Demand for alternative fuels such as biofuel has sparked as resurgence of interest in soft commodities among fund managers.
First generation biofuels are usually made from sugar, starch, vegetable oil or animal fats and Jonathan Blake, manager of the Baring Global Agriculture fund, believes the input of these soft commodities could help drive the sector forward.
“The current inputs to biofuels are agriculture products such as corn and sugar. If the oil price environment remains well supported then these commodities that are used within that energy process will also follow a similar path,” Blake explains.
Simon Webber, manager of the Schroder Global Climate Change Equity fund, also points to sugar as a soft commodity exhibiting better fundamentals following lower production in India.
Financial Express data shows that over the last year to 17 March 2010 the S&P CNX Sugar Index has outperformed against the FTSE All Share and the Consumer Price Index (CPI), returning 135 per cent compared to the FTSE All Share which returned 54.32 per cent and the CPI which returned 2.37 per cent.
Performance of the S&P CNX Sugar Index vs FTSE All Share and the CPI
Source: Financial Express Analytics
Despite strong returns the index had a high risk score of 51.4 per cent. The FTSE All Share was less risky, carrying 15.1 per cent, while the CPI was 0.9 per cent. This suggests that those with exposure to the soft commodity would have made some healthy returns, albeit taking on a high amount of risk.
Another soft commodity being favoured by Blake is the fertiliser market, where he sees attractive opportunities. According to Blake, the reduced use of fertilisers in 2009 is leading to a rebound this year as farmers have effectively mined the soil of nutrients and these will need to be replaced.
Financial Express data suggests there are 153 funds with exposure to fertiliser in their portfolios and six funds with an exposure of 10 per cent or more. One point to note is that all six of these funds are Indian mutual funds.
Therefore, those UK investors looking to profit from the production of fertiliser could be better off investing in a fund which has exposure to fertiliser companies within their portfolios.
The CF Eclectica Agricultural fund has a 5.40 per cent holding in Potash Corporation, the world’s largest fertiliser company. It also has a 4 per cent holding in Agrium, the premier supplier of specialty fertilisers in North America. The fund returned 36.52 per cent over the last 12 months.
Further analysis shows there is one other retail unit trust and OEIC fund with exposure to Potash, this the Thesis Bryth fund, which returned 50.9 per cent over the last year.
There are six FSA offshore recognised funds with exposure to potash. The Allianz RCM Global Agricultural Trends fund has the largest exposure with 8.10 per cent; it also has a 4.40 per cent holding in Agrium. The fund returned 55.23 per cent over the last year and carried a risk score of 17.5 per cent.
Over a six month period, one of the best performers was the Pictet Agriculture fund which returned 24.68 per cent. It has a 3.90 per cent holding in Potash and a 3.20 per cent holding in Agrium.
Keith Churchouse, director at Churchouse Financial Planning rates the Pictet fund range and says he is starting to see a lot more interest for the agricultural sector from his clients.
“It is very well known that with the likelihood of a global population boom over the course of the next few years that farming, as a group, is going to be an enormous growth industry, so from this point of view we are starting to see quite a lot more interest,” he says.
“We have been using some of the Pictet funds, which we think are good and unique in the market and it would be good to see others follow suit in this route.”
