Hot commodities can help diversify your portfolio, says MR MONEY MAKER Justin Urquhart Stewart
- Most investors can simply invest in a commodity fund, and there are many
- Examine any potential funds carefully as different factors can hit prices
When sitting in a cave, resting after a hard day’s hunter gathering, it would have been unlikely that I would have led a discussion group about current investment opportunities.
However, there is a very good chance that at some stage I would have considered swopping some of my hunted and gathered assets for something that I needed.
I might have considered agreeing to trade some furs for coal and timber, or even maybe that shiny gold-coloured stuff that had been dug out of the rock. Welcome to the first commodities market.
Midas touch: Commodities have a broad reach from ‘hard’ assets such as gold and iron ore, through to ‘soft’ ones including orange juice and wheat
What are commodities?
Commodities have a broad reach from ‘hard’ assets such as gold and iron ore, through to ‘soft’ ones including orange juice and wheat.
Generally these assets are consumable, in that they are used to make other things or to be consumed as food.
This makes them an interesting asset as there is usually going to be demand for them, and we can often follow this in the news as they are affected by weather, transportation or even political issues.
So what should we do?
The picture conjured up of commodity investing is often that of men in striped jackets shouting at one another, as perfectly illustrated in the 1983 Dan Aykroyd-Eddie Murphy film, Trading Places.
You don’t have to do that! For the moment I will focus on the ‘hard’ commodities and will deal with gold and soft commodities another day, as they have some different characteristics you need to be aware of.
Most investors can simply invest in a commodity fund, which will give you exposure to a range of them. This is a well-developed market, so you have a lot of choice.
However, if you have a clear view on a specific asset like oil or gas, then you could invest directly into a single commodity like copper or iron ore, but you will obviously have less diversity.
There is a range of managed funds, but you must examine exactly what they are investing in as it will not be just the commodity price itself that will affect your investment, but also any political issues, like Russia’s behaviour regarding its Nord Stream gas pipeline.
And of course any currency movement will also have an effect as such assets are often priced in US dollars.
For investments in natural resources including mining, oil and gas the JPM Natural Resources Fund covers all of those and is actively managed to take advantage of movements but will cost you 1.2 per cent per annum.
For a cheaper route then, the passive ETF market can provide a good alternative but remember it is just a tracker of an index.
Here the Invesco Bloomberg Commodity UCITS ETF fits the bill and has a management fee of just 0.19 per cent.
Tin hats on, please.
Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally.