Addressing recent volatility, Donora says commodity investors who have been waiting for a longer-term pullback “are now beginning to invest in the sector”.
He says that cotton and silver are the two commodities around which Threadneedle treads most cautiously due to the fact that they are “highly volatile and thinly traded”. Investors received a painful reminder of such tendencies last month, when the price of silver shed 24% over the course of just four days.
Threadneedle’s Enhanced Commodities Fund, managed by David Donora and Nicolas Robin, does not short stocks and is fully invested, an approach Donora maintains is suitable for investors.
“We do not take any leverage, and we do not deleverage and go to cash if we get bearish. We can move to a more defensive structure but we don’t go to cash because there’s daily liquidity. It’s in the hands of the investor whether they want to be invested in commodities or not”.
Addressing another area where prices have come off in recent weeks, Donora says “there is nothing wrong with mining stocks” but suggests they will run in shorter cycles than related investments and hence “become relatively overbought relative to other commodities”.
The manager has other concerns over the ability of some large-cap miners to generate growth or even maintain current rates of production. “Some of the numbers BHP Billiton has been putting out around capex have been eye-popping,” he says.
“If they need to reinvest that cash just in order to continue the same rate of production, then that gives us pause”.
Elsewhere, Donora says the forthcoming end of QE2 in the US “doesn’t obviate the fact that we have a very tight supply/demand balance across the field of commodities.” One exception to this is US natural gas, to which Donora has a significant underweight in the belief that fast extraction rates mean producers more than able to deal with supply shortages.
By contrast, he retains an overweight to US gasoline. “We are positioned for significant outperformance at the very front of the curve,” he says. “Any geopolitical or destabilising event will disrupt the flow of the right types of crude oil flowing to refineries”.
