Commodity funds turn in mixed performance despite price spurt

The commodities boom has seen the Bloomberg Commodity Index, which tracks 23 energy, metals and crop futures contracts, rise 43 per cent in the last year (73 per cent since the lows witnessed in April 2020). The Nifty Commodities TRI, too, has gained 88.5 per cent as against the Nifty 50 TRI’s 53 per cent return in the same period.

With the theme hotting up, net inflows into commodity funds have gained strength. Data from Morningstar Direct show that net inflows into commodity funds that were just around ₹55 crore in October 2020 rose to almost ₹2,000 crore in May 2021, though there has been some profit booking since then.

However, despite the exuberance in the segment, the one-year performance of thematic funds focussed on commodities funds has been mixed. Five out of eight funds in the segment could not beat their benchmark returns in the last year. The long-term performance (5-year return) of commodity focussed funds too has not been impressive with more than half of the total schemes in existence for more than 5 years not outperforming their benchmarks.

Note that composite benchmarks are used by most funds, and benchmark returns are available only until August 31, 2021 in fund factsheets. Hence, returns as of August 31, 2021 are considered for this analysis.

Front-runners

ICICI Pru Commodities fund, launched in 2019 with exposure to Indian metals, oil, chemicals, fertilisers, paper and cement companies, is the outperformer in the category. The fund has beaten its benchmark – the Nifty Commodities – by a wide margin in the last year. As on October 8, the fund has returned 129 per cent and remains the top performer.

SBI Magnum Comma Fund, DSP Natural Resources and New Energy Fund (with exposure to global companies through overseas mutual funds) and Tata Resources and Energy Fund – all funds with similar sectoral exposure – have generated similar one-year return in the range of 70-75 per cent, as on August 2021. But DSP Natural Resources is the only scheme that has generated alpha (excess returns over benchmark) during the said period. The range is wider at 76-95 per cent for the latest one-year returns though.

DSP World Energy Fund, which invests exclusively in energy related stocks, has put up a decent performance in the last year due to rise in oil prices from the sharp correction witnessed in the beginning of 2020. However, the agri fund from the same stable – DSP World Agriculture Fund – has posted much lower returns. The fund is a Fund of Fund (FoF) that invests in BlackRock Global Funds – Nutrition Fund.

Aditya Birla Sun Life Commodity Equities Fund – Global Agri Plan – is a better performer. This is a thematic fund investing in world businesses having exposure to agricultural commodities (with the highest exposure to US geography).

Correction expected

The current commodity rally could face headwinds in the form of potential slowdown in China as well as unwinding of easy monetary policies in developed markets. Sahil Kapoor, Head of Products & Market Strategist, DSP Mutual Fund, believes that a meaningful correction in commodities space is imminent in the short run, though he expects long-term prospects to be good.

Lalit Kumar, Equity Fund Manager at ICICI Pru AMC, says that performance of commodities as an asset class will be different in the next decade compared to the last decade, as commodity prices could be higher in future cycles vs past cycles.

He cites limited capacity addition due to China’s carbon neutral policy on the one hand and expected growth in demand for commodities on the other, as a reason for this. He, hence, recommends that investors look for any correction going ahead as an investment opportunity.

On the agri-commodities front, Kapoor says that there are droughts in major producing nations and there have been supply chain disruptions globally too. Hence, agri-commodity prices may hold up for some time before cooling off, he feels.

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