Description
The document explains Commodity Funds, types of commodity funds, its investment strategies, risk and benefit associated to that. It also compares the performance of some popular commodity funds in India and US.
COMMODITY FUNDS
Effectiveness & Success
AIM: To study about the Commodity Funds, types of commodity funds, its investment strategies, risk and benefit associated to that. It also compares the performance of some popular commodity funds in India and US.
Contents
What are Commodity Funds? ................................................................................................................. 3 Types of Commodity funds: ................................................................................................................... 3 Why commodities? ................................................................................................................................. 4 Investment Strategies ............................................................................................................................. 5 Risks and Benefits of Commodity Funds................................................................................................. 6 Benefits ............................................................................................................................................... 6 Risks .................................................................................................................................................... 6 Commodity Funds in India: ..................................................................................................................... 7 1. 2. 3. 4. SBI Magnum Comma Fund ..................................................................................................... 7 Birla Sunlife Commodities Fund .............................................................................................. 8 Reliance Natural Resources Fund ........................................................................................... 9 Mirae Asset Global Commodity Stocks Fund (MAGCSF) ...................................................... 10
Performance Comparison of Gold MF’s ............................................................................................... 11 Top 10 Commodity Funds in US: ........................................................................................................... 12 1. 2. S&P GSCI ............................................................................................................................... 12 Goldman Sachs Commodity Strategy Fund .......................................................................... 12
Effectiveness: ........................................................................................................................................ 13 Conclusion............................................................................................................................................. 14
2|Page
What are Commodity Funds?
Funds that invest either directly or indirectly in commodities. Commodity funds are an interesting, and potentially rewarding, way to diversify your investment portfolio beyond stocks and bonds. That's because commodities are often viewed as a hedge against inflation. Meaning the prices of commodities tend to rise in step with inflation This movement trends to run counter to stock prices - which is an attribute that makes commodity mutual funds so attractive to many investors.
Types of Commodity funds:
? Commodity Funds: These funds are true commodity funds in that they have direct holdings in commodities. For example, a gold fund that holds gold bullion would be a true commodity fund. ? Have direct holding in commodities. ? e.g. gold fund that holds gold bullion. ? Commodity funds that hold futures: Holding commodity-linked derivative instruments is a much more common mutual fund strategy for investing in the commodities markets. Most investors have no desire to take delivery of hogs, corn, oil or any other commodity, they simply want to profit from price changes. ? Natural Resources Funds (Commodity MFs): Funds that invest in companies that are engaged in businesses that operate in commodity-related fields, such as energy, mining, oil drilling and agricultural businesses, are often referred to as natural resource funds. While they often hold neither actual commodities nor commodity futures, they provide exposure to the commodities markets by proxy . ? Combination funds:
3|Page
Some funds invest in a combination of actual commodities and commodity futures. Gold funds, for example, may have underlying holdings that include both bullion and futures contracts. ? e.g. some gold funds. ? Commodity Index funds: Most commodity index funds are “buy only” funds, which means they simply buy commodity futures contracts when investor money comes in and they sell commodities when investors redeem their funds. ? ETF’s: Invest in commodities such as precious metals ? 1st commodity ETF was Gold bullion Securities ETF, ASX, 2003 ? conceptualized by Benchmark Asset Management Company, India
Why commodities?
Financial professionals and their clients have found that commodities can: ? It potentially provide additional risk-adjusted returns over time to a diversified portfolio; ? It provides an attractive investment option when global demand for commodities surge; ? It offer low correlation to stocks and bonds; ? It is an effective hedge against inflation; and ? It serves as a diversification tool with the potential to enhance all asset allocation models. ? Help in portfolio diversification, low correlation with equities and bonds. ? Opportunity to invest in economic growth, as commodities are affected by demand and supply. ? Allow investors to have exposure to commodities with lesser risk(diversification) ? Safe haven in times of economic and geopolitical turmoil(Gold) ? Costs of production- continues to rise resulting in the need for higher prices.
4|Page
Investment Strategies
In addition to a variety of formats, commodity funds also offer a variety of investment strategies, including active management and passive management. Active portfolios buy and sell in an effort to outperform a benchmark index. Passive portfolios seek to replicate a benchmark index and match its performance. Passive strategies can be implemented using index funds or exchange-traded funds (ETFs).
