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Published on March 20, 2008

Investing in commodities is a sound hedge against escalating inflation but there are limitations to using this strategy, say money managers.

Buying commodities is truly for strong hearts. Based on its sharp price swings, conventional wisdom advises players to be prepared for wild rides - at least that is the opinion of many fund managers I spoke to.

Commodity prices could dive to rock-bottom levels in an instant and rocket to the sky the next moment.

Extreme moves can take place within minutes, not just hours or days.

So it would make sense for the average punter to invest in an actively managed fund, such as the Finansa Global Commodities Fund, which has its feeder fund in the UBS-Rogers International Commodity Index Fund.

It matters little if volatility is in the range of 15 per cent as long as we are still in a bull run, said Teera Phutrakul, executive chairman of Finansa Asset Management.

The track record is there for all to see. From its inception in 1998 to last December, the Rogers International Commodity Index (RICI), on which the UBS-Rogers commodity index fund is based, grew in value by 342 per cent.

It certainly helps to have a "brand name" attached to the fund.

In this case, Jim Rogers is a name to be reckoned with. Taking global trips in his customised yellow Mercedes four-wheeler, he is one of the most admired professional investors today.

He equates his relocation to Singapore "like moving to New York in 1908".

His contrarian plays on commodity trades and partnerships with George Soros in the Quantum Fund have also made him an industry giant.

In these times, his word carries weight and Rogers is bullish on commodities. To be sure, the strong demand for such goods looks poised to rise further.

"It is a case of inelastic demand," said Teera, referring to rises in oil, corn and rubber prices - all daily necessities.

Farmers in the American Corn Belt too have turned to corn for ethanol rather than food or fodder.

There is also speculative demand from traders. Do not forget oil broke US$100 (Bt3,100) a barrel on January 2 because a single trader at the New York Mercantile Exchange made a "vanity trade" only to sell that position immediately at a loss.

The spectre of a global slowdown and US recession keeps commodity prices in check.

The US financial market is mired in a sub-prime-induced credit crunch, forcing the Federal Reserve to pump massive supplies of cash into the system in recent months.

The sell-off in commodities last Tuesday saw the Reuters/Jefferies CRB Index, another global benchmark for measuring commodities, drop 4.6 per cent - the biggest one-day percentage loss in its 50-year history. But supplies are drying up. The failure to build sufficient oil stocks when oil was at $20 has resulted in strains on global economies, Teera says.

He believes crude oil, which accounts for 35 per cent of the fund's direct equity position, will run out in 10-15 years. New sources are located in business-unfriendly countries such as Iraq, which possesses the fourth-largest reserves that are expected to last at least 100 years.

Other oil centres are Iran and Venezuela, both openly critical of the US. Geopolitical risks will rise when countries use commodity might as bargaining tools.

Teera highlights the RICI fund's diversified basket of commodities - 35 compared with 24 and 19 from Goldman Sachs' and Dow Jones-AIG commodity indices, respectively. The UBS-Rogers feeder fund, denominated in Swiss francs, also allows players to profit from exchange-rate gains should the dollar fall further. "It does no harm for investors to allocate 10-15 per cent of their portfolio in commodities," Teera said.

Ki Nan Tsui

The Nation