrification. A recent Bank of America report forecast 70GW in power demand growth in the US by 2030 from reshoring, artificial intelligence and new tech. Commodities offer protection from structurally higher inflation and greater diversification than bonds, it reckons.
If you buy this analysis, you quickly come to the presumption that some, though not all, commodities will benefit — though the fate of lithium, down 70 per cent this year, should serve as a warning.
One way to play the trend is via a handful of exchange traded funds that selectively invest in a basket of commodities fine-tuned to this transition. One of these is a new LGIM fund called the L&G Energy Transition Commodities UCITS ETF. LGIM already has an existing broad commodities tracker that uses clever strategies to enhance returns on everything from food staples to precious metals, but this new ETF has some novel features. It is not invested in equities but in futures contracts for three broad baskets: industrial metals, carbon allowances and energy commodities, mainly natural gas and ethanol — no doubt green enthusiasts would shun this exposure, but I think it makes sense as a stepping stone technology to a net zero world.
Its most direct competitor is a more established ETF from WisdomTree, called the Energy Transition Metals ETF, which is 80 per cent exposed to industrial metals.
LGIM’s fund has chunky exposure to silver and gold — the issuer points to how nanostructures of gold catalysts convert CO₂ into useful fuels and are incorporated in hydrogen fuel cells to improve their performance.
To be clear, you’ll still have some linkage to broader commodity indices such as the Bloomberg Commodity Index, but LGIM says 10 of the 18 commodities in its ETF are not found there. Launched in April, its total expense ratio (TER) is 0.65 per cent, with the ticker ENTR for the dollar version and ETRA for the sterling one. By comparison, the Wisdom Tree ETF has around $223mn in assets and a TER of 0.45 per cent.
Other tracker funds invest in equities within this space, such as miners producing metals for the green transition. These include WisdomTree’s Energy Transition Metals and Rare Earths Miners UCITS ETF, VanEck’s Rare Earth and Strategic Metals UCITS ETF, the iShares Essential Metals Producers UCITS ETF and the Sprott Energy Transition Materials UCITS ETF. I like the last two for their heavy exposure to mainstream industrial mining equities — Sprott’s biggest holding is one of my favourite long-term stocks, US giant Freeport-McMoRan.
I’ll finish with two crucial questions. The first is whether to buy mining equities versus commodity futures. No doubt some individual mining equities, such as Glencore or Antofagasta, have done terrifically well over the past five largely dismal years (up 66 per cent and 137 per cent, respectively) but for every success I could point to a long list of smaller-cap names that have gone nowhere. That suggests diversification via a fund makes sense.
I’d also opt for commodities trackers over mining equities, as they boast lower volatility and no stockpicking risk. Big broad commodities trackers from iShares and Invesco have marginally underperformed their equity peers at the five-year mark but have beaten them over three and one years. Enhanced strategies will probably outperform plain vanilla approaches, and I think there’s a good chance that energy transition metals will outperform even the enhanced strategies in the long term.
David Stevenson is an active private investor. Email: adventurous@ft.com. X: @advinvestor.