Commodities losing their shine to profit-takers

Just as you are about to part with your hard-earned money for units in commodity mutual funds - stop.

Although commodities will still have their run in 10 years, according to Scott Campbell, a director of fund management with the publicly listed Midas Capital, prices for the short term are expensive as many institutional investors are taking profit right now.

And unfortunately, it is the "Mr and Mrs Smiths" who are investing in commodities, said Campbell. The first three months of the year saw about US$250 billion (Bt8.1 trillion) poured into commodity index investment, he added. But many sellers, who hopped on the wave before price surges, have netted 30 to 40 per cent from their initial investment.

Even George Soros, chairman of Soros Fund Management, is convinced that the balance is not right. According to the draft of his statement to the US Senate's commercial committee, as published in the Financial Times, the buying of these commodity indices is reminiscent of "the craze for portfolio insurance" that led to the 1987 stock market crash. Speculation proves to be too much.

Still, Campbell is hoping to gradually buy some soft commodities. He believes that emerging markets will continue to fuel the demand for commodities, particularly as demand rises for industrial materials, food, alternative energy and water. The two asset classes usually share similar cycles.

Water is a particular asset class which Campbell likes as a long-term investment. It is still relatively cheap. Water's indispensability means that water technology, utilities and treatment companies' stocks are worth looking into. To date, Thailand has two water-themed mutual funds at ING Funds and PrimaVest Asset Management.

"Disciplined contrarian" is how Campbell sees himself as an investor. "You have to be disciplined when they all walk out," he said.

The recent credit crunch as the result of the subprime poison has seen house prices falling in both the US and Europe. But the upside is not confined to just distressed properties in the West. In the East, where real interest rates declined, investment opportunities abound. Scott cited Japan as an example, where despite its low interest rates, few have bothered to invest in property. Scott's own Japanese property portfolio has an average yield of 5 per cent. He noted that institutional investors in particular could make use of the domestic "carry-trade" to invest in property.

One of Scott's even more contrarian investment strategies, though, may be more common in hedge funds. He is investing in distressed loans now that the market has collapsed. Scott claims that the actual default and the one implied by market prices are far and wide. Less than one per cent of leveraged loans defaulted, whereas the implied default rate is as high as 16 per cent - according to Midas Capital's data.