Pros and Cons of Investing in Commodity Funds
Commodities offer portfolio diversification. Investing in futures contracts or actual commodities provides a portfolio component that is not a traditional stock, bond, or a mutual fund that invests in stocks and/or bonds. Historically, commodities have had a low correlation to traditional equity markets, meaning that they do not always fluctuate in tandem with market movements. For many investors, achieving this low correlation is the primary objective when seeking to add diversification to a portfolio. Commodities also offer upside potential. The raw materials used in construction, agriculture and many other industries are subject to the laws of supply and demand. When demand rises, prices generally follow, resulting in a profit for investors. Finally, commodities offer a hedge against inflation.
On the Other Hand The commodities markets can be volatile and subject to wild, short-term price swings and long lulls. Over the course of just a few days, prices can go from record highs to record lows. Another item of note is the composition of various mutual funds and the benchmark indexes that they track. In many commodities indexes, energy is often the heavyweight, taking up more than half of the index. When a mutual fund seeks to directly replicate the index, more than half of the fund's assets will be in energy. Some funds place limits on the percent of the portfolio invested in a single commodity to avoid an over-concentration in a single investment
5|Page
Risks and Benefits of Commodity Funds
Investing in commodity funds has become a popular alternative to the traditional mutual fund. This type of fund offers you with a number of benefits as an investor. Here are a few of the risks and benefits associated with
Benefits
Investing in a commodity fund presents a very convenient scenario for traditional investors. For many years commodities were an area that was difficult to access for the standard investor. In order to get involved in the commodity market, one had to purchase confusing futures contracts or house the physical asset. This eliminated many that did not want to work with a futures broker or warehouse a valuable asset in their home. With the commodity fund, you can easily get involved in the commodities market with nothing more than a standard brokerage account. This has opened the door to many investors that would otherwise not be able to get involved. Taking advantage of supply and demand is another benefit of investing in commodity funds. Since commodities represent a limited asset, when the demand for them is high, this can represent a significant boon for investors. For example, if you were to invest in building materials, when demand for these materials goes up because of a rise in construction, you can make a significant return on your investment. This type of fund allows you to take advantage of limited resources. The commodity fund also present investors with a way to hedge their portfolios against inflation. When you invest in stocks and bonds or anything else that is tied to money, you are always a risk of losing part of your return to inflation. When you invest in commodities, this is not an issue. The price of gold or silver will always move with inflation and will always be worth something. This type of fund also offers investors a way to diversify away from the traditional market. It provides an asset that is not correlated to the stock market in any way.
Risks
Investing in commodities can offer investors a good return on their investment. However, it is also a very volatile type of investment. It can lead to a significant loss in your portfolio under
6|Page
the wrong circumstances. While the values of commodities tends to always go up, if you time the investment wrong, it could cost you substantially. On more than one occasion, the prices of certain commodities have went from record highs to record lows in a matter of a few days. This type of investment presents you with no control over what is actually invested in. While you can choose which funds you purchase, once you give them your money, they are free to do with it as they please. Therefore, if you wish to purchase a certain commodity, the fund might have different objectives. Sometimes they have limits on how much of a commodity can be in the fund. Therefore, it might not always coincide with your personal investment strategy.
Commodity Funds in India:
1. SBI Magnum Comma Fund
? It is a commodity based Mutual Funds ? It offers first of its kind, SBI Magnum Comma Fund was launched in 2005 ? It invests mostly in stocks of commodity related businesses with some allocation to debt and money market ? Invests in the following sectors – Oil & Gas, metals, materials & Agriculture ? It is an open ended equity scheme with minimum investment of Rs. 5000. ? Dividend and Growth Options are available ? Asset size Rs. 620.81 crores.
