Commodity investments to jump

Pension funds and other money managers plan to increase their investments in commodities over the next three years after energy, metals and agriculture prices rose to record highs, according to Barclays.

About half of the 150 investors surveyed this week in New York plan to expand the weightage of commodities to more than 10 per cent of their portfolios, compared with 15 per cent of respondents in 2005, Barclays Capital, the investment banking unit of London-based Barclays, said in a statement today.

"The investing world has only just woken up to commodities,'' Philippe Comer, who heads Barclay's commodity investor solutions business in the Americas, said by phone. "In terms of the inflows we have seen, it's only just started.''

Commodities are outperforming stocks and bonds this year, luring pension plans, hedge funds and other investors, as the rising demand from China, India and other emerging economies strained supplies of oil, wheat and lead.

The investments in funds and products tracking commodity indexes will rise to $150 billion in January from $110 billion this year, Standard & Poor's said on November 1. Funds that track such indexes allow the investors to replicate the gains and declines in the prices of select commodities, without owning them.

Twelve per cent of the respondents said they invested in commodities by using an index, compared with 35 per cent two years ago, according to a Barclays presentation. About 56 per cent use a so-called active strategy compared with 22 per cent in 2005.

An active strategy is when a manager boosts holdings of raw materials in short supply or cuts holdings of plentiful ones.

The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts has returned 18 per cent this year compared with a 4.8 per cent gain in the Standard & Poor's 500 index of stocks. The US Treasuries have given returns of 9.4 per cent, according to Merrill Lynch indexes.

The growth in demand for raw materials is coming from nations outside the Organization for Economic Cooperation and Development, Comer said. "This demand will limit the negative impact of a possible US recession on commodities next year,'' he said.

Most investors plan to hold their commodity investments for at least three years, while an "increasing'' number intend to bolster "short-term'' holdings, Barclays said.