Funds cool, but not frosty, on holding commodities

Commodities are out of favour with investors, but may not be quite as unfashionable as gloomy headlines have suggested, with the decline in their appeal stabilising.

Investors are, overall, underweight commodities, Bank of America Merrill Lynch said, following a survey of 251 fund managers, responsible for $691bn of assets between them.

However, the majority of fund managers underweight, compared with those overweight, is, at 1%, the lowest possible.

It was also level with January's figure, and well below a reading of about 15% in July last year.

The bank noted that the underweight came "even though US energy is the second best performing sector year to date".

Rush for the exits

The data come amid a debate on commodity markets over the sector's appeal to investors, given the renewed interest in equities which has helped many share markets hit multi-year highs.

Equity funds, excluding exchange traded products, attracted $4.1bn of net inflows last week, and $5.8bn the week before according to JPMorgan.

Meanwhile, losses of 3.7% last year, and 1.4% in 2011, according to Newedge, have reportedly seen commodity hedge funds at least lose a hefty proportion of their investors.

Barclays - which on Tuesday revealed it ha shrunk commodities staff by one-third and stopped "speculative" agriculture trading - says investors have withdrawn $10bn from commodity indexes over last year, leaving $133bn in the sector.

New York-based eVestment|HFN says combined assets at more than 400 commodity hedge funds fell 5% last year to $78.9bn.

'Intensifying driver'

Doane, the Missouri-based crop broker, flagged "rumblings about investment funds pulling out of commodity-based indices", a withdrawal which "will be an ongoing, if not intensifying driver".

"Pension funds in particular have become disenchanted with commodities as a useful hedge against inflation," Doane said.

Other commentators in the agricultural sector to highlight the trend include soft commodities broker Sucden Financial, which noted that "there seems to be malaise for the commodity fund community".

Last week, Richard Feltes, at Chicago-based RJ O'Brien, cautioned over the likelihood of "diminishing participation" in commodities "as asset class allocators see better opportunities in other markets - especially if 2013 US weather normalises, thus triggering gains in 2014 grain stocks.

"Additionally, traders perceive better opportunities in year ahead in allocating capital to currency markets which are starting to break out of recent trading ranges."

More contracts, less optimism

In agricultural commodity futures and options, recent weeks have seen a marked decline in the net length of non-commercial investors in US-traded crops, according to Rabobank.

The net long position – the advantage of long holdings which profit when prices rise over short positions which benefit when values fall - in derivatives in major crops, softs and livestock contracts fell to 113,000 lots as of the end of January, down from more than 600,000 some six months ago.

However, the overall level of open contracts, at more than 2.5m, held by non-commercial investors has risen so far this year, the data, drawn from the Commodity Futures Trading Commission, show.

Open interest in agri commodity futures and options from all investment sources topped 6.5m lots, up 12.1% from a December lot.

In the much-watched managed money category, a proxy for hedge funds, open interest has echoed this trend, increasing in 2013, even as the net long position has fallen.

'Scramble to rebuild inventories'

Meanwhile, Australia & New Zealand Bank highlighted some boost to prices from end users from revived economic sentiment, which has fostered "a scramble to rebuild global inventories".

"Much of the second half of 2012 was characterised by an unwinding of inventory," ANZ senior ag economist Paul Deane said.

"But as financial market risk diminished from Europe and key economies showed signs of stabilising, the inventory cycle switched."

The impact had been particularly evident in China, where futures in purified terephthalic acid, or PTA, a basis for polyester for clothing or bottles, have risen by 12% since late November, and in steel rebar by 18%.