Nomura is launching its first commodities certificate for the German retail market, seeking to exploit opportunities and limit risk using the Rogers Index.
Cushioning risks without relinquishing the diversification features of alternative assets forms the basis of Rising Star AG's Starcommodity Index certificates.
With demand for commodities rising, an increasing number of investors are discovering this asset class as an investment opportunity. However, commodity prices are subject to strong fluctuations, a factor that has deterred some retail investors.
Nomura has used the index of commodities guru Jim Rogers to structure its first certificate for German private investors, refined by an actively managed portfolio. Investments in managed futures and outside commodities stabilise the index. Investors can subscribe to the Starcommodity certificates for EUR 1,050 at selected banks, savings banks and asset managers up until 25 July.
Many investors expect that commodities are going to profit from further price increases in the foreseeable future as rising demand from emerging countries like China face a limited supply. If China really does uncouple its national currency from the dollar, this will additionally boost demand because the materials usually traded in US dollars will be significantly cheaper as a result.
Although the commodities boom started back in 1998, investors are still turning to commodities on the back of the US Department of Commerce prediction that commodities cycles last an average of 18 years. Adjusting for inflation, the current level is still moderate in a historical comparison and significantly under the peaks of earlier bull commodity markets.
Commodities are also attractive because their alternative characteristics immunise the portfolio against the risks inherent in equities and bonds, interest rates, inflation, and even against geopolitical risks. In order to exploit these advantages to the full, the commodities investment needs to be as pure as possible. Whereas equities or funds invariably bring unsystematic market risks, a commodities index can reduce these through diversification.
Rising Star AG chose the Rogers International Commodity Index (RICI) of Jim Rogers for the Starcommodity certificate because, with 35 components, it gives the most comprehensive overview from the global commodity markets perspective. Its weighting is restored each month to that specified at the beginning of the year (avoiding speculation-driven concentrations of risk).
"Packing just one commodities index into a certificate is, however, not enough if we want to be successful in the German certificates market right from the start," explains Joachim Willnow, global head of equity derivatives at Nomura in London and now also responsible for the launch of the Japanese investment bank's certificates in Germany. "Much more relevant is a structure with genuine value added. And hedging risks is what investors currently want more than anything else. But a bonus certificate with safety cushion is too sluggish for us because it has more of a fixed interest character during its term, with performance tending not to show until towards the end."
In order to preserve the dynamic character of a commodities investment, Nomura furnishes the underlying with a risk cushion in collaboration with Rising Star, through semi-active asset management with two components.
"We virtually refine the RICI by combining it with an actively managed portfolio showing only low correlation with commodities and other markets," Willnow explains.
Risk and Portfolio Management AB in Stockholm (RPM), a specialist in multi-manager CTA strategies is responsible for this aspect. RPM forms a part of the index that also invests in various futures specialists outside the commodities spectrum. The active RPM portfolio is mixed with the RICI and Nomura adjusts the initial 65:35 ratio on a monthly basis. The aim is to form the RICI and simultaneously achieve as high a Sharpe ratio as possible for the mixed portfolio.
Following the principle: "As much Rogers as possible, as little risk as necessary", the Starcommodity Index calculated in this way picks up as much of the commodity markets' positive development as possible while significantly cushioning setbacks. As opposed to a bonus structure, the safety cushion cannot be entirely lost and the index risk is reduced through systematic diversification until the certificate is sold.
Although past price developments are no guarantee for the future, calculating back through the period from August 1998 to May 2005 illustrates the certificate's added value. While performance peaks of the RICI would have been formed up to 94 per cent of the Starcommodity Index (key date view), it would have reduced maximum losses by one third on average - with approximately 25 percent less volatility.
Comparing the Starcommodity Index with global equities or bond markets reveals its profit potential. Under current legislation, profits are tax-exempt if investors hold the certificate for at least one year. Access to the global commodity markets costs investors 1.7 per cent per annum with safety cushion and far-reaching currency certainty. After issue on 26 July, the certificates are tradable on the Vienna Stock Exchange. With a term until 2035, Nomura can terminate the certificates yearly to the termination date as from 22 April 2015.