How to play commodities in 2013
It is possible to invest directly in commodities, trading raw materials through specialist brokers or through the derivatives markets.
Many investors, however, feel uncomfortable with the volatility associated with direct investment - and the minimum deal sizes that are often required.
Instead, says Philip Challinor, of independent financial adviser Chatfield Private Clients, "the most straightforward way to capture returns from commodities is via an exchange traded product (ETP), which is simple, low cost and liquid should you wish to sell." BlackRock-owned iShares, Deutsche Bank-owned db-x and ETF Securities are the three biggest ETP providers in the UK.
ETPs will, however, replicate market volatility. And regulators have anxieties about synthetic ETPs, which track the market through investments in derivatives rather than the underlying asset. If that process goes wrong, investors may suffer.
Funds and trusts
The alternative is a collective investment fund, offering professionally managed exposure to commodities. "We like M&G Global Basics, because it's the cheapest of the good ones and it's got a bit of a yield," says Flora Maudsley-Barton, of independent financial adviser Parsonage.
For hard commodities and precious metals, McDermott of Chelsea Financial Services recommends four possibilities. "For gold, I like the BlackRock Gold & General and Investec Global Gold funds," he says. "For silver, I like Way Charteris Gold and Smith & Williamson Global Gold & Resources."
Mike Horseman, of independent financial adviser Cockburn Lucas, adds: "Investec Enhanced Natural Resources is one to watch." For other areas of the commodities sector, Horseman adds: "We feel the food and water issue the world faces also offers a good opportunity to companies in this sector and would access via Sarasin Agrisar." McDermott suggests JPMorgan Natural Resources and Baring Global Agriculture.
It is also worth considering two potentially undervalued investment trusts, argues Tom Tuite Dalton, an investment trust analyst at Oriel Securities. "City Natural Resources High Yield (CYN) and BlackRock World Mining (BRWM) have both delivered excellent long-term returns, but have suffered shorter term as commodity prices have declined," he says.
Shares in the two trusts trade at discounts of 20% and 15% respectively.
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