In mid-2008 expectations were still high; China and other emerging countries were booming. Everything fell apart in the second half of the year. Between September and December 2008, most markets lost the gains they accumulated for the preceding eight months. The collapse of Lehman Brothers tightened credit plunging the global demand for commodities.
Hedge funds offloaded commodities
Hedge funds sold large portions of their commodity portfolios, worsening the situation. Oil fell to $33 a barrel in December compared to expectations of $200 during the summer; gold was the only thing to rise.
By contrast, last year started in a context of fragility; despite small macroeconomic improvements in December 2010 the economic environment progressively deteriorated. Funds performed slightly better in 2011 than in 2008 (-24% on average against -33% in 2008).
In 2008, gilts surged during the last quarter when equity markets crashed in September. However, the crash of 2008 was mostly an equity and property problem and all sovereign bonds broadly benefited from that violent shock.
Conversely, 2011 primarily experienced a sovereign debt problem and the UK was one of the few places to profit. In 2008, 30% of UK fixed income funds beat their benchmark, but only 34% in 2011, suggesting that not many learnt their lesson.
Most of the new funds (launched after 2008) returned positively in 2011, but with an average return of 5.8% meaning that only a few beat their benchmark. Among the 144 funds that returned negatively in 2008, 33% outperformed their benchmark in 2011.
Most managers of commodity funds considered the turmoil of 2011 as “just a phase”, as their allocation remains the same. Their views have not changed; they still have positive outlooks for the longer term. This is especially true for gold equities, with many arguing that mining companies show strong cash flows, are not fairly priced, and will benefit from governments printing money.
Political considerations
While the sovereign debt crisis in Europe escalated rapidly, it started a while ago, and UK fixed income funds should have been able to sense the shift towards gilts. This failing is particularly clear in the Sterling Strategic Bond sector, which has much more freedom of allocation, yet still 69% of managers failed to beat their benchmark.
UK fixed income funds will be greatly impacted by the situation in the eurozone, which could go either way. Commodity funds could possibly opt for a defensive positioning, a wait-and-see strategy until a clear trend comes out – though managers seem very positive about their views and will probably stick to them. For both sectors, their salvation could come from the temporary optimism surrounding presidential election periods.
2011 was a tough year with lot of volatility and surprises. Whether they were good or bad, managers faced difficulties coping with the flow of news.
If 2012 is filled with downwards revised economic data and unpredicted political statements, funds will find it hard to beat their benchmark again this year based on last year’s evidence.