7|Page
2. Birla Sunlife Commodities Fund
? Inception in 2008 ? Open Ended Growth scheme with objective of long term growth of capital. Invests in: o o Stocks of Commodity companies overseas mutual fund schemes
? Choice of three plans: o Multi-commodity plan o Precious metals plan o Agri-plan for agro based businesses ? Asset Allocation o Agri Plan – Foreign equity(94.05%) o Multi-comm. Plan – Agriculture (21.23%), Energy(31.04%), Industrial Metal(16.06%), Precious Metal (22.08%), Water(4.83%)
8|Page
o
Precious Metals- Foreign equity (94.54%)
3. Reliance Natural Resources Fund
? It is an open ended fund ? Invests in equity securities of issuers in natural resources industries ? Invests in companies listed in BSE, LSE, NYSE, TSE, ASX ? Objective is to provide long term growth and capital appreciation by investing in companies engaged in discovery, development, production of natural resources.
9|Page
4. Mirae Asset Global Commodity Stocks Fund (MAGCSF)
? Open ended equity fund that invests in companies in Asia Pacific and Emerging markets engaged in commodity sectors ? Focuses on Agriculture, Metals and Energy sectors ? At least 65% of corpus invested overseas in Asia Pacific and Emerging markets ? Minimum Subscription Rs. 5000
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Performance Comparison of Gold MF’s
1yr Absolute Returns (in %) as on Jan 12, 2011
23 22.5 22 21.5 21 % 20.5 20 19.5 19 18.5
AIG World Gold Fund DSP-BR World Gold Kotak Gold ETF Reliance Gold ETF SBI Gold ETF UTI Gold ETF Gold BeES Quantum GFund
11 | P a g e
Top 10 Commodity Funds in US:
Fund
Silver Trust Fund(SIVR) iPath Dow Jones-UBS Precious Metals Subindex Total return ETN(JJP) Gold Mining, market vectors Gold Miners ETF(GDX) Carbon iPath Global Carbon ETN(GRN) Nickel, iPath Dow Jones -UBS Nickel Subindex Total Return(JJN) Coffee, iPath Dow Jones - UBS Coffee Subindex Total return ETN (JO) Cotton, iPath Dow Jones AIG Cotton TR sub-index ETN( BAL) Gold, DB Gold Double Long ETN (DGP) Tin, iPath Dow Jones-UBS Tin Subindex Total Return ETN( JJT) ProShares Ultra Silver (AGQ)
Return in past 52 weeks 30 to 34% 21 to 28% 22 to 24% 24% 25 to 29% 28 to 33% 35% 39 to 59% 42 to 60% 50- 53%
1. S&P GSCI
? Serves as a benchmark for investment in commodity markets and as a measure of commodity performance ? It is a tradable index available at CME ? It contains a high exposure to energy ? Comprises of 24 commodities from all commodity sectors – energy, metals, agricultural products ? It also acts as an economic indicator as it is based on the average quantity of each commodity produced, over last 5 yrs of data
2. Goldman Sachs Commodity Strategy Fund
? Uses S&P GSCI as the benchmark
? Gains exposure to commodities through commodity linked notes.
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Effectiveness:
Commodities get a lot of attention from the media. The price of oil, gold, corn, soy, cotton and hogs are in the national news nearly every day. While investing in the commodities markets is a fairly sophisticated endeavor, commodity mutual funds provide an opportunity for almost any investor to get a piece of the action. ? Commodity funds potentially serve as an effective hedge against both inflation and deflation. ? It potentially provides additional risk-adjusted returns over time to a well-balanced and diversified portfolio; ? It provides investors with a means to capitalize on surges and declines in commodity demand and prices; ? It allows for a buy and hold strategy while simultaneously acting upon short term market trends; and ? It may be an effective complement to other alternative investments. ? Diversification does not guarantee protection against market losses or ensure a gain.
13 | P a g e
Conclusion
In recent years, investable commodity indices and commodity linked assets have increased the number of available commodity-based products. The direct commodity investment can provide significant portfolio diversification benefits beyond those achievable from commodity-based stock and bond investment. These benefits stem from the unique exposure of commodities to markets forces such as unexpected inflation as well the potential of a positive roll return in futures-based commodity investment in periods of high spot price volatility. Adding a commodity component to a diversified portfolio of assets has been demonstrated to result in enhanced risk-adjusted performance.
