The Commodity Investor – Flows Analysis：Long-term investors still cautious

Commodities Research 20 May 2014 The Commodity Investor – Flows Analysis Long-term investors still cautious • Many things have improved for commodity investments in the past few months, but not investment flows. Q1 proved to be the strongest return period for commodity benchmarks for two years; cost of carry for long-only investors turned positive and correlations with other assets turned sharply lower. However, these factors appear to have done little to reverse the liquidation of commodity assets by index investors. • In the year to date, a net $8.5bn has been withdrawn from commodity investments with around $10bn exiting the commodity index swap sector where most of the buying interest tends to come from pensions funds, endowments and other long-term asset managers. • Trends in other commodity assets have been more positive than in index swaps. Exchange-traded products recorded a third consecutive month of inflows in April and the structured product sector saw net issuance of just over $400m of commodity-linked product, the largest monthly issuance total for five months. • Whether or not longer-term investors return to commodities in size will depend very much on the performance of the asset class. Here the return picture is currently a more mixed one than was the case for most of Q1, as commodity index returns have slowed in Q2 and are no longer outperforming the benchmarks in other asset classes. • The slowdown in commodity index returns fits with our view that 2014 as a whole is unlikely to prove a strong year for commodity beta and that alpha strategies hold out the prospect of better returns over the rest of this year. • Whether the improvements in cost of carry and correlation prove to be enough to attract longer-term investors back to commodity beta investments in significant scale without the positive return profile of the first quarter remains to be seen. FIGURE 1 Commodity index outflows in the year-to-date already exceed last year’s total Bloomberg, MTN-I, ETP issuer data, Barcla ys Research-50-30-1010305070200420062008201020122014 YTDCommodity medium term notes issuanceExchange traded commodity productsCommodity index swapsInflows into commodities ($bn)Kevin Norrish +44 (0)20 7773 0369 kevin.norrish@barclays.com Christopher Louney +1 212 526 6721 christopher.louney@barclays.com Avgustina Sarkizova +44 (0)20 3134 3336 avgustina.sarkizova@barclays.com www.barclays.com PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 22 Barclays | The Commodity Investor – Flows Analysis TABLE OF CONTENTS INVESTOR ACTIVITY ..................................................................................... 3 Investors still cautious despite a strong start for commodities ...................................................... 3 Index outflows intensify despite improving performance................................................................... 4 Exchange-traded products: The inflow continues... modestly ...................................................... 5 Medium-term notes: Noisy after a quiet first quarter ...................................................................... 6 CHARTS AND DATA ...................................................................................... 8 Commodity assets under management ............................................................................................. 8 Commodity investment flows .............................................................................................................. 9 Trends in total commodity investments ...........................................................................................10 Commodity index investments...........................................................................................................11 Commodity ETP investments .............................................................................................................12 CFTC data: Positions by market .........................................................................................................13 COMMODITY TRADES ............................................................................... 15 Commodity returns by index and sector ..........................................................................................16 Commodity returns by strategy .........................................................................................................17 Commodity risk premia returns .........................................................................................................18 PRICE TRENDS ............................................................................................. 19 Price changes......................................................................