Weekend Investor: Why commodities still belong in your portfolio

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SAN FRANCISCO (MarketWatch) ?€" The recent nosedive for many commodities has done little to shake money managers?€™ belief that natural resources are on track for long-term gains as China and other developing countries grow richer.

Commodity futures prices hit the skids in May, in some cases losing more than at any point in the last two years and giving back much of 2011?€™s gains.

?€œDramatic gains that we?€™ve seen, primarily liquidity driven, are unlikely to be repeated?€ in the next three to six months, said Mihir Worah, a portfolio manager and managing director with Pimco, the mutual fund giant. Worah leads several of the firm?€™s top performing commodity-based funds.

Yet commodities still play an important part in an investment portfolio, offering some diversification from traditional stocks and an avenue to the long-term growth of the world?€™s developing markets.

Greater numbers of people in China, India, Brazil and other emerging economies have more money to spend ?€" a global force that requires more commodities and materials for both infrastructure and consumer needs.

?€œMetals are a proxy for standard of living,?€ and as China and other emerging markets grow, they will need metals to build infrastructure, said Wayne Atwell, a metals and mining analyst with Rodman & Renshaw investment bank in New York.

?€œLarge parts of the global population, particularly in China and India, are going through a particularly commodity-intense growth phase,?€ which bodes well for commodities?€™s longer-term prospects, Worah added. ?€œWe see significant supply-and-demand mismatch.?€

Demand ?€" or the lack of it ?€" has been worrying commodities investors over the past few weeks. Commodities futures went south after a flare-up in eurozone sovereign debt concerns boosted the U.S. dollar and pushed traders to unwind positions linking a weak dollar to higher commodities prices.

In addition, a series of increases in the amount of money required to trade silver, crude oil, and gasoline, among other commodity futures, unchained steep selloffs for commodities. Moves by China and India to cool their economies and raise interest rates also pressured commodity prices. Read more: Gold investors need nerves of steel.

The Dow Jones UBS Commodity Index has lost 0.2% this month, on top of a 5% decline in May. The benchmark is still up 2.4% for the year so far.

Dig deep

Commodities investors may be in for more rough times. With the U.S. job and housing markets still ailing, and manufacturing showing signs of slowing, many buyers are bracing for slower global growth.

The U.S. Federal Reserve?€™s asset-buying program, known as QE2, is drawing to its June 30 close without a clear replacement despite the slowing economy, and that is also worrying investors.

In this climate, Pimco has avoided or cut back on commodities ?€œoverly influenced?€ by liquidity factors, Worah said.

That means trimming oil and gold positions in favor of commodities that are ?€œunderpriced relative to growth potential,?€ he said, such as natural-gas futures. Worah also is bullish on corn, which faces potential shortages in the near term.

Pimco recently took profits and unwound positions in Brent oil futures, the European benchmark, to buy more of the U.S.-traded oil benchmark, the West Texas Intermediate product.

Authors: Commodities - Yahoo! News Search Results

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