How to Position Clients in Commodities

In today's choppy environment, advisors suggest using mutual funds, ETFs and managed futures for some clients

“Stagflation” was the hot buzzword in the late 1970s. It’s started popping again in the news media: A Google news search shows the word appearing almost 400 times from mid-May to mid-June. These are early prognoses, because inflation remains relatively tame — for now, at least — and the economy is still growing, albeit more slowly than previously anticipated.

If we do see another economic slowdown and a possible resurgence of inflation, what would it mean for commodities investors and how should you position your clients’ commodities allocations?

R. Alan Moore, CRC, financial planning analyst with Kahler Financial Group in Rapid City, S.D., says his firm uses long-position mutual funds and managed futures for clients’ accounts.

Moore works primarily with the PIMCO Commodity Real Return Strategy Fund (PCPRX) for its mutual fund investments and Steben & Company Inc. in Rockville, Md., for managed futures.

In his firm’s experience, long funds perform best in periods of economic growth and moderate market volatility. In choppy markets, managed futures accounts have performed best.

“In a highly volatile market or in a market that is dropping quickly, the managed futures tend to do much better because [the fund managers] are active timers,” he says. “They’re very strict trend followers; and, so, whereas if the market is plummeting or is being very volatile our long funds will not do as well.”

Economic forces can also influence demand for a specific commodity and create an investment opportunity regardless of the U.S. economy’s short-term performance.

Kevin Mahn, managing director and chief investment officer of Hennion & Walsh Asset Management in Parsippany, N.J., says industrial metals will benefit from global trends. His firm has allocations to a copper ETF in its managed portfolios and he cites several sources of demand for the metal.

“We look at the decimation that occurred in Japan not so long ago following the earthquake and ensuing tsunami and the massive infrastructure rebuilding effort that needs to take place there,” he says.

“Obviously, that’s going to place a demand on certain metal-based commodities to rebuild their infrastructure, whether it’s copper, aluminum, tin -- all of those commodity prices are going to be influenced by that increased demand," Mahn explains.

"Then, you look at the various uses of things like copper in circuitry, in computers, in telephones. All of that requires some base need for copper and aluminum for containers and also manufacturing,” the advisor concludes.

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