Betting on commodities

This fund house has a very diverse equity portfolio. While two funds are focused on the domestic market, one is a China-dedicated fund and the other a commodities fund with an exposure to the domestic and international market. Gopal Agarwal, deputy chief investment officer and equity head, not only shares his views on the market but delves in detail as to why investors must look at commodities too. Mirae Asset offers a commodity fund. Don't you think commodities are too volatile an asset class for a retail investor? We agree with the view that commodities, as an asset class, are volatile in nature. The news flow concerning commodities is immense and all this influences the prices significantly. Let's say you are purchasing the stock of a construction company. You may be unaware of the operating margin of the company until the quarterly results are declared or till the time the management comes out with its guidance. Not so in the case of commodities. Their annual report will tell you the cost of production and the realisation is available on a daily basis from the exchanges. Consequently, commodity stocks are relatively more volatile since the news flow is continuous. Having said that, there certainly is money to be made in this asset class, so why should investors not participate? In this current rally itself, which started in March 2009, the BSE Metal index was the first to cross its earlier high. The Sensex moved up from 9,000 to 18,000 while BSE Metal crossed its previous high much faster. So those who allocated part of their portfolios to this asset class would have definitely benefitted. There is money to be made, but this asset class is very cyclical in nature. Everything is cyclical. Even the stock market is cyclical. World growth is cyclical. Between 1996 and 2002 world growth was in bad shape. From 2003 onwards there was a recovery till the collapse of 2008. The commodities market follows the same pattern. Commodities are cyclical and so is world growth. In my opinion, demand for commodities and world growth go hand-in-hand. We cannot have a situation where there is world growth but no commodity growth. If there is no growth, commodities will be beaten down significantly. Commodity producers are not huge in number, when looked at from the macro perspective. The demand is plenty; there are many more users than producers. So pricing power lies with the commodity producer. As demand rises, so will prices. That is why I believe an investor must have some exposure to commodities at any given point of time. Commodities, as an asset class, will boom as world growth picks up. How much of an investor's portfolio should be allocated to commodities? We would recommend at least 10-15 per cent of one's portfolio in commodities. Yet, we emphasise that this investment must take place via the systematic investment plan (SIP) ro