Gregory Smith has over 25 years' experience in the commodities markets as a fund manager, senior trader and founder/co-founder of two CTA funds, as well as the Enhanced Commodity Index (ECI) Fund for Asian and European investors.
Global Commodities Ltd is an Australia-based hedge fund that uses a quant-based investment model developed and applied in the commodity futures markets for over 15 years. The firm has offices in Australia and Singapore, and offers private managed accounts for retail investors and a Cayman-domiciled fund, ECI, for wholesale investors. The portfolio weightings are 42%, 21%, 19% and 18% for Energies, Metals, Grains and Agriculturals respectively. The investment objective is to outperform a benchmark constituting the CRB index and GSCI with equal weighting, and to have lower portfolio volatility than global equities. ECI is offered in USD, EUR and AUD share classes.
From a review of ECI's performance graph, in the past, it can be noticed that the spikes were more prominent and the troughs less deep as compared to the CRB/GSCI benchmark.
Initially the reference benchmark was the CRB index. In March 2001, it was decided to modify the reference benchmark so as to more accurately represent the ECI portfolio.
To do this, 50% of the CRB was substituted for the GSCI. Thus a blend of two indices became the reference benchmark.
References to the ECI historical performance between December 1999 and November 2004 are to Commodity Strategies Ltd (CSL), utilising its commodity index enhancement methodology. I was a director of and equal shareholder in CSL during this period. At Global Commodities, we continue to utilise and improve the commodity risk management methodology.
But since late 2003, they have been pretty strongly correlated. What would you attribute this to?
It's basically been one-way traffic since mid 2003, meaning we have seen a sharp escalation in most commodity values. In such bull moves, we keep up but will not outperform our reference benchmark.
Performance to date has shown a capture of approximately 85% of positive moves in the reference benchmark.
How large is your fund now and what % of the assets under GCL's management is distributed among private managed accounts and ECI?
The fund now has over US$40 million and we have no managed accounts as yet. We offer them but most investors are comfortable with the ECI Fund. We offer three classes of shares US dollar, Euro and Australian dollar.
If you were to summarise your investment strategy in terms of one unique selling proposition, what would that be? Why?
We offer efficient, liquid, low cost collateralised commodity investment with low fees and an active risk management overlay.
What makes us unique is we revert to fixed interest when commodities are a cost to store. The cost of storage and its associated risk can reduce returns and increase volatility. We try and stay out of those commodity markets that are a cost to store in our portfolio.
There are 3 or 4 other players in this area, including Goldman Sachs, with about US$30 billion invested in the passive commodity indices strategy. How does an index fund like yours differentiate itself?
We utilise an index structure (unleveraged) but reduce commodity exposure during times of increasing storage costs. We offer an efficient, low cost collateralised commodity investment with a risk management overlay that over time delivers less volatility than shares with a similar return expectation.
Who do you feel are your main competitors?
Global Commodities is a niche manager and sits between passive commodity indices and CTAs.
How is a benchmark-outperforming strategy with a risk management overlay better for returns than a risk-neutralising absolute return strategy?
We are not an absolute return strategy. We are a risk manager focusing on capital preservation while allowing the underlying asset class (commodities) to generate the returns. We outperform the reference benchmark over time by losing less when it is determined that commodities are a cost to store.
Could you elaborate on the 'low management fee and no performance fee' aspect of ECI?
We wanted to offer a robust alternative to passive indices with the benefit of active risk management with low fees. Performance fees are inappropriate as they actually reduce commodity exposure to the reference benchmark during times of high storage costs.
Does this make it more attractive to investors?
Yes… as investors are paying fewer fees.
Also, does this mean that more of the manager's capital is at risk?
You could look at it that way… as our investors are happy to pay a low management fee (compared to CTAs and hedge funds) and they understand the better we preserve capital, the more we earn over time.
It says in your investment mandate that the strategy is not to target market inefficiency but to capitalise on how commodities are stored, transacted and valued. How frequent are instances of a happy congruence of both?
Rarely… as the commodity markets are very efficient.
Are such instances actively pursued?
No… our strategy is identifying costs associated with storing commodities and managing the risk.
Do you factor in the location of an investment opportunity in your asset allocation decision? If yes, could you give us a breakdown of the fund's assets by investment region and/or the respective share of each region?
No… we factor in supply demand and seasonality's among others but not locality.
How many markets do you trade in globally?
22 markets across 4 sectors (fossil fuels, metals, grains and tropicals [sugar, coffee, etc]).
A look at the numbers in the Eurekahedge database shows that the number of funds located in Asia using the managed futures strategy, is far lower in comparison to the number of funds operating in Europe or the US. Does being one of the few such funds give you an edge in terms of access to investors?
Not really… it's a global market place after all. However, Asian investors are becoming more aware of their regions demand for commodities and the benefits associated with this asset class.
Are there any other merits to being located in Asia?
Being licensed in Australia gives investors added comfort from a regulatory perspective as it is very comprehensive when compared to other jurisdictions in alternate financial regions.
What is your outlook for the growth, in number as well as in size, of CTA funds in the region as well as globally?
Growth will continue as more investors want and gain commodity exposure. Increasing investment in this asset class will be driven by the low correlation to shares and hedge funds, commodities are a real asset, they are supply/demand-driven (not net present value of future earnings). And without commodities we do not have a functioning society… reckon we save this discussion for a later article.
What are the implications of the same for your fund's future performance?
As more funds invest in this asset class, we expect larger price ranges and more abrupt moves in market structure (from contango to backwardation). During these types of market conditions, it is prudent to apply risk management strategies. Our objective is to manage the downside risk effectively and offer a superior risk-adjusted investment compared to our reference benchmarks over any 3-year period.
Global Commodities Ltd
+61 8 8231 2522