PRE­CIOUS METAL ETFs

Pre­cious metal ETFs of­fer lo­cal in­vestors a method of di­ver­si­fy­ing away from eq­ui­ties in min­ing com­pa­nies, writes Stephen Gun­nion

Financial Mail - Investors Monthly - - Contents -

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.

Pic­ture: THINKSTOCK

Vladimir Nedeljkovic … In­sti­tu­tional in­vestors take a longer-term view.

Jo­hann Eras­mus… Fun­da­men­tal, over­ar­ch­ing de­mand for com­modi­ties is still there.

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