Schroders commodities strategy aims to outperform the Bloomberg Commodity Index (BCOM TR) with a lower level of volatility.
Schroders began managing commodities in October 2005. The strategy is managed by a dedicated team based in London and supported by the global resources of the entire Schroders group. The investment opportunity set includes more than 60 commodities and the strategy invests in both commodity futures, commodity swaps and commodity-related equities. Rigorous risk controls place strict limits on the maximum exposure to any single commodity as well as to sector, instrument and cash. Cash/collateral positions are solely invested in US Treasury Bills with less than 12 months maturity.
We believe that over a market cycle, an actively-managed commodities portfolio will produce higher returns at a lower level of volatility than a passively managed portfolio.
The investment approach emphasizes active management within an index unconstrained opportunity set. The strategy is long only and does not employ leverage. Fundamental analysis drives the investment process with quantitative, technical and sentiment analyses playing key supporting roles. Equal emphasis is placed on each of the three key commodity sectors: agriculture, energy and metals. Investments are made on a medium-term time horizon.
Our investment process makes a distinction between market analysis, which encompasses identification of trends and resulting opportunities and portfolio construction.
The Schroders Commodity team meets formally on a quarterly basis to discuss global conditions for commodities. This internal meeting is designed to ensure that we identify potential opportunities and risks relating to the commodity markets and overall strategy. A broad investment framework covering major themes in the market is then created encompassing the following:
- Global and sectoral outlooks (energy, metals and agriculture)
- Multi-linear regression models and seasonality studies (quantitative analysis)
- Long-term chart analysis (technical analysis)
- Sentiment analysis.
The team meets formally on a bi-weekly basis to discuss any recent commodity research produced by the team members, performance, portfolio positioning, as well as any market developments.
Commodity analysis forms the core of our investment process. Our research process is the primary source of ideas for investments. Major commodities are reviewed once a year, minor ones less frequently.
Fundamental analysis forms the largest proportion of our investment process and involves the relevant analyst producing a detailed report on the commodity under discussion. This is summarised in a one page report which covers supply, demand, supply/demand balances and sets out three and 12 month price forecasts for the commodity together with an anticipated 12 month price range.
Quantitative analysis is derived from the production of standardised commodity risk models and seasonality studies. The commodity quantitative models use price, supply, demand and inventory data to score and rank commodities based on five key factors. Ongoing back-testing for both full and sub-periods ensures the validity of the models. The quantitative process can be classified as an extension of the fundamental analysis.
Technical analysis makes extensive use of chart analysis: the volatile and frequently momentum-driven nature of many commodities makes both long and short-term chart analysis of price patterns a valuable tool.
Chart analysis encompasses:
- Trend analysis (indicators such as trend lines, moving averages)
- Momentum analysis (indicators such as MACD, trading volume)
- Pattern analysis (predominately Elliott Wave Analysis, also well known patterns such as Head & Shoulder, Gaps, Flags etc).
Chart analysis is particularly useful in supporting good decisions on timing and aggressiveness of positioning. Chart analysis also often generates investment ideas which are then fully researched through fundamental analysis.
Sentiment analysis attempts to discover how other market participants are positioned and/or are likely to change their positions in the future. Accurate readings can support our own assessment of risk/opportunity in markets. A few key measures are systematically considered as contrarian indicators:
- Consensus market forecasts - proprietary indicators (developed by us)
- Mutual fund “beta” - proprietary indicators (developed by us)
- Investor surveys (internal and external)
- Commercial and non-commercial positioning.
All fundamental research is undertaken by the commodity desk and most of the research material used to make investment decisions is produced internally, with external resources providing a secondary input into the process.
During our analysis, we develop 3-12 month price forecasts for commodity markets. In order to aid investment decision making, the team maintains a scorecard for all commodities and their respective markets in our universe, thus enabling the team to rank opportunities based on the output from our investment process. Using the liquidity based diversification rules the portfolio is built on a bottom-up basis.
- Index-unconstrained opportunities with active management
- Long-only strategy; does not use leverage
- Equal emphasis placed on each of the three key commodity sectors: agriculture, energy and metals