14 | P a g e
doc_147191732.docx
The document explains Commodity Funds, types of commodity funds, its investment strategies, risk and benefit associated to that. It also compares the performance of some popular commodity funds in India and US.
COMMODITY FUNDS
Effectiveness & Success
AIM: To study about the Commodity Funds, types of commodity funds, its investment strategies, risk and benefit associated to that. It also compares the performance of some popular commodity funds in India and US.
Contents
What are Commodity Funds? ................................................................................................................. 3 Types of Commodity funds: ................................................................................................................... 3 Why commodities? ................................................................................................................................. 4 Investment Strategies ............................................................................................................................. 5 Risks and Benefits of Commodity Funds................................................................................................. 6 Benefits ............................................................................................................................................... 6 Risks .................................................................................................................................................... 6 Commodity Funds in India: ..................................................................................................................... 7 1. 2. 3. 4. SBI Magnum Comma Fund ..................................................................................................... 7 Birla Sunlife Commodities Fund .............................................................................................. 8 Reliance Natural Resources Fund ........................................................................................... 9 Mirae Asset Global Commodity Stocks Fund (MAGCSF) ...................................................... 10
Performance Comparison of Gold MF’s ............................................................................................... 11 Top 10 Commodity Funds in US: ........................................................................................................... 12 1. 2. S&P GSCI ............................................................................................................................... 12 Goldman Sachs Commodity Strategy Fund .......................................................................... 12
Effectiveness: ........................................................................................................................................ 13 Conclusion............................................................................................................................................. 14
2|Page
What are Commodity Funds?
Funds that invest either directly or indirectly in commodities. Commodity funds are an interesting, and potentially rewarding, way to diversify your investment portfolio beyond stocks and bonds. That's because commodities are often viewed as a hedge against inflation. Meaning the prices of commodities tend to rise in step with inflation This movement trends to run counter to stock prices - which is an attribute that makes commodity mutual funds so attractive to many investors.
Types of Commodity funds:
? Commodity Funds: These funds are true commodity funds in that they have direct holdings in commodities. For example, a gold fund that holds gold bullion would be a true commodity fund. ? Have direct holding in commodities. ? e.g. gold fund that holds gold bullion. ? Commodity funds that hold futures: Holding commodity-linked derivative instruments is a much more common mutual fund strategy for investing in the commodities markets. Most investors have no desire to take delivery of hogs, corn, oil or any other commodity, they simply want to profit from price changes. ? Natural Resources Funds (Commodity MFs): Funds that invest in companies that are engaged in businesses that operate in commodity-related fields, such as energy, mining, oil drilling and agricultural businesses, are often referred to as natural resource funds. While they often hold neither actual commodities nor commodity futures, they provide exposure to the commodities markets by proxy . ? Combination funds:
3|Page
Some funds invest in a combination of actual commodities and commodity futures. Gold funds, for example, may have underlying holdings that include both bullion and futures contracts. ? e.g. some gold funds. ? Commodity Index funds: Most commodity index funds are “buy only” funds, which means they simply buy commodity futures contracts when investor money comes in and they sell commodities when investors redeem their funds. ? ETF’s: Invest in commodities such as precious metals ? 1st commodity ETF was Gold bullion Securities ETF, ASX, 2003 ? conceptualized by Benchmark Asset Management Company, India
Why commodities?
Financial professionals and their clients have found that commodities can: ? It potentially provide additional risk-adjusted returns over time to a diversified portfolio; ? It provides an attractive investment option when global demand for commodities surge; ? It offer low correlation to stocks and bonds; ? It is an effective hedge against inflation; and ? It serves as a diversification tool with the potential to enhance all asset allocation models. ? Help in portfolio diversification, low correlation with equities and bonds. ? Opportunity to invest in economic growth, as commodities are affected by demand and supply. ? Allow investors to have exposure to commodities with lesser risk(diversification) ? Safe haven in times of economic and geopolitical turmoil(Gold) ? Costs of production- continues to rise resulting in the need for higher prices.
4|Page
Investment Strategies
In addition to a variety of formats, commodity funds also offer a variety of investment strategies, including active management and passive management. Active portfolios buy and sell in an effort to outperform a benchmark index. Passive portfolios seek to replicate a benchmark index and match its performance. Passive strategies can be implemented using index funds or exchange-traded funds (ETFs).
