Commodities: Investors plough a new furrow in agri-finance
The amount of money invested in commodities and particularly the amount of new investment inflows has attracted enormous attention. Unfortunately much of the analysis on the subject has been ill founded and confused.
According to Barclays Capital, the scale of index investments in commodity markets in particular is being hugely overestimated because of flawed methodologies and because much of the rise in assets under management that is actually due to rising prices is being misclassified as new inflows.
By examining published data from fund managers and industry sources, Barclays Capital calculates that the total amount invested globally in commodities at the end of the second quarter of 2008 was $270 billion, of which $175 billion was tracking commodity indices in pension funds and mutual funds, $51 billion was in exchange-traded products and $44 billion in medium-term notes, mainly structured products.
Although assets under management increased by $43 billion from the first quarter to the second quarter of the year, the bank estimates that new money accounted for just $6.4 billion of that figure, with the rest being simply the result of price appreciation.
Although other estimates for the amount of money in commodity indices alone are as high as $250 billion, Barclays Capital believes that such figures are exaggerated because they are derived by using agricultural futures data published by the US Commodity Futures Trading Commission and the reported weights for agricultural commodities in various indices to arrive at an implied measure for the total amount of index investments.
This approach is flawed because proponents of the methodology often use long-only index positions rather than net long positions, which differ substantially, and secondly, says Barclays, because the overweighting of the agriculture sector, particularly in the first quarter of this year, has led to total commodity positions being overestimated.
