Piling into commodities

More evidence for the sometimes-reviled ‘financialisation‘ of commodities: UK pension fund managers (at least, some of them) are indeed increasing their commodities exposure.

The growing interest in commodities markets from “financial” investors — those who aren’t traditionally involved in the commodities industry itself — has been a point of contention for those who take the view that rising numbers of speculators are driving up commodities prices for those who use them, whether in business or as end-users.  (Others, however, argue that more investors means more liquidity, more counterparties, and can even help keep prices lower by creating incentives to store commodities.)

The FTfm/Towers Watson survey of UK-based alternative investment managers that oversee pension funds found that the top 100 managers had increased their commodities allocation from 0.4 per cent to 2 per cent  between 2008 and 2009. It’s a small base, but Towers Watson senior investment consultant Alasdair MacDonald points out that pension fund managers tend to be conservative.

The following are the biggest managers of commodities investments for pension funds:

However, interestingly for the argument about the role of ‘financial traders’ or speculators, FTfm reports that the composition of holdings suggests a “strategic allocation”, or exposure to risks, rather than seeking to outperform benchmarks. Moreover, these investors are mostly targeting commodities as a broad asset class, rather than in particular categories such as crude oil.

At the same time, however, some of the biggest traditional US pension funds such as CalPERs are remaining shy of commodities markets altogether, as the FT’s Greg Meyer reported last week. The four biggest funds are either staying away from commodities altogether, or having holdings below their target levels. Volatility, plus the poor returns on tracking commodities indices, thanks to markets being in contango, have put the funds off the idea.

At the same time, however, storage levels remains reasonably high – but not growing. Philip Verleger, energy market economist, points out that the return on storage of Brent crude oil has reverted to historical range, after being well above the 20-year average from mid-2008 to mid-2009. However the amount of oil in storage around the world has not decreased significantly — but Verleger suggests it may be reaching a plateau:

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