Institutions Want Sophisticated Commodities Strategies

By Bill McIntosh, Senior Financial Correspondent
Thursday, December 06, 2007 3:40:08 PM ET

LONDON (HedgeWorld.com)—Institutional investors are planning to substantially increase their commodities holdings in the coming years, a new survey by Barclay's Capital shows.

The survey, carried out by Barclays at its U.S. Commodities Investor Conference in New York, found that about half of more than 150 investment clients said they expect to have more than 10% of their overall portfolios in commodities during the next three years. That marks a greater than threefold increase from 2005, when a similar poll showed only 15% of investors expected to have more than 10% of their portfolio in commodities.

"Investors demonstrated a high level of sophistication about commodities in this year's survey," said Benoit de Vitry, head of commodities, emerging markets and quantitative analytics at Barclays Capital. "We have seen this trend in the types of commodity products that we have developed to meet the needs of our investors, and we believe this trend will continue as the asset class grows."

Two messages from the survey are positive for hedge fund operators across emerging markets, managed futures, resource infrastructure and resource equity long/short funds. Barclays found that absolute returns now match portfolio diversification as the most attractive reason for investing in commodities. Two years ago, commodities attraction as a portfolio diversifier outranked its absolute return characteristics by a four-to-one margin among investors surveyed at the 2005 Barclays conference.

At a more general level, the survey found that investors are continuing to adopt a broadening range of investment options for their commodities holdings, including active management strategies and structured products. It also found that while most investors expect to hold commodity exposures for three years or longer, an increasing number of them are looking to increase short-term holdings.

Almost half of those surveyed—45%—said they expect the highest returns in 2008 to come from agricultural commodities. Nearly one in five (19%) plumped for precious metals or chose energy (18%), with 10% naming livestock and 8% industrial metals.

On energy, 54% said the average price of a barrel of oil over the next five years will be above $100 with 27% forecasting an average price of $80 to $100. Just 16% said they expect oil in the $60 to $80 range of the next half decade with 2% seeing it below $60.

In the survey, Barclays also gauged investors' concerns about commodities. Despite the continued rise in most commodity prices from 2005 to 2007, Barclays found that the number of investors with concerns about high price levels had fallen over the two-year period to 51% from 58% earlier. However, it also found that the number of investors with concerns about capacity and liquidity had virtually doubled to 32% over the period.

On environmental markets, 40% of the investors said carbon emissions trading offered the best way to get exposure to climate change. One-third, or 33%, selected alternative energy equities to get exposure to this market, while 16% chose direct agriculture/biofuels as the best way to get exposure.

The survey was conducted through electronic polling at the conference, which featured presentations from Barclays Capital experts on various commodities and environmental markets. Among those surveyed were asset managers, banks, endowments, hedge funds, insurers and pension funds.