Weekly Musings – NFO Pick (Quant Commodities Fund)

18 Dec 2023 , 09:39 AM

COMMODITY FUNDS – WHAT ARE THE KEY FEATURES?

Commodity funds are mutual funds that predominantly invest in commodities. From an investment perspective, commodities are broadly classified into four categories. These include agricultural commodities (cotton, soybean, maize etc), industrial commodities (copper, zinc, aluminium), precious metals (gold, silver, palladium), and energy (oil, gas, and electricity). A commodity fund is one that invests that invests in such commodities, either in their physical form or through the use of futures. Here are some standout characteristics of such commodity funds in the Indian context. 

• Commodity funds are across commodities with different commodity business cycles and weather cycles. Hence commodity funds are not only diversified internally, but also help diversify other asset classes.

   

• Commodity funds make commodities accessible to small investors. Most commodities are very complex and their demand and supply are subject to various domestic and global factors. A commodity funds brings a professional approach to these products.

   

• Commodity funds can be used to hedge risk. Since they normally enjoy negative or low correlation with traditional asset classes, adding commodity funds to your portfolio helps you to lower your overall portfolio risk.

   

• Commodities are generally, the best bet against inflation since commodity prices generally tend to have a direct correlation with price levels. In a high inflation environment, these funds can offset your loss of purchasing power.

   

• The choice is substantial in commodity funds. Whey they are still picking up in India, these commodity funds are spread across precious metals, industrial metals, energy products and agricultural products; most of which follow distinct life cycles.

   

• Commodity funds tend to be cyclical and that makes them riskier. Hence success in commodity funds is not about long term holding, but about gauging the cycle correctly and being in the right place at the right time and stay long enough to play the cycle.

To sum it up, commodity funds not only enhance returns when synced with the cycle, but they also offer a natural hedge against portfolio risk.

EMERGING OPPORTUNITIES IN THE COMMODITIES SPACE

Obviously, investing in commodities cannot be about buying the same old companies in steel and aluminium. The focus has to be future perfect and in sync with the changing trends. Here are four trends that one can decipher in the commodities space.

• As automobiles shift to electrical vehicles and power and fossil fuels go green, the big shift is likely in the demand for certain unique commodities. For instance, the demand for copper, lithium and steel is likely to get a big boost. Low carbon technologies are likely to be copper intensive and lithium is the base commodity for most of the new age batteries. This trend has been playing out for some time now.

   

• One way to counter the above trend is to look at the traditional supplies like oil and coal, which are likely to go out of usage in another 50-60 years. What we could see is sharper supply erosion than has happened in the past and that means these traditional fossil fuel commodities could also witness a sharp rally in the coming months.

   

• Mining sector is seeing substantial investments in the sector due to the greening of the entire mining process. Most mining companies have been reducing the carbon intensity in their products and processes and “brown to green” has emerged as one of the biggest themes for the mining sector to be attracting investments.

   

• Finally, on the agricultural sector, there are benefits likely to accrue from improving prices, sustainable farming, and the gains of upstream agriculture. This is likely to create big opportunities in the farming and food sector, again creating profitable opportunities for such agri related commodity funds. 

The core idea of the Quant Commodities Fund NFO is to be able to tap the above big trend shifts and ensure that the corpus is invested in such futuristic themes.

QUANT COMMODITIES FUND – ASSET ALLOCATION STRATEGY

Here are how the Quant Commodities Fund plans to allocate its corpus across different commodity related themes in India.

1. It would still be an equity fund that will have substantial investment interest in companies that are engaged in commodity and commodity related sectors. Such exposure to commodities can be either direct or indirect i.e., it can be direct equities or even through futures. Even themes that benefit from such commodity trends will be considered for investment by the Quant Commodities Fund.

    

2. The portfolio of Quant Commodities Fund will be managed through a flexi-cap approach. That means, the fund will look at large cap, mid-cap and small cap commodity companies listed on the stock exchanges. The sectoral mix will be across metals, mining, agricultural, chemicals and energy sector.

    

3. Broad asset allocation strategy of the fund permits investments in gold and silver ETFs, Exchange traded commodity derivatives across agricultural commodities, industrial commodities, precious metals, and energy to capture maximum risk premium for the investors. Each of the asset classes would still go through a rigorous investment and decision making process before they make the grade.

The fund will also put its cycle analytics expertise at into play that will help them to identify risk on and risk-off investment opportunities in the commodities space.

INVESTMENT STRATEGY OF QUANT COMMODITIES FUND

The investment strategy of Quant Commodities Fund will be broadly predicated on 4 aspects pertaining to asset allocation in the commodities space. 

• The fund will invest 80% to 100% in equity and equity related instruments of companies that are actively engaged in the commodities business across the entire commodities spectrum. The balance 20% can be allocated to gold and silver ETFs as well as to exchange traded commodity derivatives (ETCD) as well as some small allocation to non-commodity sectors too.

