The commodities boom has seen the Bloomberg Commodity Index, which tracks 23 energy, metals and crops futures, rise 43% in the past year (73% from the lows seen in April 2020 ). The Nifty Commodities TRI also gained 88.5% against the 53% return of the Nifty 50 TRI during the same period.
With the rise of the theme, net inflows in commodity funds have strengthened. Morningstar Direct data shows that net inflows into commodities funds which were around 55 crore in October 2020 have risen to nearly 2,000 crore in May 2021, although there has been some profit taking since. during.
However, despite the segment’s exuberance, the year-over-year performance of thematic funds focused on commodities funds was mixed. Five of the segment’s eight funds failed to beat their benchmarks last year. The long-term performance (5-year return) of commodity-focused funds has also not been impressive, with more than half of programs that have been in existence for more than 5 years not exceeding their benchmarks.
Note that composite benchmarks are used by most funds and that benchmark index returns are only available until August 31, 2021 in the fund factsheets. Therefore, the returns as at August 31, 2021 are taken into account for this analysis.
The ICICI Pru Commodities fund, launched in 2019 with exposure to Indian metals, petroleum, chemicals, fertilizers, paper and cement companies, is the best performing in the category. The fund significantly outperformed its benchmark, Nifty Commodities, last year. As of October 8, the fund has returned 129% and remains the best performing.
SBI Magnum Comma Fund, DSP Natural Resources and New Energy Fund (with exposure to global companies through foreign mutual funds) and Tata Resources and Energy Fund – all funds with similar sector exposure – generated returns over a similar year of around 70-75%, as in August 2021. But DSP Natural Resources is the only program that has generated alpha (excess returns over the benchmark) during said period. period. The range is, however, wider at 76-95% for the latest one-year returns.
DSP World Energy Fund, which invests exclusively in energy-related stocks, performed decently last year due to the rise in oil prices after the sharp correction seen in early 2020. However, the agricultural fund from the same team – DSP World Agriculture Fund – posted much lower returns. The fund is a fund of funds (FoF) that invests in BlackRock Global Funds – Nutrition Fund.
Sun Life Aditya Birla Commodity Equity Fund – Global Agri Plan – is performing better. It is a thematic fund investing in global companies exposed to agricultural commodities (with the highest exposure to American geography).
The current rally in commodities could face headwinds in the form of a potential slowdown in China as well as the unwinding of accommodative monetary policies in developed markets. Sahil Kapoor, Chief Product Officer and Market Strategist, DSP Mutual Fund, believes that a significant correction in the commodities space is imminent in the near term, although he expects the long-term outlook to be. good.
Lalit Kumar, equity fund manager at ICICI Pru AMC, says the performance of commodities as an asset class will be different in the next decade compared to the last decade, as commodity prices could be higher in future cycles compared to past cycles.
He cites the limited addition of capacity due to China’s carbon neutral policy on the one hand and the expected growth in demand for raw materials on the other as the reason for this. He therefore recommends that investors consider any future correction as an investment opportunity.
On the agricultural commodity front, Kapoor says there are droughts in major producing countries and there have been supply chain disruptions around the world as well. As a result, the prices of agricultural products may hold out for a while before cooling off, he believes.