PRECIOUS METAL ETFs
Precious metal ETFs offer local investors a method of diversifying away from equities in mining companies, writes Stephen Gunnion
Diversifying away from equities in mining
Commodities have fallen out of bed this year, with iron ore slumping more than 40% and oil priced at its lowest in more than four years. Precious metals haven’t been spared, with gold looking increasingly dull. Investors in exchange-traded products that track commodity prices are seeing the pullback as an opportunity, as are traders.
Local issuers of exchange-traded products that track commodities, including gold, platinum, oil and wheat, are putting a brave face on the steep fall in prices this year. And why shouldn’t they? Local demand hasn’t waned. In fact, according to Vladimir Nedeljkovic, head of investments at Barclays Africa, and Standard Bank’s head of global structuring, Johann Erasmus, the price move has created a buying opportunity. Institutional investors in particular have been buying on the dips and increasing their exposure to exchange-traded funds such as NewGold, NewPlat and NewPalladium, says Nedeljkovic. Erasmus says Standard Bank is also witnessing longer-term buying and holding intentions for the ETFs and exchange-traded notes (ETNs) it issues on all three precious metals, as well as base metals, oil and agricultural products.
“The fundamental, overarching demand for commodities is still there and the pullback in prices provides the long-term investor the opportunity to get in at much more reasonable prices than where we were a month or two ago,” says Erasmus.
While this may not be the case in all geographies, a few factors set SA apart. Probably most important is the rand. With commodities priced in dollars, the rand has to some extent cushioned the fall for local holders of the ETFs, which are listed on the JSE and purchased in rand. South African investors are also less speculative than their global peers, says Nedeljkovic. “SA institutional investors take a much longer-term view,” he says. “Investors who invested in NewGold in 2004 are still with us and are still accumulating, and the same is true for platinum and palladium investors. They see an investment in precious metals as well as in other commodities as being part of the strategic exposure in their portfolios.”
However, while investors may not be selling out of commodity exchange-traded products, they have been switching.
Like Absa, Standard Bank issued ETFs on platinum and palladium this year. ETFs track the spot prices of the metals, and the issuer has to hold the underlying commodity. ETNs track the futures prices, and the underlying commodity is not held, creating a different opportunity for both institutional and retail investors. “When we launched the ETFs, we did see quite a bit of switching from ETNs, and we are seeing a lot more trading in the ETNs, though the long-term investors prefer to stick to the ETFs,” Erasmus says.
“Retail investors again are split between the trading camp and longer-term holders.”
Erasmus says while the ETNs are pretty evenly split between retail and institutional investors, the bulk of investors in commodity ETFs are institutional — so retail investors trading in and out don’t have much influence on the big ETF portfolios or levels of liquidity.
“We have been seeing large inflows into the funds as the prices pulled back. In the first three weeks of October we added 120,000 ounces of palladium and about 70,000 ounces of platinum to both our funds,” he says.
As an originator of exchange-traded products, Nedeljkovic says his job is to ensure Barclays Africa has product available. That it offers three precious-metal ETFs means investors can switch exposure as they see market fundamentals changing. Investors who switched into the bank’s palladium tracker when it launched will have done better than those holding its gold and platinum trackers.
Over the six months to 31 October, the palladium ETF shows a positive return of 1.6%, while NewGold is down 5.5% and NewPlat is 10.3% lower. But despite NewGold looking grim in recent months, those investors who got in at the beginning have seen decent returns.
Likewise with Standard Bank’s WTI Oil note, which fell 15% in October alone. However, it’s almost 10% from inception and before oil started sliding in June, it was up 45%, says Erasmus.
“If the outlook for oil changes — and we believe that in the longer term the price has to rise — the ETN’s performance will track that,” Erasmus says. “We are very positive on the long-term investment prospects of [each] of the commodities. Copper has had a negative return on an annual
basis, but I think that’s also got a lot to do with the macro-view of the world at this stage.
“At some stage commodities will correct themselves and show positive growth again.”
There is all too often a focus on the short-term performance of these funds, says Nedeljkovic. “What happened last quarter or what the short-term macro-economic implication of a particular Fed decision is,” he says. “Generally commodities have several very important characteristics that I think SA investors take into account. One is that commodities are not correlated — or are weakly correlated — to other asset classes. So introducing commodities into a portfolio tends to improve the risk/return characteristics.”
Apart from the rand hedge that South African investors get from commodities, precious metals have very strong inflation-hedge characteristics, he says. As SA is a commodity-producing country, the largest producer of platinum and among the largest producers of gold and palladium, investing in precious metal ETFs gives local investors a method of diversifying away from equities in mining companies. This is helping drive demand for these instruments, he says.
“Commodities are held as a separate asset class and demand is driven by the longer-term view on the underlying metal but also the larger, macro-economic view on why one should buy specific metals,” says Erasmus.
Vladimir Nedeljkovic … Institutional investors take a longer-term view.
Johann Erasmus… Fundamental, overarching demand for commodities is still there.