In order to focus on capital preservation and optimisation, Juno’s first fund has combined a 70% commodities futures portfolio with 30% exposure to equities with strong commodity-based drivers. This includes firms involved in alternative energy, water, and infrastructure.
Juno has also now created a pure commodity fund, and is about to launch a pure equity fund, allowing clients to choose commodity or equity-based options without going with the hybrid structure. “At the end of the day we’re trading it in the same fashion,” says Rodriguez. “The real purpose for us here is to be recognised in the industry as leaders in commodities. We’re in this for the long-term. This is something we envision will be a driving force in the asset management industry.”
Juno is already awake to the fact that many institutional investors are currently underweight commodities, and expects there to be considerable interest in the asset class going forwards. Commodities offer natural diversification benefits. “Ten years ago commodities were not considered an asset class,” says Eugenio Verzili, Juno co-founder and CEO. “Right now it has become more mainstream, with fund and institutional participation. And it is not just the speculative influx – there are fundamental drivers there. No matter how you slice it, the world as we know it can’t escape from the fact that billions of people are going to start demanding more food.”
The reality is the world faces shortages in many basic commodities as its population increases. Food, energy, and water prices are expected to trend upwards over the long-term, yet current investment in commodities is less than US$250 billion and these funds are new allocations to index-based investments.
But why have prices soared across the board simultaneously? Juno says we are now in the seventh year of a supply cycle in commodity prices, the sort of cycle that usually occurs during periods of high economic and population growth. Verzili points to the documented spike in commodity prices which occurred after the First World War, and prevailed throughout the 1920s as another example of such a cycle. This time round it is increased consumption in developing economies and the commensurate purchasing power, particularly from large and populous countries like China and India, that is driving prices. It is this, Verzili argues, that is pushing prices up across the board, from base metals to rice to oil.
Principal grain markets in countries like the US have been suffering from overproduction for decades, and benefiting from subsidies in order to keep farming profitable. In reality, the rise in food prices has been a long time coming. The tipping point seems to have been the allocation of increasing amounts of acreage to biofuels, and although this might prove to be a temporary boost, by the time that land goes back to growing food crops, higher agricultural prices will be here to stay. Changing weather patterns are also having an impact (for example the drought in Australia in 2007).
Political intervention always has to be a factor when viewing commodities markets on a global scale: US government intervention on biofuels has played a role already in raising grain prices. “Before this happened, most of these markets were protected to the downside,” says Verzili.
“My personal view is that we’re heading towards a new era where the wealth of any nation will be determined by their stockpile of commodities,” says Rodriguez. “It is going to be a power play, and the more that consumption increases, the more wealth will be built on how much each country has local supply.”
Initiatives like bringing more acreage under cultivation and artificially increasing crop yields might make a dent in agricultural commodities prices, but at the same time weather patterns are changing, and becoming more unpredictable as the climate changes. The spiralling cost of rice – up over 60% in two months this year – is evidence of this. Governments are already starting to be toppled as they lose control of domestic food prices. Politicians are having to rethink their biofuel policies and are coming to the realisation that they are not a solution.
Where is it all going to end? “From the long term point of view, we have a bullish conviction,” says Verzili. “We don’t see a viable alternative to the high oil price in the short term. The current price is way out of proportion to the fundamental side. The price of oil should be US$80-85 per barrel, but that doesn’t mean the market could not runto US$130.”
Commodities markets tend to run in anticipation of higher demand, and macro forces are making it worse. The main driver of the oil price right now is the currency situation: the worldwide oil market is quoted in US dollars and is being used as a downside hedge. “How you can see a flight to safety in oil is mind boggling,” says Rodriguez.
The oil market, argues Verzili, is currently possessed of a significant degree of hysteria. At some point it is destined for a correction. The shock of the US$100 barrel of oil has passed, and even in the US some energy traders are taking a US$125 barrel in their stride.
On the equity side, Juno can use its hybrid master fund to exploit commodities-related themes. Big favourites at the moment include companies that are exposed to the massive new crop currently being planted in the US which will require harvesting and delivery at some point. In Europe it has taken interests in some alternative energy producers as a hedge against a potential reversion to non-fossil fuel energy sources at some point in the future.
“We’re far beyond waking up to the commodities story,” says Rodriguez. He is finding it hard to find other peers that run money in a similar way to Juno, and anticipates that as the institutional investment community wakes up to commodities, it will be harder to find seasoned managers who know what they are doing. Luckily, it is a fairly liquid asset class.
Eugenio Verzili has 17 years of experience in hedge fund management, and has worked with a number of recognised organisations, including Focus Investment Group, Banco Atlantico, Arab Banking Corp, and the Fairfield Greenwich Group. At Juno he is responsible for business operations, investment advisory, investment committee, and risk management. He has a degree in economics, and has attended Concordia and Boston universities.
Arturo Rodriguez comes from a background in futures and options trading, and has spent 17 years in the investment business, including roles with Fortis Finanz AG, and Prudential Securities. At Juno he is responsible for commodities trading, portfolio management, and the implementation of hedging strategies. He has a degree in financial economics from the Georgia Institute of Technology and has written a thesis on agricultural commodities.