   

• The entire 100% focus of the portfolio will be in the commodities sector only. The typical sectors that the fund will invest include oil & gas, consumable fuels, cement, power, chemicals, sugar, metals, mining, paper, construction material, agricultural products etc. The fund will look at corporate proxies for such commodity themes like manufacturers, user industries, wholesalers etc.

   

• The 20% investment in gold and silver ETFs as well as in exchange traded commodity derivatives will be to generate alpha. Hence, such investments would be purely from the perspective of catching commodities at the bottom of the cycle and playing them all the way up the cycle through various proxies.

   

• All the asset classes; be it equities, precious metals, or exchange traded commodity derivatives; will be put through a rigorous analytical framework to ensure that they do fit into the larger definition of what the fund is trying to achieve. In the commodity, it is not just the returns, but the management of risk that also matters a lot.

The bottom line is that the Quant Commodities Fund NFO would try to hit multiple targets with one stone. It will look to boost returns, manage risk, and also diversify the portfolio.

WHO SHOULD INVEST IN QUANT COMMODITIES FUND

The fund is open to anyone who is eligible to invest. However, it is best to know what are the conditions to make the best of such an investment for the investors.

• This fund is suited to investors wanting to participate in the India economic growth story by investing in a range of domestic and global commodity stories. The strategy will be flexi cap. Hence investors need to bear in mind that these funds will carry the commodity cycle risk as well as the traditional risk of equities. 

   

• The Quant Commodities Fund is best suited to investors with a longer term horizon. It takes time for the commodities to actually react to the cycle and start generating returns. Ideally, an investment horizon of 2-3 years would help the investors to best leverage the opportunities in this fund.

   

• The fund is a great choice for investors looking to participate in the new age commodity shifts. The big focus on infrastructure, electrical vehicles, renewable energy etc is likely to generate huge demand for specific classes of commodities like coper, zinc, aluminium, lithium etc. That is a high risk but a high return strategy.

   

• The Quant Commodities Fund is suited to investors looking to diversify their portfolio risk by inducing low-correlation assets into their portfolio. These commodity funds follow their distinct commodity patterns and have low corelation with traditional equity and bond portfolios, making them valuable from a diversification perspective too.

The moral of the story is that the Quant Commodities is best suited to investors with a higher risk appetite and with willingness to wait for the longer haul.

HIGHLIGHTS OF THE QUANT COMMODITIES FUND NFO

Here are some key takeaways that investors should know about the NFO.

• The Quant Commodities Fund NFO opened for subscription on December 08, 2023 and closes on December 22, 2023. The allotment date for the NFO is December 27, 2023 while the fund will be available for continuous purchase and redemption from December 27, 2023 onwards. 

   

• Ankit Pande, Sanjeev Sharma, Vasav Sahgal and Varun Pattani will be the fund managers for the Quant Commodities Fund. They have a combined experience in the fund management industry of over 30 years.

   

• It is an open ended mutual fund scheme which is classified as an active equity mutual fund scheme thematic fund under SEBI classification norms. Any equity fund runs the risks of market volatility, business cycles, portfolio quality. In addition, the Quant Commodities Fund also has the additional risk of playing the commodity cycles, that can be quite complex to predict and leverage on.

   

• The performance of Quant Commodities Fund will be benchmarked to the Nifty Commodities TRI. The TRI index is total returns index, which not only factors the capital gains but also the dividends received by the components of the index. This provides a better basis for comparing the performance of the fund with the index.

   

• The objective of Quant Commodities Fund is to generate long term capital appreciation by creating a portfolio that is predominantly invested in equity and equity relate securities of companies engaged in the commodities and commodity related sector. It is a thematic fund and being an equity fund, there is no assurance of returns.

   

• Lumpsum purchases in the NFO entail a minimum investment of Rs5,000 per application. Additional applications can be done of minimum Rs1,000 while, SIP investment can have a minimum base of Rs1,000. 

   

• There will be no entry load under SEBI regulations. However, an exit load of 1% will be imposed on the fund if it is sold within 15 days of the allotment date. Any sale of the fund beyond 15 days does not attract any exit load from the fund.

   

• The Quant Commodities Fund offers Regular Plans and Direct Plans to investors with the TER adjusted accordingly. In addition, the fund also offers investors the growth option, and IDCW options to investors. Investors must evaluate tax implications of the various options before opting for the same.

   

• While there are no lock-in restrictions, it is suggested that ideally the Quant Commodities Fund be held for a minimum period of 3-5 years, to derive the full benefits of varying equity cycles and to counter the added risks of multiple asset class exposures.

It must be noted that in the case of equity funds, the dividends are taxable at the marginal rate of tax applicable to the particular investors. The capital gains are taxed at concessional rates of 15% for short term capital gains and 10% for long term capital gains (above a threshold of Rs1 lakh of capital gains).