NEW YORK – (Reuters) – Investors who have plowed some $400 billion into raw materials markets over the past 10 years are accelerating efforts to change their strategies, if not their allocations, on the growing belief the commodities “supercycle” has come to an end.
While pension funds and other institutional investors have been quick to bail on gold as bullion fell deeper into bear market territory in the second quarter, they have yet to abandon other markets like oil and metals en masse, asset allocation experts and analysts say.
Instead, more and more funds are changing tack, abandoning the passive, buy-and-hold strategies that held sway in the previous decade to embrace a more active approach to picking winners and losers within the commodities sphere.
While the shift toward ‘active’ investing has been growing for several years, the pressure to adapt is mounting. The 19-commodity Thomson Reuters-Jefferies CRB index .TRJCRB fell 7 percent in the second quarter and 25 percent from a second-quarter 2011 peak, entering bear market territory.
Among individual commodities, the second quarter was gold’s worst on record due to fear the U.S. Federal Reserve will curb stimulus money crucial to bullion prices. Brent oil had its third quarterly loss in a row for the first time in 15 years and copper, its biggest quarterly drop in almost 2 years.
Correlations between raw material markets are also deteriorating amid seismic fundamentals shifts in many markets.
“Removing outright directional risk is important in a market where there are so many unknowns,” said commodities portfolio manager Nic Johnson at PIMCO, the world’s top bond fund, which also has a $30 billion commodities portfolio.
In the next six months, PIMCO will look for relative value trades between gold versus silver and soybeans versus corn, among others, he said.
Those who have watched these markets for years, from hedge fund legend Stan Druckenmiller to Marius Klopper, head of giant miner BHP Billiton (BLT.L), believe that the commodities supercycle – which heralded a decade-long rally in oil, metals and crop prices since 2004 – is over.
Bankers who sell to the buy side are also feeling the heat to develop more investment vehicles and add to the growing suite of long-short, spread-based or volatility indices that have sprung up in the past few years to help boost returns.
“I think we’re close to an inflection point here,” said Oscar Bleetstein, head of Credit Suisse’s Institutional Commodity Sales for the Americas. “We’re not seeing people exit, but they are looking for new toys, new strategies, and they’re putting pressure on the banks to deliver.”
CHALLENGES ON ALL FRONTS
Nearly 10 years after commodities began taking shape as a mainstream asset class alongside stocks and bonds, the sector heads into the second half of the year facing one of its most challenging phases in a decade.
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