The recent equity rally has so far proved remarkably resilient and investors may now be growing more comfortable with the idea of taking on risk once again. Commodities would normally be an obvious choice of ‘recovery’ asset class and yet have been almost completely neglected by investors in this most recent rally. Why?

According to recent statistics from Morningstar, commodities have seen the slowest organic growth rate of any asset class except property over the last 12 months – at just 0.39%. This compares with 1.23% for equity funds, and 14.18% for fixed income funds. Investors clearly do not believe a bounce in commodity prices is likely to accompany any resumption in economic growth.

“Most now believe China’s move to a more consumer-driven economic growth model may lead to a slow-down in its demand for commodities.”

At an institutional level, investors may also have been influenced by the actions of some of their peer group. The Financial Times points out, for example, that Calpers, the influential $244bn (£161bn) Californian state pension scheme, has just reduced its commodities exposure from 1.5% of its overall portfolio to 0.6%. Hedge funds also appear to be moving away from the asset class.

Partly the reason is historic – investors have seen poor returns on commodity markets over the past few years. Commodity indices peaked in April 2011 and have been slowly moving lower ever since, particularly compared with equities. The S&P GSCI index spot is down 9.6% over one year, compared with an 11% rise in the S&P 500 index. Commodity markets are often blown about by market mood and speculation and are perhaps more vulnerable to negative sentiment.

But it is also clear some investors’ faith in the so-called ‘commodity supercycle’ is waning. China bulls such as Jim Rogers may continue to bang the drum but theirs are increasingly isolated views. Most now believe China’s move to a more consumer-driven economic growth model, plus the necessity of tackling its pollution problem, may lead to a slow-down in its demand for commodities. But perhaps more important is the prospect of US energy self-reliance – China has taken over from the US as the world’s largest net oil importer, largely on the back of an increase in US domestic production.

For UK fund investors, commodity investment has also been unprofitable, with the majority of the natural resources and energy portfolios languishing at the bottom of the Investment Management Association’s Specialist sector over both one and three years, with some making double-digit losses. If this type of fund does not prosper at a time of increasing investor confidence, investors might reasonably ask, then when will it? It would be a very brave contrarian who reinvests now.

March 2013

Important Note: Material within this article has been complied with the help of the Marketing Hub which is part of Marketing In Practice Ltd on behalf of your professional financial adviser. The contents of this document do not constitute advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term. Before taking any decisions, we suggest you seek advice from a chartered financial planner.