Commodity markets for the rest of us

Your Money - Tuesday December 18, 2007

NETWorth

Commodity markets for the rest of us

ANDREW WOOD

Commodity futures options (CFOs) often conjure up images of high-risk players staking everything on the rise and fall of pork bellies and orange juice markets, as portrayed to great comic effect in the Eddie Murphy movie Trading Places.

As funny as trading pork bellies or orange juice may sound, investors should not ignore the vast potential for gains in commodities, while equally being aware of the need for risk limitation.

There are many way to invest into CFOs, including exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) instruments. These vehicles are collective asset investments that enable private savers to participate in previously exclusive sectors without the need to hold physical assets. Thus, you needn't worry about running open ranges of cattle, operating nickel mines or humping around suitcases of gold ingots at considerable personal risk.

Once the preserve of giant institutions, global fund houses and multi-millionaires, CFOs are now within reach of mainstream investors by way of securities that best suit their risk tolerance, nationality and tax position.

It is even possible to tap into these markets, with suitable risk-reduction provisions, via insurance-wrapped offshore trading vehicles. These were formerly restricted markets that could require an initial investment of some $500,000, with entry and exit penalties of 3% to 5%.

Exchange-traded funds for the private commodities trader: Just as you might prefer doing all your household shopping in one supermarket, so too can you buy into a big basket of securities under just one fund warehouse. ETFs can also embrace a plethora of other exchange-trading mechanisms:

- Speciality Boutique Fund : comprising equities, mutuals, shares, currencies, either correlated or non-correlated by market sector or asset type.

- Asset-backed securities : offering opportunities to collectively warehouse REITs, property or mortgage income trusts, and hedged fund instruments.

- Combination Sicavs : These selective investment and combination asset vehicles can be tailored to suit your profile. These could perhaps gather together a diverse portfolio of fixed-rate securities, money market funds, treasury certificates and dividend bonds.

- Funds of Funds are another specialist way to create a basket of independently structured investments according to a defined strategy of return.

Though these vehicles are not as complex as they may appear, it is nevertheless important to seek professional advice before committing to any risk-related investments, taking into account your financial risk profile and objectives.

Exchange-traded commodity fields open world markets to all investors: Having selected a mechanism, if you wish to add commodities you can choose from a range of ETFs. Inasmuch as collective funds and bonds are much the same as other normal equity funds or hedged instruments, these securities can be correlated to some of the following:

- precious metals including gold, silver, platinum and palladium;

- base metals _ lead, tin, copper, nickel and aluminium or zinc;

- soft commodities covering practically everything from pork bellies to coffee, corn, wheat, soybeans, orange juice, tea, cotton and countless others;

- energy markets _ oil and gas and the "black, blue and white gold" markets of coal, water and milk respectively;

- "fund-of-commodities funds" which manage a select basket of the above assets to reduce risk but respectively reduce rates of return;

- corporate equity and dividend bond funds. Should you not wish to invest in frontline securities, you could opt for an institutionally structured vehicle investing in funds that do invest in these securities.

Although the extensive range of ETF and ETC options to trade safely and profitably is by no means endless, it is certainly a varied and exciting new stratagem for risk-averse investors to optimise portfolios in a previously exclusive sector reserved for institutions or extremely wealthy individuals.

Expat investors should be mindful, however, that commodity trading is not without widely varying levels of risk versus return depending on the sector. These factors can be further mitigated by professional management of diverse assets via exchange-traded portfolio bonds that are structured offshore.

If you feel that you would like to diversify your portfolio or start a new era of investment, call your professional adviser today and make an appointment to start the New Year with something a little different.

Questions to the author can be directed to Barclay Spencer International on 0-2653-1971 or email to info@barclayspencer.com

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