Should you be increasing your exposure to natural resources and commodities within your investment portfolio?
According to a new survey from Barings, nearly two in five investment advisers believe their clients should increase their exposure to these alternative asset classes.
The survey found that one in six (16%) advisers are now ‘very favourable’ towards natural resources and commodities, up from just 6% when the research was last carried out.
The latest Baring Asset Management Investment Barometer found that the biggest global macro-economic challenges to growth over the next six months is thought to be supply and security of global resources.
Commenting on the research, Duncan Goodwin, Head of Global Resources at Barings, said:
“We believe the outlook for the global resources sector remains positive, with a number of short and longer term drivers supporting the asset class.
“At this stage of the economic cycle, we believe valuations for resources companies are highly attractive, as they are trading below historical levels and look set to revert to
their long-term mean.
“On a longer term basis, population growth will continue to drive absolute demand for natural resources, with the growing global population’s needs for energy, foods and other raw material inputs sustaining an ever rising need to boost production.”
We believe in the long-term potential of natural resources and commodities as an investment here at Informed Choice, but think investors should be wary about boosting exposure at this time.
In many cases, investors already have indirect exposure through their equity holdings.
The FTSE 100 index of leading UK company shares, for example, consists of nearly a third of market capitalisation exposed to commodities.
There is also the impact of adding this asset class to an existing portfolio to consider.
When adding different investment types to a portfolio, investors need to think about the impact this might have on how that portfolio will behave in the future.
Commodities and natural resources are a useful alternative asset class because they tend to be negatively correlated with other, more mainstream investment assets.
But investors should be seeking to construct and maintain efficient investment portfolios; those which deliver the best possible returns for the level of risk being taken.
When adding new asset classes to an existing portfolio, there is a danger that portfolios can move off the efficient frontier and result in a return which is not commensurate with the risk being taken, as measured by volatility.
The results of this survey from Baring Asset Management makes for interesting reading and we hope that those advisers who are so positive on the outlook for commodities will be testing the impact on the efficiency of models before recommending changes.
