Energy & mining equities lack comprehensive access and behave too much like stocks, argues commodities expert
The world is becoming too complex for the ‘tried and true.’ That has already become the consensus for Canadian equity investors, who are rapidly moving to diversify their exposures beyond North American stocks. This has been the consensus in fixed income, too, where the blending of active and passive approaches, as well as government bonds and credit, has helped investors maximize yield. Tim Pickering believes that commodity investing requires that same upgrade.
Pickering is the Founder, CIO, and President of Auspice Capital Advisors, a specialist commodities investment manager. He notes that for most retail investors and advisors, commodities exposure has come through resource equities. They’ll buy some energy stocks for their oil exposure and some mining stocks for gold and silver exposure and call it a day.
“The problem with that is really simple: resource equity companies, whether it's an energy company, whether it's a mining company, or even if it's agriculture-based, they're going to have a high beta correlation to equity,” Pickering says. “In general, stocks have high correlation to the benchmarks that they are part of. With some resource equities that correlation could be 80-plus percent.”
Pickering doesn’t deny the utility of resource equities in a portfolio, one can simply look at recent performance by gold mining companies on the TSX to validate that exposure. However, he argues that commodities exposure should be separated out from broad equity market beta to give investors the true diversification that they should expect from their commodities sleeve. Resource equities, he argues, can be impacted by so many factors, be the broad equity market sentiment, company financials, or shifts in the news. Commodity prices, he argues, are much more tied to a simple interplay between supply and demand and the inflationary factors that affect or daily lives.
Historically, one of the core reasons why investors sought resource equity rather than direct commodity exposure is a simple matter of liquidity. The equity beta was viewed as a trade off for buying something with intraday liquidity that could suit the needs of a retail investor. Now, Pickering argues, there is no longer a liquidity advantage to resource equities, perhaps even a risk.
Broad commodity portfolios, as well as exposures to individual commodities, are widely available as either ETFs or liquid alternatives products. The Bloomberg Commodity Index (BCOM), a volatile long-only benchmark, is is tracked by a couple bank owned ETFs in Canada. While companies like Auspice have offered products in the space for a long time, TD Asset Management has offered a commodities pool fund since 2023 and BMO global asset management has just launched an ETF similarly tracking the Bloomberg commodity index.
The big banks’ entry into this space, offering more retail-facing commodity strategies, validates what Pickering sees as an ongoing commodity super-cycle. While many investment banks have published outlooks and positioned themselves as ‘commodities experts,’ a place Pickering started his career over 30 years ago, this move by the Canadian banks represents a recognition of the opportunity now out there for experienced commodity fund managers. Pickering argues, however, that the conservative grounding at the banks, the experience at global commodity majors and management techniques his own firm has honed for the past 20 years gives them an advantage.
Auspice, Pickering explains, assembles portfolios from the broad commodity market, looking at what’s moving across this hugely varied asset class. In certain strategies Auspice will go long, and select exposures only to the commodities they see on the upswing while flat (no position) on others and the bulk of investor capital earning a cash return. In other strategies, Auspice will go long on upswinging commodities and take short positions on falling commodities to benefit from weakness. In both cases, risk is carefully managed to protect investor capital and managed through diversification as opposed to concentration in single markets like Gold or Silver.
While analysts can examine macro trends and make predictions about commodity markets, Pickering argues that presence across the space offers the best degree of certainty. For advisors looking to upgrade their commodities exposure, Pickering argues that they should seek experienced management that understands the true diversity of this space.
“The commodity market is the most diverse asset class there is. Cotton is not like crude, is not like coffee, is not like canola. These are all very disparate, unique opportunities,” Pickering says. “Our strategy has exposure to many commodities that we tactically gain access to when they start moving. Picking one or two and hoping you've got the right one is very difficult.”
