The Best Place To Be In

The Best Place To Be In

Global commodity wizard Jim Rogers has won a new fan following in India. Domestic fund houses, grappling with fast-declining AUMs, are finally looking to commodities for some stress-free returns

GAU R AV PAI OU R M U M BAI B U R EAU

AROUND THIS time last year, mutual fund (MF) houses were busy launching equity schemes like there was no tomorrow. This was no surprise, given that the equity market at that time was still in a boom phase and stock indices were testing new highs more than ever before. Come June ’08, and the scenario has changed completely. The stock market is in a bear grip and the fund houses that were earlier queuing up to launch equity schemes, are now turning to the commodity market for some solace.

Blame it on speculation or on the ‘demandsupply’ mismatch, but that fact remains that commodity prices have remained buoyant since the past few years. Domestic fund houses believe that there is still more steam left in the rally, since scarcity of natural resources will only increase in the future, given the traction in demand.

It’s quite evident that leading fund houses are losing their appetite for equities. In fact, many of them — including marquee players like Morgan Stanley and Mirae Asset Financial Group — have struggled to raise even Rs 100 crore in their recent equity new fund offerings (NFOs). With a volatile stock market offering no respite, these funds are increasingly eyeing commodity offerings to keep their cash registers ringing.

While the Securities and Exchange Board of India (Sebi) does not allow MFs to invest directly in commodities, fund houses have found a way to abide by the rules and also gain from the current opportunity in the commodity space. They have taken an indirect route to commodities, as they invest in stocks of companies engaged in mining and other activities that draw sustenance from commodities. And since there are not many mining companies listed on the domestic bourses, most of these fund houses propose to invest in companies abroad.

Among all the commodities, gold has been the most widely hunted commodity by domestic MFs so far. Benchmark Mutual was the first fund house in the country to introduce gold exchangetraded funds (ETFs) in February ’07. It now plans to launch two other ETFs which will track oil and silver prices. “There is too much choice available for investors on the active management front, but very little on the passive front,” says Benchmark Mutual’s executive director Sanjeev Shah. “We want to offer more choice to the Indian investor through these ETF schemes.”

ETFs will buy into units overseas whose values are based on oil and silver prices. However, these funds are still in the pipeline and are yet to receive approval from Sebi. Also in the pipeline is HSBC’s Agri and Natural Resources Fund, which plans to invest in companies that
are active in the agricultural sector.

ING Investment Management India recently launched ING Optimix Global Commodities Fund, India’s first multi-manager global commodity equity fund. Vineet Vohra, MD and CEO, ING Investment Management India, says, “In the context of high inflation and falling equities in the stock market, commodities do well in helping an investor to diversify his/her portfolio. Even institutional investors are allocating more and more funds into commodities.” This is hardly surprising as commodities perform well during high inflation.

ING Investment also launched the Latin America Fund a few months ago, to invest in commodity-based companies in the natural resources-rich countries of the region.

A study by Mirae Asset Management, which offers a Global Commodity Stocks Fund, has found that the Rogers International Commodity Index (RICI) outpaced most other emerging market indices, including the BSE Sensex, in different phases since 1999. RICI, designed by Jim Rogers in 1998, is known as one of the most diverse commodity indices, spanning 35 commodities from 11 international exchanges.

With so many fund houses besotted by commodity investment, it needs to be seen whether this exodus from a beleaguered equity market into commodities results in another problem of plenty. However, fund houses say that the current downtrend in commodity prices is just a passing phenomenon and we are still in the midst of a long-term bull run.