As the economy returns to growth mode and inflation begins to pick up, investors should consider investing in hard assets that will maintain their value over time, a panel of commodities experts said on Wednesday.

Speaking at a Toronto event hosted by the Alternative Investment Management Association Canada, panelists said commodity investing has grown dramatically in popularity as investors seek the security associated with a hard asset.

“We are seeing more interest, especially with people concerned about inflation, about long-term inflation, about long-term preservation of capital in a world that’s uncertain,” said Eva Greger, managing director of renewable resources at Boston-based GMO LLC.

Reflecting this spike in popularity are the large inflows of funds into commodity-based exchange traded funds in the past couple of years, noted Keith Black, associate director of curriculum at the Chartered Alternative Investment Analyst Association.

“These markets are growing exponentially in their investment size,” he said.

Investors benefit from the diversification that direct commodity exposure brings to their portfolio, Black said, since commodity prices are negatively correlated to stocks and bonds over long periods of time.

“Even though commodities have a similar volatility as equities, adding a commodity futures program to your equity portfolio can serve to reduce portfolio volatility without hurting your returns,” he said.

It’s important for investors to diversify their commodity holdings, since there is generally low correlation between different types of assets.

“Recently, we’ve seen rallies in corn, coffee and sugar, and those who invested exclusively in gold or energy products missed out on these rallies,” Black explained. He encourages investors to hold a variety of energy, metals and food products.

Greger encourages investors to also consider investing in illiquid commodities such as timberland and farmland in the current uncertain economic environment.

“It’s a good hedge against disaster in your portfolio – it’s a real asset,” she said. “If you invest correctly, you can have some security that you have a real commodity to sell, that should have value in just about any condition in the world.”

Greger said she’s seen timberland and farmland gain popularity among investment managers recently, as a stable asset to hold in a portfolio over long periods of time. The assets are most popular among institutional investors such as pension funds and endowment funds, as well as among high net worth investors.

It’s a bit challenging for retail investors to get exposure to these types of illiquid commodities, since there’s typically a high cost involved and a high level of due diligence required in the management selection process, Greger said.

But as investor demand has grown, she’s seen many financial advisory firms pooling their clients’ funds together to invest in these commodities.

IE