Dylan Grice: 'Commodities for the long run? Not on your Nellie - I'd rather eat coal!!'
I have often in the past quoted Albert Edwards of Société Générale, but Dylan Grice, his colleague on the SocGen Cross Asset Research Team, is equally sharp (and entertaining). Below are a few food-for-thought paragraphs and a chart from his latest report - on a flavor-of-the-month topic, commodities.
"With scarcity developing in key parts of the commodities complex - energy, industrial metals and agriculture - there are many good reasons to want exposure to commodity markets. Regular readers will know I'm particularly bullish on agriculture (and gold, though I view this as a currency). But there is one very good reason not to invest in the commodities themselves: their expected long-run real return is 0%.
"The fluctuations of commodity prices have fascinated speculators for hundreds of years, but why should investors be interested? Commodities aren't productive assets, so how can they create wealth over time? And why should they provide investors with a collectable risk premium? Commodity returns can be decomposed into the "spot" return and the "roll" return. It's not obvious to me that either are dependable sources of compoundable profit.
"Prior commodity bull markets have been much like England football managers: they promised much, burned brightly for a while, but ultimately crashed, breaking the hearts of those who believed in them most. The chart below shows that in real terms, commodity prices have gone nowhere in the long run. Bull markets have tended to end where they started. Admittedly, the commodity series in the chart is a spot price index rather than an investable total return index, but total returns are likely to be as underwhelming.
"All this implies a bright and profitable future for skilled traders able to see the bottom of bear markets and the top of bull markets. The rest of us, we'll be lucky to do as well as your average long-suffering fan of the English national football team. There will be ups and downs, but history suggests "buy and hold investors" in raw materials are likely to make zero real returns. Better to build a portfolio of low-cost commodity producers/equipment providers, or give your money to people who know the commodity markets well, be they trend-following CTAs or competent speculators (if you can find any at a good price)."
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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