For value investors, commodities’ lower prices naturally raise the question: Is this an opportune time to buy commodity-focused funds?
Several trends point in that direction, according to Mike McGlone, director of research at ETF Securities-U.S.
First, investors in commodity exchange-traded products, or ETPs, did not rush for the exits in 2014, despite falling prices—although there has been rotation among different assets.
Still, ETF Securities’ research finds that global assets under management in commodity ETPs fell by $9.2 billion to $101.5 billion in 2014.
Apart from gold ETP redemptions, however, it was price movements—not investors’ redemptions—that caused the decline; overall net flows into non-gold commodity ETPs were neutral.
In categories like oil funds, for instance, inflows were up sharply, an indication of changing investor sentiment.
“The price of crude oil was down effectively, 40% on the year,” he says. “Yet total AUM in crude oil actually increased. So, to me, you’re seeing a flow out of more protective assets like gold into more cyclical assets like crude oil.”
Other categories also saw growth in 2014, ETF Securities reports. Broad commodity index-tracking ETPs received $1.1 billion in 2014, a sign that strategic investors are starting to view commodities as an asset class that has high value relative to stocks and bonds.
As for specific categories like grains, low prices brought investors mainly into corn and wheat, as longer-term investors believe that growing conditions are unlikely to be as favorable this season as last.
Second, many commodities are selling below their “all-in” cost of production, McGlone notes, and that becomes an unsustainable situation that eventually results in production cutbacks. (All-in costs include the cash costs of production plus other amounts such as administrative expenses.)