A sharp reversal in commodities and resource stocks on account of a stronger dollar has left some of the commodity-focused mutual funds bleeding. Mutual funds, which took positions in commodity-related stocks, have posted negative returns in the range of 3-15 per cent in the one month since August 2008.
The DSP Merrill Lynch World Gold Fund, which was one of the best performers a few months ago, has seen its net asset value (NAV) erode by almost 42 per cent from its 52-week high in March this year. The downturn in the commodity market has brought the fund’s NAV down to Rs 9.38 from Rs 16.3. The fund primarily invests in the stocks of gold mining companies.
Gold exchange-traded funds (ETFs) too have not been spared as prices of the yellow metal witnessed a severe correction in the last few months. All gold ETFs, including Reliance and Quantum, have posted negative returns in the range of 4.25 per cent in the past one month. UTI Gold ETF has dropped 17 per cent from its 52-week high.
International gold prices have crashed by 26 per cent since the yellow metal touched a lifetime high of high $1033 an ounce in March this year. The metal is now trading at $788 per ounce. This week, gold prices have fallen by over 4 per cent as the US dollar strengtened by 1.9 per cent.
According to a Sharekhan report on commodities, “We suggest sell on rise in the base metals complex, as we expect massive long liquidation as major financial institutions tumble. Deleveraging pace could accelerate, which could weigh heavily on the base metals complex.”
Similarly, DSP Merrill Lynch’s Natural Resources Fund’s NAV, which was concentrated towards energy (44 per cent allocation), has also witnessed a fall of 14 per cent. The fund has posted negative returns of 7.66 per cent in the past one month. Crude oil prices have declined by over 30 per cent since July and the Nymex crude has dropped to $96 from the high of $148.
Others such as Mirae Asset’s Global Commodity Stocks Fund, ING’s Latin America Fund and Reliance Natural Resources Fund too have met with the same fate after commodity prices globally began to correct. Market experts believe that worldwide the crash in commodity prices was followed by a sharp appreciation in the US dollar against the basket of six major currencies. The US dollar index rose by over 12 per cent since July 15 this month to touch a 2008 high of 79.33.
The fall in the commodity prices gave been so sharp, say analysts, that some of the hedge funds are going bust. Recently, RK Capital Management LLP, a metals hedge-fund firm Michle Farmer, reportedly lost as much as 30 per cent last month amid falling copper and aluminum prices. Farmer ran one of the world’s largest copper trading company.
Says Paras Adenwala, chief investment officer, ING Mutual fund, “There is going to be some amount of pain for commodities in the short term. But we are bullish on agri and natural commodities. There has been a general decline in demand due to slowdown in developed world. Some excesses that have been made will get corrected”
The sell-off since July has hurt hedge funds including Proxima Alfa Investments LLC’s $400 million Anglian Commodities Fund and Red Kite Metals fund. According to commodity investment guru Jim Rogers, historically, the commodity bull market has lasted for 18-20 years.
The euphoria surrounding commodity prices had forced many fund houses to launch commodity based products. Tata mutual fund has filed for a precious metals fund and new fund offer for ING Optimix global commodity stocks fund is already open.
