Are Commodities Coming Back Into Fashion?

As evangelists of diversification, Gatemore has long allocated to commodities. We believe the asset class can offer uncorrelated returns while acting as a hedge against inflation. In the years following the financial crisis, however, as growth slowed globally (and in China in particular), many commodities suffered lackluster returns and subsequent investor outflows. Nonetheless, as we wrote in a blog last August entitled A Contrarian View on Commodities, “we continue to maintain long-only commodities exposure in portfolios, viewing the correction over the past couple of years as an opportunity more than an omen of what is to come.”

On April 25th the Financial Times published an article entitled “Investors starting to look at commodities again.” The article cites several factors that are bringing investors back to the commodities fold, including a desire to diversify away from equities into a “contrarian” asset class, backwardation in several markets, and a decrease in correlations.

According to the FT, “the correlation between returns from commodities, equities and bonds, which were unusually high after the global financial crisis in 2008, has dropped sharply over the past year. This is helping fundamentals to reassert themselves with supply and demand balances determining the winners and losers.”

Alas, the “contrarian” label may no longer apply, as the return to fundamentals and the drop in correlations have helped turn $50 billion in investor outflows from passive commodity vehicles in 2013 into $6 billion in inflows in 2014. And to be sure, many of the same risks that have dragged down returns over the past few years persist today, including continued decreased demand from China and other importers as well as increased supply through technological advances. But with interest rates slowly rising, we continue to view commodities as an important part of a well-diversified portfolio – an asset class that can both generate uncorrelated returns and help hedge against inflation.