The Hindu Business Line : Magnum Comma Fund: Invest

Indian investors looking to profit from the upward spiral in commodity prices do not have access to a domestic commodity index or exchange traded funds that allow them to own a basket of commodities. Nor do diversified funds, in the Indian context, invest aggressively in commodities or commodity stocks.

Magnum Comma Fund, which invests in stocks of companies that are in commodity businesses, is a unique option in this respect. Investors can consider this fund as a diversification option, pending the launch of more sophisticated products that are a more direct play on commodities.

The fund has been an out-performer over the past year and in the nearly three years since its inception, has delivered a strong 33 per cent compounded annual return.

Suitability: Commodity stocks, from an investment perspective, tend to be much more volatile than stocks from non-commodity businesses. Due to operating leverage, earnings of these companies tend to balloon in the boom phase of a commodity cycle and deflate rapidly when the cycle goes bust.

To add to this, valuations for commodity stocks also swing sharply based on expected turns in the cycle. These attributes of commodity stocks make Magnum Comma Fund a risky fund, suitable only for investors who can handle sharp dips in returns from year to year and long phases of poor or negative returns.

Performance and strategy: The fund’s annualised return of about 33 per cent since inception just about matches the category average for diversified equity funds (34 per cent for this period). The Sensex has managed a 38 per cent return over the three-year period. However, such a comparison is not quite correct on two counts.

One, the fund invests in only a limited universe of commodity stocks and, hence, is not exposed to most of the sectors in represented in the market.

Second, commodity cycles (and thus earnings of companies that depend on them) often move in cycles that are complementary to the equity market. For instance, after turning in a muted performance in 2005-06, commodity stocks have outpaced the market over the past year, with indices such as the BSE Metal and Oil recording returns of 65 per cent and 45 per cent (Sensex 20 per cent) respectively over the past year.

Magnum Comma Fund, with a one-year return of 32 per cent, hasn’t managed to do as well as some of the commodity sector indices, but has comfortably outpaced the broad market (20 per cent) as well as other diversified funds (18 per cent).

Metals (including steel), the top performing sector over the past year has consistently been the fund’s top sector weight (27-33 per cent of assets in recent months), while refineries have been the second most preferred exposure.

These two key sectors apart, the fund hasn’t taken focussed bets on any other sector. This is probably explained by the fact that investment options in the listed commodity space have been limited over the past year. While agri-commodities such as sugar and plantations have been dampened by a downturn in commodity prices, those such as cement have come up against regulatory intervention.

Though the fund has tried to avoid excessive concentration by taking exposure to select companies in the fertiliser, cement and chemical sectors, the performance will continue to hinge on the outlook for top sector bets in the portfolio such as metals and steel.

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