Pros and Cons of Investing in Commodity Funds
Commodities offer portfolio diversification. Investing in futures contracts or actual commodities provides a portfolio component that is not a traditional stock, bond, or a mutual fund that invests in stocks and/or bonds. Historically, commodities have had a low correlation to traditional equity markets, meaning that they do not always fluctuate in tandem with market movements. For many investors, achieving this low correlation is the primary objective when seeking to add diversification to a portfolio. Commodities also offer upside potential. The raw materials used in construction, agriculture and many other industries are subject to the laws of supply and demand. When demand rises, prices generally follow, resulting in a profit for investors. Finally, commodities offer a hedge against inflation.
On the Other Hand The commodities markets can be volatile and subject to wild, short-term price swings and long lulls. Over the course of just a few days, prices can go from record highs to record lows. Another item of note is the composition of various mutual funds and the benchmark indexes that they track. In many commodities indexes, energy is often the heavyweight, taking up more than half of the index. When a mutual fund seeks to directly replicate the index, more than half of the fund's assets will be in energy. Some funds place limits on the percent of the portfolio invested in a single commodity to avoid an over-concentration in a single investment
5|Page
Risks and Benefits of Commodity Funds
Investing in commodity funds has become a popular alternative to the traditional mutual fund. This type of fund offers you with a number of benefits as an investor. Here are a few of the risks and benefits associated with
Benefits
Investing in a commodity fund presents a very convenient scenario for traditional investors. For many years commodities were an area that was difficult to access for the standard investor. In order to get involved in the commodity market, one had to purchase confusing futures contracts or house the physical asset. This eliminated many that did not want to work with a futures broker or warehouse a valuable asset in their home. With the commodity fund, you can easily get involved in the commodities market with nothing more than a standard brokerage account. This has opened the door to many investors that would otherwise not be able to get involved. Taking advantage of supply and demand is another benefit of investing in commodity funds. Since commodities represent a limited asset, when the demand for them is high, this can represent a significant boon for investors. For example, if you were to invest in building materials, when demand for these materials goes up because of a rise in construction, you can make a significant return on your investment. This type of fund allows you to take advantage of limited resources. The commodity fund also present investors with a way to hedge their portfolios against inflation. When you invest in stocks and bonds or anything else that is tied to money, you are always a risk of losing part of your return to inflation. When you invest in commodities, this is not an issue. The price of gold or silver will always move with inflation and will always be worth something. This type of fund also offers investors a way to diversify away from the traditional market. It provides an asset that is not correlated to the stock market in any way.
Risks
Investing in commodities can offer investors a good return on their investment. However, it is also a very volatile type of investment. It can lead to a significant loss in your portfolio under
6|Page
the wrong circumstances. While the values of commodities tends to always go up, if you time the investment wrong, it could cost you substantially. On more than one occasion, the prices of certain commodities have went from record highs to record lows in a matter of a few days. This type of investment presents you with no control over what is actually invested in. While you can choose which funds you purchase, once you give them your money, they are free to do with it as they please. Therefore, if you wish to purchase a certain commodity, the fund might have different objectives. Sometimes they have limits on how much of a commodity can be in the fund. Therefore, it might not always coincide with your personal investment strategy.
Commodity Funds in India:
1. SBI Magnum Comma Fund
? It is a commodity based Mutual Funds ? It offers first of its kind, SBI Magnum Comma Fund was launched in 2005 ? It invests mostly in stocks of commodity related businesses with some allocation to debt and money market ? Invests in the following sectors – Oil & Gas, metals, materials & Agriculture ? It is an open ended equity scheme with minimum investment of Rs. 5000. ? Dividend and Growth Options are available ? Asset size Rs. 620.81 crores.
