Gold funds dominated a league table of commodity managers in the second quarter, but amongst the broad-based funds, it was those seeking returns uncorrelated with commodity price direction that did well after markets sold off heavily in May.
PIMCO's CommoditiesPLUS Short Strategy fund topped a Lipper performance league table of more than 100 actively managed commodity funds, up 6.80 percent, whilst the DB Platinum V Hermes Absolute Return Commodity Fund came seventh, up 2.16 percent.
Nicholas Johnson, manager of the PIMCO fund, attributed the outperformance to its strategy of taking an inverse position to the long-only DJ-UBS Commodity Index.
"It's a way for investors to either take a view on a commodity decline or hedge overweight commodity exposures in other areas of their portfolio," said Johnson. "When commodities fall this fund will have strong returns."
The second quarter was tough for managers, with commodities selling off heavily in early May. The S&P GSCI ended the quarter down 7.94 percent, led by weakness in the energy and agriculture sectors, S&P said.
The average actively managed commodity fund in the Lipper Global Commodity sector was down 5.12 percent for the quarter.
MARKET NEUTRAL
Apart from the gold funds, the strongest performers were those that tried to deliver uncorrelated returns, such as the DB Platinum Hermes fund and the eighth-placed Equinox Market Neutral Commodity Strategy Fund.
"If you compare us to commodity hedge fund managers in the U.S., we enter into predominantly market neutral trades - there won't be a significant amount of directionality in the portfolio," said Colin O'Shea, head of commodities at Hermes.
The fund, which has some $120 million under management, also makes relative value trades within sectors and curve trades, which O'Shea said should do well in all market environments.
"In Q2 there were a lot of macro fears and commodity prices fell, and a lot of those funds with a relatively high beta to the market suffered as a result," he said.
"Our portfolios are very diversified, and so the small number of directional positions we might have had in our portfolio were largely offset by the market neutral element, and those market neutral trades performed very well."
Equinox's market neutral fund, by its very nature, is not dependent on the direction of commodity prices for its returns, as it takes offsetting long and short positions.
It also has a targeting mechanism that aims to maintain volatility of 6 percent per annum or less, compared with an average volatility of 25-30 percent for commodities over the last 5-10 years and 15-20 percent for equities.
This works by increasing exposure during times when volatility is low and reducing it when volatility is high.
The top 10 rankings were dominated by funds investing in gold bullion, gold futures and gold miners, as investors returned to the traditional safe haven due to worries about the global economic recovery, eurozone sovereign debt defaults, negative real interest rates and the U.S. dollar.
The S&P GSCI Precious Metals index was up 2.05 percent in the second quarter - the only sector in positive territory.
Peter Sigg, manager of the fourth-placed LGT CF Dynamic Gold Fund , said an overweight position of 100-120 percent for the quarter helped the $72 million fund outperform.
The fund, which invests in exchange-traded gold futures, uses a combination of qualitative and quantitative factors to adjust its exposure between 60 percent and 140 percent, including leverage.
"Due to a strong positive scoring from the quantitative side with a stable and consistent uptrend, and supportive fundamental factors such as strong official sector purchases from emerging market countries and positive investment flows, we had an overweight position," said Sigg.
He sees gold benefiting in either a bullish (inflationary) or bearish (flight-to-quality) global growth scenario.
LAGGING AGRICULTURE
Agriculture funds took a hammering in the second quarter, filling up the bottom end of the table after the U.S. Department of Agriculture said that farmers had planted the second-largest acreage with corn since World War II.
Although this news came late in June, it still clobbered the agriculture-focused funds with large long positions, and the S&P GSCI Agriculture Index ended the quarter down 12.09 percent.
PIMCO's Johnson sees commodities like corn and wheat, which can have quick supply responses, among the worst performers in the second half of the year.
He expects commodities with supply constraints such as oil and copper to be among the stronger performers, whilst Hermes' O'Shea also pointed to energy. "We are operating at low levels of global spare capacity," he said.
Sigg said the recent sell-off driven by the unfailingly negative newsflow of recent months had brought investors' expectations back to more down-to-earth levels.
"It is from these more reasonable levels that we expect a modest appreciation for the remainder of the year," he said. He favours agriculture and energy over base metals, which he sees as more well-supplied.
The worst-placed funds were the Tuma Commodities fund , a hybrid fund that invests in commodities futures and commodity-related companies, and the Aliquot Agriculture (UCITS) Fund , which invests predominantly in agriculture commodity-related futures.
The Tuma fund was down about 18 percent for the quarter, and the Aliquot fund was down 13.76 percent. Both funds are up over the 12 months to end-June.
(Reporting by Claire Milhench; Editing by Alison Birrane)
