
Oil, precious metals and agricultural crops - they all fall under the term 'commodities' when it comes to investing.
Many investors think of commodities as not only a way to diversify portfolios, as the performance characteristics of commodities are uncorrelated to the performance of equities, but also as an inflation hedge.
However, commodity prices have been more volatile recently, in line with stockmarkets more generally.
So should clients still have exposure to this asset class? Is there a long-term case for allocating to commodities? And, if so, what types of products give them the most suitable exposure, given that many may prefer holding the physical asset over equities, such as shares in mining companies?
Read on to find out how advisers' clients are currently positioned in commodities and the wider role commodities can play in portfolios.
Volatility concerns keep clients' exposure to commodities down
The majority of investment clients have less than 10 per cent of their portfolios exposed to commodities, financial advisers have revealed.
But a significant percentage also had clients with no exposure to this asset class at all, according to the latest FTAdviser Talking Point poll.
When asked how much exposure to commodities, on average, their clients had, 50 per cent of advisers polled said less than 10 per cent, while 36 per cent of advisers said their clients had none at all.
Dennis Hall, chief executive of Yellowtail Financial Planning, said: “I’m also in the group that has zero direct exposure to commodities and I’m comfortable with this.
“I acknowledge that I have an indirect exposure to commodities through a diversified portfolio of holdings that will include things like mining stocks. These will tend to be loosely correlated with the underlying demand for commodities.”
I think people see gold as something different because is it a currency or is it a commodity?
Oil prices have climbed again recently, with the price of Brent oil, the international crude benchmark, reaching nearly $80 (£60) a barrel in recent weeks.
Despite this, only 3 per cent of advisers polled said their clients had between 15 and 20 per cent of their portfolios allocated to commodities such as oil, while 11 per cent confirmed that clients had less than 15 per cent exposed to this asset class.
James de Bunsen, portfolio manager on Janus Henderson’s UK-based multi-asset team, said the best way for most investors to get access to a physical commodity was via exchange-traded funds.

But he suggested: “Of those people who said they had them [commodities in their portfolios], probably most of them have only got gold and nothing else.
“I think people see gold as something different because is it a currency or is it a commodity? It’s probably, in many ways, more similar to a currency than any of those other major commodities that feature in the indices.”
Mr de Bunsen suggested people had gold in their portfolios mainly as a hedge against geopolitical risks and a hedge against quantitative easing (QE) going wrong.
“That was one of the big reasons for people holding gold a few years ago,” he added.
Mr Hall questioned whether commodities as an asset class was a useful diversifier in clients’ portfolios, “given the additional risks and higher level of volatility that commodities can bring”.
“My own opinion is that adding commodities to a portfolio is simply adding a higher level of speculation to the portfolio – it may pay off, though in the long run I doubt it does,” he added.
eleanor.duncan@ft.com
House View: Commodities - is now a good time to invest?
Before we provide readers with the merits of investing in commodities, it is important to highlight how dreadful investor returns have been across the broad commodity complex since 2010.
In fact if we look back to the dark days of January 2009, during the financial crisis, any investor that invested £1,000 in the broad commodity complex (represented by the Bloomberg Commodity Total Return index) would have suffered a 28 per cent loss on their investment.
In contrast, if investors had put the £1,000 into US equities (S&P 500), global equities, global high yield or Reits, they would have seen their portfolio increase by around 200 per cent profit.

From our perspective, the recent weakness in metals, and agricultural commodities in particular, has been a direct result of the unprecedented targeting of tariffs between the US and its previously regarded ‘important’ trade partners, such as Mexico, Canada, the EU and China.
Investor sentiment for commodities has never been so low.
However, if we step back and look at the individual commodities, purely from an unemotional fundamental perspective, for many of the energy, metals and agricultural commodities, the supply and demand balances look very tight indeed, and with prices being at multi-decade lows, the market is not recognising this structural tightness right now.
Many individual commodity prices, in inflation-adjusted terms, remain well below the highs seen in the 1970s and early 1980s.
You don’t need much exposure to protect real returns in your portfolio in a rising inflationary environment.
For this reason it is clear to us that given commodities are so cheap relative to many other asset classes, this is no doubt one of the main reasons why we have started to see investors slowly coming back to commodities and commodity related equities.
However we should also remind investors of the other reasons why investors are dusting off the ‘investing in commodities’ folder right now:
• Portfolio diversification - History tells us that commodities tend to hold a low to negative correlation to traditional assets. Therefore, commodities offer a good way in which to diversify a portfolio’s risk assets away from traditional asset classes such as bonds.
• Geopolitical hedge - Looking at North America, South America, Europe and Asia, it is hard for anyone to make the case that geopolitical relations are better than they were five years ago and, from where we sit, unless the rhetoric changes (from one individual in particular) it is difficult to see how these relationships do not deteriorate further over the few years ahead. In the past, in periods of heightened geopolitical risk, commodities in particular have performed as a good natural hedge against geopolitical events.
• Protection against rising inflation - Rising commodity prices have historically been a major contributor to rising inflation, poor financial asset performance and tighter monetary policies. Commodities therefore provide excellent protection for those with inflation-linked liabilities, as well as those who seek liquid and accessible ‘real asset’ investments.
Inflation protection
The key point here is ‘rising inflation’ - not high inflation, rising inflation.
This is a big misconception among investors; many think that commodities just perform well in periods of high inflation, but this is actually not precise enough.
If you go back to analysing the annual returns of three common investment subsectors (equities, bonds and commodities) since 1976, it is very clear that during periods of falling and subdued inflation, commodities perform poorly, but when inflation starts to pick up, even from a low base, commodities significantly outperform equities and bonds.
This is another key message for potential commodity investors: you don’t need much exposure to protect real returns in your portfolio in a rising inflationary environment.

All the signs are showing that inflationary risks are rising - while not very high, it is clear to us that US core inflation has definitely started to increase and this is feeding through into CPI which is heading towards a rate of 3 per cent year-on-year (note this compares to an annual CPI rate of just 1 per cent year-on-year two years ago).
In Europe, CPI has increased from almost zero in June 2016 to just under 2 per cent in June 2018, albeit from a low base, the trends are positive.
Supply outlook
Coming back to the fundamental supply balances for commodities, we will finish by reminding investors that commodities are cyclical industries.
Remember, “the best cure for low commodity prices are low prices” and as a result of many of these commodities trading below the average cost of production for the last few years, new project capital expenditure (future supply) has collapsed to historically low levels, which we believe will have a negative impact on supply over the next few years.
The only way investment can be increased is if prices recover.

Source: Schroders
Mark Lacey is head of global commodities and resources at Schroders