7|Page
2. Birla Sunlife Commodities Fund
? Inception in 2008 ? Open Ended Growth scheme with objective of long term growth of capital. Invests in: o o Stocks of Commodity companies overseas mutual fund schemes
? Choice of three plans: o Multi-commodity plan o Precious metals plan o Agri-plan for agro based businesses ? Asset Allocation o Agri Plan – Foreign equity(94.05%) o Multi-comm. Plan – Agriculture (21.23%), Energy(31.04%), Industrial Metal(16.06%), Precious Metal (22.08%), Water(4.83%)
8|Page
o
Precious Metals- Foreign equity (94.54%)
3. Reliance Natural Resources Fund
? It is an open ended fund ? Invests in equity securities of issuers in natural resources industries ? Invests in companies listed in BSE, LSE, NYSE, TSE, ASX ? Objective is to provide long term growth and capital appreciation by investing in companies engaged in discovery, development, production of natural resources.
9|Page
4. Mirae Asset Global Commodity Stocks Fund (MAGCSF)
? Open ended equity fund that invests in companies in Asia Pacific and Emerging markets engaged in commodity sectors ? Focuses on Agriculture, Metals and Energy sectors ? At least 65% of corpus invested overseas in Asia Pacific and Emerging markets ? Minimum Subscription Rs. 5000
10 | P a g e
Performance Comparison of Gold MF’s
1yr Absolute Returns (in %) as on Jan 12, 2011
23 22.5 22 21.5 21 % 20.5 20 19.5 19 18.5
AIG World Gold Fund DSP-BR World Gold Kotak Gold ETF Reliance Gold ETF SBI Gold ETF UTI Gold ETF Gold BeES Quantum GFund
11 | P a g e
Top 10 Commodity Funds in US:
Fund
Silver Trust Fund(SIVR) iPath Dow Jones-UBS Precious Metals Subindex Total return ETN(JJP) Gold Mining, market vectors Gold Miners ETF(GDX) Carbon iPath Global Carbon ETN(GRN) Nickel, iPath Dow Jones -UBS Nickel Subindex Total Return(JJN) Coffee, iPath Dow Jones - UBS Coffee Subindex Total return ETN (JO) Cotton, iPath Dow Jones AIG Cotton TR sub-index ETN( BAL) Gold, DB Gold Double Long ETN (DGP) Tin, iPath Dow Jones-UBS Tin Subindex Total Return ETN( JJT) ProShares Ultra Silver (AGQ)
Return in past 52 weeks 30 to 34% 21 to 28% 22 to 24% 24% 25 to 29% 28 to 33% 35% 39 to 59% 42 to 60% 50- 53%
1. S&P GSCI
? Serves as a benchmark for investment in commodity markets and as a measure of commodity performance ? It is a tradable index available at CME ? It contains a high exposure to energy ? Comprises of 24 commodities from all commodity sectors – energy, metals, agricultural products ? It also acts as an economic indicator as it is based on the average quantity of each commodity produced, over last 5 yrs of data
2. Goldman Sachs Commodity Strategy Fund
? Uses S&P GSCI as the benchmark
? Gains exposure to commodities through commodity linked notes.
12 | P a g e
Effectiveness:
Commodities get a lot of attention from the media. The price of oil, gold, corn, soy, cotton and hogs are in the national news nearly every day. While investing in the commodities markets is a fairly sophisticated endeavor, commodity mutual funds provide an opportunity for almost any investor to get a piece of the action. ? Commodity funds potentially serve as an effective hedge against both inflation and deflation. ? It potentially provides additional risk-adjusted returns over time to a well-balanced and diversified portfolio; ? It provides investors with a means to capitalize on surges and declines in commodity demand and prices; ? It allows for a buy and hold strategy while simultaneously acting upon short term market trends; and ? It may be an effective complement to other alternative investments. ? Diversification does not guarantee protection against market losses or ensure a gain.
13 | P a g e
Conclusion
In recent years, investable commodity indices and commodity linked assets have increased the number of available commodity-based products. The direct commodity investment can provide significant portfolio diversification benefits beyond those achievable from commodity-based stock and bond investment. These benefits stem from the unique exposure of commodities to markets forces such as unexpected inflation as well the potential of a positive roll return in futures-based commodity investment in periods of high spot price volatility. Adding a commodity component to a diversified portfolio of assets has been demonstrated to result in enhanced risk-adjusted performance.
14 | P a g e
doc_147191732.docx