Commodities are a major asset class that many UK investors lack exposure to. Here, we discuss the benefits of investing in commodities as part of a diversified approach, such as that offered by the Winton Absolute Return Futures Fund.
Investing in commodities allows savers to profit from price changes in the raw materials that underpin the global economy. The asset class – which includes energies, base metals, precious metals, crops and livestock – consists of a range of markets whose supply and demand dynamics differ. The figure below details the breadth of commodities markets available, by showing the 43 currently traded in the Winton Absolute Return Futures Fund.
Rather than buying or selling the physical commodity, investment managers such as Winton gain exposure to these markets through exchange-traded futures contracts, which converge to the price of the underlying commodity at maturity. These contracts make it easy to open and close positions. They also provide more direct exposure to changes in commodity prices than, say, buying the shares of an oil major or mining company.
Source: Winton, as at 25 October 2019.
The diverse nature of commodity markets means that their returns tend to vary from one another. The heatmap below shows how correlations between average commodity sector returns have been close to zero over the past 20 years. Commodities have also historically had low correlations with equities and bonds, which makes them a valuable source of diversification.
Source: Winton, as at 25 October 2019. Shows the 20-year correlation between the average 20-day returns of five commodity sectors, equities and bonds, calculated using daily back-adjusted futures returns.
These diversification benefits are apparent in Winton’s portfolios. The figure below shows the calendar-year performance by sector for Winton’s systematic multi-asset strategy since 1997, ranked from most profitable to least profitable. In a given year, the strategy made money in the sectors that fall above the white line. As the figure shows, no one sector has consistently delivered positive returns, which demonstrates the importance of applying the strategy to multiple asset classes.
Source: Winton, as at 25 October 2019. Shows futures and forwards sectors ranked by calendar-year contribution to performance for Winton’s largest futures and forwards portfolio since October 1997.
Overall, Winton’s strategy has made money in commodities in 16 out of 22 calendar years since it started trading. These positive contributions have been particularly valuable at times. For example, profits in commodity markets mostly offset the Winton Absolute Return Futures Fund’s losses in currencies and equity indices during 2018. This broader investment universe has also enabled Winton’s investors to profit from some major investment opportunities outside of equities and bonds – such as the rally in gold prices after the 2008 financial crisis and the collapse in the oil market during 2014 and 2015.
The number of commodities traded by the Winton Absolute Return Futures Fund has increased from five at inception in July 2017 to 43 today, following the addition of carbon credits, iron ore and Dutch natural gas in September this year. Winton continues to seek out new markets to add to its portfolios and this number could increase further, providing investors in the fund with exposure to an even larger number of investment themes.
Important Information: The Winton Absolute Return Futures Fund (the "Fund") is a sub-fund of Winton UCITS Funds ICAV (the "Company"). The Company is authorised by the Central Bank of Ireland as an undertaking for collective investment in Transferable Securities pursuant to the UCITS Regulations. This webpage is prepared by Winton Capital Management Limited ("Winton") which is authorised and regulated in the United Kingdom by the Financial Conduct Authority. Registered Office: 20 Old Bailey, London EC4M 7AN.
This webpage is a summary only and potential investors must refer to the prospectus, the supplement and the Key Investor Information Document ("KIID") for the Fund. This webpage is not a recommendation to purchase or sell any investments.
The Fund currently has or intends to have more than 35% of its total holdings in bonds issued by or guaranteed by: EU member state, by its local authorities, by any other OECD member state, or by any public international body of which one or more EU member states are members.
The value of an investment and any income derived from it can go down as well as up and investors may not get back their original amount invested. The information on this webpage is believed to be materially correct but Winton makes no representation or warranty as to its accuracy or completeness and accepts no liability for any inaccuracy or omission. This material is not suitable for distribution in the United States or to US Persons.
Who is the Fund for?
- Investors seeking conservative capital appreciation over the long term.
- Investors seeking a strategy that has the potential to provide positive returns in a variety of market environments.
- Investors seeking exposure to multiple asset classes and markets as part of a diversified portfolio.
Key risks to consider
- Absolute return – The Fund aims to provide positive returns over a rolling three-year period, but a positive return is not guaranteed over any time period and capital is at risk.
- Derivatives – The Fund invests in futures and forwards, which are financial derivative instruments that can increase the size of gains and losses.
- Commodity-related and macroeconomic risk – The Fund will gain exposure to the performance of equity indices, government bonds, interest rates, currencies and commodities, all of which can be volatile and influenced by economic and political developments.
- Process risk – There may be issues with the systems and mathematical models that Winton uses to implement the Fund's strategy or the processes and procedures related to those systems.
A more comprehensive list of risks is provided in the Company's prospectus and Fund supplement.