Commodity Panelists Disagree on Strategy at Morningstar Confab

Experts adopt varied techniques to deal with world of rising commodity demand.

Experts on commodity markets touted divergent investment strategies in a panel discussion at the Morningstar Investment Conference in Chicago on June 9. The panelists largely agreed, however, on the underlying economics of tight supply and growing demand across a range of commodities.

The panelists were Bob Greer of PIMCO, MacKenzie Davis of RS Investments, and Geoff Jay of Janus. The discussion, held in a room packed to capacity with hundreds of attendees, was moderated by John Rekenthaler of Morningstar.

PIMCO’s Greer touted using commodity futures for diversification, emphasizing that historically they have provided “negative correlations in many cases from stocks and bonds” along with “greater inflation protection.”

Davis, however, countered that “correlations have risen” and “the negative correlation of equities and commodities has not held up in recent years.” The RS Investments fund manager argued that “futures work well to protect you against supply shocks,” but “increasingly commodities are driven by changes in demand.” His strategy focuses on investing in the stocks of natural resources companies.

Jay, an energy equity research analyst at Janus, emphasized his firm’s approach of “bottom up stock picking,” or focusing on the merits of individual companies.

To some degree, the panelists viewed their divergent strategies as complementary. Greer acknowledged that “oil equities have a place in a portfolio.” Still, he stated that “if you want exposure to the price of oil, it’s preferable to strip away the equity beta that comes with energy stocks,” such as the risk of an offshore platform explosion as occurred to BP’s Deepwater Horizon in the Gulf of Mexico last year.

Asked about oil prices, Jay predicted that they would be higher in a 24-36 month timeframe. He noted that “OPEC spare capacity is very low.”

Greer argued that “we are stretching our capacity in many commodities,” and noted that global demand for commodities will continue to rise as China and other emerging economies develop. “As you increase per capita income in an emerging economy, you will increase demand for commodities,” he said.

Davis noted that supply in the copper market is “quite tight,” and suggested it may become tighter if the new president of Peru, Ollanta Humala, follows through on a proposal to tax copper companies.

Pointing out another commodity niche in which supply is tight, Davis said there is a rising need for workers to handle production jobs in the oil sand fields of Canada. It is possible, he said, to make an income well into the six figures doing such work without benefit of a college education.

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