* Miners boost hybrid equity and futures funds
* Optimism on China, U.S. lifting cyclicals
* Managers stick with gold as QE3, debt wrangling persist
By Claire Milhench
LONDON, Oct 10 (Reuters) - Base metals are back in favour
with commodity managers after a long period in the dog house,
reflecting a new enthusiasm for growth-oriented assets as the
global economy picks up.
"The key economic regions of the world have either resumed a
slight upward trend or have at least put the worst behind them,"
said Ronald Wildmann, an adviser to the GFP Long Mining Fund
, which returned almost 15 percent in the third
quarter. "In China, the hard landing feared by many has not come
Commodity prices as indicated by the Thomson
Reuters-Jefferies CRB index rose 3 percent in the
third quarter, compared with a 6 percent fall in the second
This turnaround meant the average actively-managed fund in
the Lipper Global Commodity sector was up 1.94 percent, compared
with a loss of 9.58 percent in the second quarter.
But it was hybrid funds, which invest in natural resource
equities and commodity futures, that topped the Lipper league
table, as these benefited from a rally in the mining sector.
"Mining stocks outperformed commodities, which is usually
the case when the markets rally from the bottom," said Wildmann.
He attributed the fund's strong third quarter performance to
investments in Rio Tinto, Glencore Xstrata,
Teck Resources, Vale and Freeport.
"We were overweight in iron ore and copper holdings," he said.
His favourite picks remain miners in copper and iron ore
segments, as well as direct investments in palladium and
"We are also interested in stocks with a connection to met
coal, as we think coal prices have bottomed for the time being,"
he said. Metallurgical, or coking coal, is used to make coke for
the iron and steel industry.
The bigger hybrid funds also benefited from their stock
exposure, such as the $385 million BlackRock Commodities
Strategies Fund, which invests about 50/50 in
commodity equities and futures and returned 4.81 percent.
Portfolio managers Catherine Raw and Poppy Allonby said the
mining sector had been a particularly strong performer for them.
"A pick-up in the Chinese economy led to an increase in
industrial commodity prices such as base metals and iron ore,
but also improved market sentiment towards the sector," they
said in an e-mailed response to questions.
They see improving economic data out of China, Europe and
the United States continuing to provide support for industrial
metal and energy prices into the end of the year.
Pure commodities futures managers are also upbeat about the
prospects for the more cyclical commodities, although these have
yet to benefit from the same level of uplift as mining stocks.
"The performance in the equity space has been partly due to
improving prospects for global growth, but these improvements
have not yet been priced into the commodity space," said Mikael
Simonsen, a director with eQ Asset Management, whose eQ
Raaka-aine commodities futures fund returned 4.9
He expects markets to move sideways in the fourth quarter in
general, but added: "On any news of positive growth surprises in
China the industrial metals sector will improve, but the same
goes for announcements of stimulus to the economy from the
He was more cautious on the energy sector, saying he had
reduced his overweight there to a slight underweight at the end
of August. He said the sector was range-bound for the moment,
but would relive upside in a benign growth scenario and if
Middle East geopolitical tensions suddenly escalated.
Simonsen attributes some of his outperformance to option
positions in gold, which rallied throughout July and August. It
started to come off in September but received a fillip mid-month
when the U.S. Federal Reserve surprised the markets by saying it
would continue its monetary stimulus programme.
STICKING WITH GOLD
Managers such as Peter Frech, of the hybrid Quantex
Commodity Fund, said they were retaining their
precious metals positions, while recognising that performance
would be volatile over the next few months as uncertainty around
QE3 and the wrangling over the U.S. debt ceiling continues.
The Quantex fund returned just over 7 percent, which Frech
attributed to an overweight position in gold mining stocks. He
retains "a relatively large bet" on precious metals in case of
deflation, and even more aggressive money printing.
BlackRock's Raw and Allonby added that the fourth quarter
tends to be a seasonally strong period for jewellery demand, so
they are not expecting prices to trade below their June lows.
Gold is currently at around $1,301 an ounce, up from
around $1,180 an ounce at end-June.
But Frech also believes the industrial metals miners will
deliver the goods. "There is a reasonable chance for a continued
recovery of the global economy. So I am more inclined to hold on
to more cyclical sectors like the base metal producers than
before," he said.