LONDON Commodities will battle to regain a prized place in many portfolios after the "super cycle" fizzled out and in a world of muted global growth, executives at JP Morgan Asset Management said.
The sector could, however, claw back a shred of its former glory by providing some diversification benefits, they said during a conference by the fund manager in London this week.
During a commodities boom mainly spurred by China's hunger for infrastructure in the years leading up to the global financial crisis, many investors boosted allocations to commodities to capture strong emerging market growth while diversifying from equities and bonds.
But during subsequent years of the financial crisis, commodities often moved in tandem with other asset classes.
"The rule of thumb is that assets diversify until they become fashionable," said John Bilton, head of the global strategy team for multi-asset solutions at JP Morgan Asset Management.
The group is one of the world's biggest fund managers with assets of $1.7 trillion.
"Commodities went from being a source of diversification to a source of additional return in portfolios."
NO LONGER STAR PERFORMER
The 19-commodity Thomson Reuters/Core Commodity CRB Index soared fourfold from early 1999 until touching a peak in July 2008, but has since slumped by more than half.
Those former buoyant returns are not due to come back as China's transition to a consumer-led economy is moderating commodity demand and elsewhere heavy debt burdens will weigh on economic growth for years to come, he added.
One bright area is that unloved commodities are no longer marching as much in step with other asset classes.
"The opportunity for commodities to become more of a diversifier going forward is certainly there, but it's unlikely they're going to be the star performer in terms of returns."
Bilton is advising clients to diversify through a host of methods from volatility funds to currencies.
Institutional investors such as pension funds and insurance groups are also keen to diversify, but commodities are not on their radar, said Sorca Kelly-Scholte, head of EMEA pensions solutions and advisory at the fund manager.
"Our view is that holding the actual commodities is not a long-term investment strategy for most pension funds. It may offer you some inflation protection over the long-term, but there's no added value from it."
Other assets, such as infrastructure and real estate can provide inflation protection as well as added value, she added.
Despite the long term slide in commodities, the sector has outperformed in recent months as oil and metals rebound, with the CRB Index up 15 percent since early April.
That has driven natural resource funds, which have been popular recently among investors shifting from hedge funds and long-only funds into UCITs, a brand of funds regulated in the European Union (Undertakings for Collective Investment in Transferable Securities).
"Interestingly enough, this year the number one performing sector has been the natural resources sector... so we've seen a lot of clients passively allocate to commodities," said Natasha Petiton, vice president in strategic product management.
"But I don't think we're seeing a big trend in terms of significant target allocation to commodities, more of a tactical strategy."
(Editing by William Hardy)