The roller coast ride continues for investors in commodity-focused funds, as witnessed Wednesday with the announced liquidation of the 19-year-old Oppenheimer Commodity Strategy Total Return Fund (QRAAX).
Even though the category, as tracked by Morningstar, has been on the upswing since the start of the year, commodity investors and portfolio managers have been generally behind the curve for the past several years as commodities have experienced wild volatility.
The
liquidation of the Oppenheimer fund is “just another example of closing the barn door after the horses have run out,” said Paul Schatz, president of Heritage Capital.
“Commodities peaked in July 2008, collapsed to February 2009, rallied hard to April 2011 and then collapsed again to January 2016,” he added. “This year they've been very strong, but it's been a punishing secular bear market that may have either ended this year or taken a long-term siesta.”
Since the start of the year, the Oppenheimer fund is up 7.19%, which compares to a category average gain of 9.48%. But the
performance over the past five years helps explain why assets have been flowing out of commodity strategies.
The Oppenheimer fund, which has seen its assets under management shrink to $269 million, from more than $2 billion in 2011, hasn't had a positive year since it gained 8.61% in 2010 while the category gained 23.62%.
Mark Hamilton, the chief investment officer in charge of asset allocation, cited a waning investor appetite for the strategy, in a statement from OppenheimerFunds.
“We continue to believe in the merit of an investment strategy that includes exposure to commodities,” he wrote. “But as investors' appetite for this asset class has evolved over time, we believe such a strategy can best be implemented as a component of diversified multi-asset portfolios.”
OppenheimerFunds manages a total of $216 billion, and the core strategy fund, which will return the assets to investors in mid-July, is the firm's only commodity fund.
The fund's plight is seen by some as indicative of the challenges of
managing and investing in commodity strategies, but not necessarily an indication that commodities are to be abandoned at this time.
“A number of years ago we had that Oppenheimer fund on our platform but we moved away from it when it changed its benchmark and still couldn't keep up it,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
In addition to being subject to the realities of price volatility, commodity funds are also at the mercy of the logistics of investing in futures contracts as opposed to the physical underlying commodities.
In order to keep a portfolio fully invested, portfolio managers are constantly challenged with having to buy forward contracts as futures contracts expire, an issue that can be particularly punishing to casual investors in commodity ETFs.
“When it comes to commodity funds there are some pretty big factors and frustrations, which is something we spend a lot of time thinking about,” Mr. Haworth said. “As I think about the commodity space, there are certainly a number of ways to get access. Sometimes a mutual fund is best, sometimes it's a structured product, and sometimes it's an ETF, but in the end you're just trying to get that beta exposure in an efficient way.”
On that point, Mr. Schatz believes the best course is through low-cost ETFs.
“It's hard to make a case for commodity mutual funds when ETFs offer commodity exposure at a much lower cost,” he said. “And there are other commodity mutual funds that enact very actively-managed long-short strategies if an investor is seeking something other than commodity-index type returns. But I don't see this liquidation as being a new trend developing.”
According to Morningstar, there are currently 41 commodity-focused mutual funds, which is still an all-time high even though assets in the funds have fallen 51% since 2012 to $24.8 billion as of Wednesday.
There are currently 109 commodity-focused ETFs, which is down from a peak of 118 in 2014.
Commodity ETF assets peaked in 2012 at $118 billion and have since dropped 46% to $63.8 billion.
The Oppenheimer fund will be the third commodity mutual fund liquidated this year. One fund was liquidated last year, and three were merged. But the past few years has seen a flood of new funds in the space as the fund industry has continued to chase this moving target.
Including multiple share classes, the industry rolled out 115 new commodity funds since the start of 2010.
Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, pointed out that the timing of the closing of the Oppenheimer fund as particularly unique, considering that the category is showing some strong performance again.
“Money tends to chase performance, so investors will be coming back in,” he said. “The turnaround and demand for commodity products has caught many investors and asset managers off guard.”
Bob Rice, chief investment strategist at Tangent Capital, said commodity funds “have been under incredible pressure, because commodities are notoriously difficult to manage, even in ETFs.”
For that reason, he believes commodities held inside funds “are not a good mix.”
“Personally, I just don't favor commodity funds for the vast majority of investors,” he added. “It's not worth it for most people, except for the few funds where you can directly own the underlying.”
