Emerging Market Fund Managers Turning to Commodities

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Commodity volatility, contrary to popular belief, has also been comparatively low. Using three-year volatility of monthly returns on an annualised basis, the DJ-AIG All Commodity index has shown a volatility varying between 12% and 16% while that of the MSCI Emerging Markets index has been between 16% and 26%, which is an argument for including commodities in the portfolio as means of improving efficiency.

ETF Securities Limited has just held its latest markets presentation, this time concentrating on the correlation (or not) between the emerging markets and the commodities. This presentation was brought about because an increasing number of emerging market fund managers are now starting to use Exchange Traded Commodities to give some diversification to their portfolios and there was a clear demand for some analysis on the issue.

Thus, the presentation given in mid-July, the essential conclusions of which are as follows:

That ETCs reduce portfolio volatility and improve a fund's risk-reward profile as a result of commodities' low correlation with Emerging Market (EM) and developed equity markets.

ETCs provide a natural hedge against inflation

And a highly liquid means of gaining exposure to growth themes in otherwise hard to access markets, commodity-related companies and sectors that are often state-owned or private.

They provide direct exposure to EM growth themes without the natural inherent political or regulatory risks that adhere to equities

And are liquid investment vehicles in which to maintain exposure to EM growth while building positions in equities or markets, or waiting for volatile market or political conditions to settle

While acting as a quick, easy and liquid way to hedge (through short or long ETCs) or enhance (through leveraged ETCs) exposure to commodity and emerging market trends...

Commodity volatility, contrary to popular belief, has also been comparatively low. Using three-year volatility of monthly returns on an annualised basis, the DJ-AIG All Commodity index has shown a volatility varying between 12% and 16% while that of the MSCI Emerging Markets index has been between 16% and 26%, which is an argument for including commodities in the portfolio as means of improving efficiency.

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