Structured commodity products are expected to account for 18% of the overall investments in commodities during the next twelve months, according to a survey of around 230 attendees at Barclays Capital's Fifth Annual Commodities Investor Conference held in Barcelona last week. "Structured commodity products remains one of the core pillars for financial institutions wanting to offer investments in commodities," said Martin Woodhams, head of commodity investor solutions at Barclays Capital. "It has definitely grown over the years and it remains one of the most important pillars of our business. Total issuance of commodity structured notes was over $10bn last year and has grown from almost nothing just a few years ago."
The bank stressed that it will continue to increase its 30% global market share, and that investment solutions for 2009 are being tailored to meet demand for long-short and active management strategies over simple long-only exposure. "A lot of the conference discussions were about winners and losers in the commodity market over the next three years," said Woodhams, "And we spent a lot of time talking about index strategies that allow you to have long/short allocation to commodities. These were perceived as likely to outperform delta-one index investments over the short term, and we are working on solutions to meet the demand of our client base."
As structured commodity products markets have developed very rapidly in Europe, the US and to a less extent in Asia, "Retail markets have taken very aggressively to investing in commodities in [the sense] that investors are moving away from commodity stocks such as Exxon, Shell... to taking underlying exposure through structured notes and through exchange-traded products," continued Woodhams.
Nearly half of the respondents (45%) to the Barcap survey said portfolio diversification is one of the main reasons for investing in commodities: "Alongside portfolio diversification, which is what the large institutions and retail investors are looking for, a very large portion of the audience like commodities because of the potential to provide favourable absolute returns," said Kevin Norrish, a commodity researcher at Barclays Capital. "Over the long-term, the absolute return from commodities compared with that of other asset classes has been very competitive." Norrish also pointed out that the S&P500 has experienced an annualised loss of 3.4% during the last ten years, whereas equivalent commodity returns (based on the benchmark return of the S&PGSCI) are positive, at 4.9% annualised: "Some of the commodity sub sectors have returned in excess of 10% annualised during the last ten years. Going forward, investors are expecting favourable long-term returns from this asset class as well," he added.
With interest rates close to zero in many countries, investing in structured products is at the top of the list, as investors seek yield enhancement and capital protection: "[These] have become two very important factors when it comes to investing, and the structured product market has the flexibility to be able to structure the type of payoff that fits into any of those categories," concluded Woodhams.
