Q: Is there a particular asset class grabbing your attention at the moment? Why?
As a commodity portfolio manager, I would be remiss to not beat my own drum and extol the virtues of investing in real assets. The performance of broadly diversified commodities this year demonstrates the role they can play in protecting investors from specific risks. We are all aware that gold in particular has delivered standout returns amid the enormous uncertainty, which has emerged with the new US administration.
However, what is noteworthy and overlooked is the resilience of industrial metals. Against broad expectations of an economic slowdown, copper, nickel and tin have delivered positive year-to-date gains, while many other cyclical assets are in the red.
This gives credence to the idea we are heading towards a new regime where governments and corporates are forced to expand capital expenditure to reorientate and secure their productive capacity, security and infrastructure, and improve their resilience against geopolitical risk.
Q: How do you see sustainable and ESG-oriented investing evolving from here within the asset class you cover?
At first glance commodities seem incompatible with ESG and sustainability, having often worn the moniker of a ‘dirty’ industry and asset class. However, investors can allocate to commodities with a clear framework of understanding the function commodity derivatives fulfil in the real economy and how ESG principles can be applied to traditional asset classes.
We consider commodity derivatives neutral from an ESG perspective, as an investor exercises neither ownership nor control over the assets producing said commodities, they merely participate in price exposure. However, when allocating to commodity derivatives, asset managers will often have additional liquidity due to low margin requirements, which can be invested in instruments with solid ESG credentials. This evolution allows investors to embed commodity exposure while still meeting ESG commitments.
Q: What will be different about the investment sector a decade from now?
We are in a transformative period, witnessing a dramatic shift of global allegiances and alliances, with governments forced to respond to the hammer blow of an aggressive ‘America first’ doctrine.
Trade wars, like other wars, are easy to start but hard to stop. The knock-on consequences are often anticipated by markets, causing rapid capital migration. If deglobalisation of trade and productive capacity are a fixture of the coming decade, it seems likely governments will increasingly view the globalisation of capital markets as problematic and counter to their objectives.
As such, we expect asset managers will be incentivised to make capital allocation decisions in traditional asset classes that they otherwise would not. This makes alternative asset classes an increasingly important source of diversification.
Read the rest of this article in the June issue of Portfolio Adviser magazine
