Hidden Commodities Exposure
With commodity prices running at a high level in recent weeks, many investors might be tempted to increase exposure by purchasing unit trusts that invest 100% into energy, soft commodities , base metals etc.
I some time feel that i can draw a parrallel comparison to the case of the China bull in street talks with this commodity run, although it hasn’t reach the streets yet. Discipline investors and long term investors would need to sit down and evaluate whether they want such a sector to be overweight in their portfolio.
Roger Nusbaum writes here what i feel is a misconception sometimes that you do not have any exposure to alternatives such as commodities:
Additionally, there are countries like Brazil, Australia, Chile, Canada and Norway that are leveraged to various commodities that they produce, and so stock, bond and currency exposure to these countries can also be a commodity play. For example, a downward spiral in copper would impact Chile’s growth, trade surplus, currency, economic cycle and ultimately the stock market of Chile. This means that even a publicly traded bank or phone company from Chile would likely feel a big decline in the price of copper. This applies to other countries as well.
This creates a visibility of an unintended overweight exposure (as differentiated from an intended overweight by an investor who puts 30% into various commodity funds), creating more potential downside the next time commodities endure a correction of some sort.
It is this reason that investors in BRIC or emerging markets unit trusts,ETFs or mutual funds do take note that you might already be heavily overweight on this sector and adding another specialise fund to it might tilt it to severe overweight as my example here.
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