quant Mutual Fund, which has in recent times captured the attention of investors, has brought a new fund offer to the market. quant Commodities Fund is a new thematic open-ended equity scheme investing in commodity and commodity related sectors. This fund widens the product choice in the equity commodity fund space, which has schemes from ICICI Pru and SBI MF. The NFO period ends on December 22. Here is a lowdown on the latest offering.
Why commodities
Commodities constitute natural resources derived from diverse processes, encompassing mining for precious and industrial metals, drilling for oil and gas, and agricultural practices yielding products such as corn and cotton. The pricing dynamics of commodities are fundamentally governed by the interplay of supply and demand forces. In the context of soft commodities, meteorological conditions assume a pivotal role in influencing prices, while hard commodities are notably more susceptible to the oscillations of the broader business cycle.
Commodities hold appeal for investors owing to their potential for compelling returns and their role in diversifying investment portfolios. Additionally, they serve as a hedge against the erosive effects of inflation. It is worth noting that commodity futures contracts, in contrast to the physical assets they represent, confer a long-term risk premium above inflation. Consequently, strategic inclusion of commodities in asset allocation emerges as a prudent approach.
Commodities represent a cyclical facet within the realm of investments, constituting an integral subset of the expansive undulations characterising the broader business cycle. The demand dynamics for industrial metals, illustratively, are intricately intertwined with the cyclical movements of sectors such as automotive, aviation, and construction. Similarly, the energy sector’s fortunes are profoundly tethered to global economic growth and exhibit a heightened susceptibility to geopolitical events. Furthermore, the prospect of a paradigm shift towards lower or zero-carbon energy sources carries the potential to instigate an emergent commodity super cycle. The accelerated transition to more sustainable energy alternatives is poised to induce transformative dynamics within the commodity landscape, thereby reshaping the traditional cycles and introducing novel patterns of demand and supply.
Strategy focus
quant Commodities Fund will focus on India’s growth potential in many commodity linked sectors; from organised agriculture, healthcare, manufacturing to power. The scheme can invest 80 -100 % in equity and related instruments of companies engaged in commodities and 0 -20 % each through a flexible combination of ETFs, ETCDs, and non commodities equity for better diversification.
Using the AMC’s VLRT framework, quant Commodities Fund will primarily be concentrated on companies involved in the commodity and related sectors, with additional exposure to diverse industries. Employing a flexi-cap approach, the fund’s portfolio management strategy aims to capitalise on opportunities spanning a broad spectrum of sectors, notably encompassing Metal & Mining, Agri, Chemicals, and Energy.
The flexibility in the fund’s asset allocation strategy extends to include investments in Gold and Silver Exchange Traded Funds (ETFs) and Exchange Traded Commodity Derivatives (ETCDs). This diversity encompasses commodities such as Copper, Aluminium, Lead, Zinc, Crude Oil, Natural Gas, Cotton, Castor, Cumin Seeds, Coriander, among others. This broadened exposure could yield a higher positive beta during cyclical upswings.
A dimension of the scheme involves leveraging cycles analytics expertise. This could facilitate the identification of risk-in/risk-off cyclical opportunities within the broader business cycle.
Existing commodity funds
ICICI Pru Commodities Fund and SBI Magnum Comma have mandates similar to quant Commodities Fund. As per latest data, the top holdings of ICICI Pru Commodities Fund are JSW Steel, Jindal Steel & Power, Tata Steel, Jindal Stainless, Grasim, Ultratech Cement, Ambuja Cements, NMDC Steel, Dalmia Bharat, UPL Chemicals, Mangalore Refinery And Petrochemicals, Orient Cement and Aarti Chemicals. The focus appears to be metals & mining, materials, energy and chemicals for this fund.
For SBI Magnum Comma, top holdings are K.P.R. Mill, Tata Steel, NTPC, Coal India, Ultratech Cement, Antony Waste Handling Cell, CCL Products (India), Reliance Industries, Hindustan Petroleum Corporation, Hindustan Copper, Neogen Chemicals, Hindalco, Sagar Cements, Grasim, Shree Cement and NMDC. Compared to the earlier fund, the SBI scheme appears more diversified.
About a year back, the lone passive offering in this space was launched in the form of ICICI Prudential Nifty Commodities ETF.
Our take
Commodity funds being thematic offerings should only be a small part of your portfolio if you find exposure to the theme to be missing from existing funds, or if you believe the theme deserves higher allocation. While SBI Comma Fund has a longer track record than ICICI Pru Commodities, the latter has delivered alpha vs. NIFTY Commodities Total Return Index in recent times. If you feel quant MF’s commodities fund can deliver a better job, you can consider it with a 3-5 year horizon in SIP mode.
