Commodities have been one of the best performing areas over the past year but Vince Childers, manager of the Cohen & Steers Diversified Real Assets fund, has taken a tactical underweight in favour of infrastructure and property.
Real assets have come to the fore over the past 12 months, with commodity prices spiking led by the rise in oil, which rose on the back of sanctions imposed on Russia following its invasion of Ukraine.
Indeed, the S&P GSCI Gas Oil Spot price is up 91.9% so far in 2022, despite falling almost 30 percentage points from its October high.
Meanwhile, the broader Bloomberg Commodity index has made a more modest 25.2% as it has been weighed down by the likes of gold, for example, with the S&P GSCI Gold Spot index up 7%.
Performance of indices over YTD
Source: FE Analytics
As such it has not been as straightforward as buying a broad commodity tracker. While the trade has worked well for much of 2022 and has good long-term potential, in the short run it may be a different matter.
Childers said: “Softer economic data suggests that a global economic slowdown may create a nearer-term soft patch for industrial metals before stronger Chinese stimulus takes over, but that would likely have to wait until the country gets its Covid situation firmly under control.”
Here, investors may be wise to switch to the more agricultural side of commodities, as the war between Russia and Ukraine could lead to significant food inflation.
“Russia and Ukraine combined account for 25% of global wheat exports and Ukraine is responsible for 13% of corn exports,” he said.
“The sector also benefits from elevated at-home consumption, which may continue to rise longer term due to more flexible work-from-home arrangements,” he said, while the cost-of-living crisis could mean people spend less on luxuries and more on basic goods.
Childers also said that he was “constructive” on energy stocks, but had underweight position to European companies given the concerns around windfall taxes and stagflation.
“We maintain a favourable long-term view on energy, expecting continued draws in global inventories; OPEC’s recent announcement of production cuts (by 2 million barrels per day) suggest tighter oil markets in the intermediate term,” he said.
Infrastructure is another area that Childers has been looking at, as “returns have historically shown positive sensitivity in inflationary environments” such as the one we are currently in.
The manager said that he expects this to continue for some time and as such the fund is overweight due to the asset class’ “improved valuation and a supportive macro backdrop”.
“Most infrastructure businesses can generally pass rising costs along to consumers and, as a result, they have tended to perform well during periods of unexpected inflation,” he said.
However, Childers noted that range of returns among infrastructure assets can be very large depending on sector and asset type.
“Performance dispersion among infrastructure subsectors can be significant in challenging economic periods and amid rising bond yields,” he said.
The manager of the five FE fundinfo Crown-rated Cohen & Steers Diversified Real Assets fund said however that he was underweight global real estate securities based on concerns about the potential for rising interest rates.
Performance of fund vs sector and benchmarks since launch
Source: FE Analytics
However, pockets have emerged as valuations have improved and the recent correction in share prices had given the sector an “attractive return potential relative to broad equities”.
“Slowing economic growth and high inflation temper the near-term outlook for real estate, particularly for sectors lacking pricing power. However, cash flows generally remain sound, and we anticipate healthy earnings growth this year and next,” said Childers.
“Moreover, real estate companies typically have high operating margins, low sensitivity to commodity and labour prices, and (in many cases) inflation-linked rents, making them better suited than traditional asset categories to defend against a prolonged environment of high inflation.”
Companies that provide data and logistics infrastructure, including data centres and industrial warehouses, should continue to benefit from strong secular demand in the shift toward a digital economy, he argued, particularly in the US, while offices could continue to struggle.
In Europe, health care and self-storage may also be options, although the “growing macro headwinds” mean the fund has trimmed its position recently.