Commodity prices have gone parabolic with strong underlying fundamentals exacerbated by the unfolding war and humanitarian crisis in Ukraine. Until recently, commodities have spent the better part of the last decade in the doldrums, but we’ve always believed that an allocation to real assets is a vital part of comprehensive portfolio construction.
Due to its commodity-centric approach, Purpose Diversified Real Asset Fund provides a unique opportunity to participate in the broader commodities theme working through markets in real time.
We believe the commodity case is extremely bullish for the following five principal reasons:
1. Bullish economic recovery: Global economies are running hot, providing a strong bid for the raw materials of production. Even sharp rate increases are unlikely to impact commodity demand within a 12–24-month period.
2. Limited potential supply response: Following a period of under-investment in capex, there is less excess supply in the system to bring online in response to demand growth, increasing upside price volatility.
3. Energy transition and ESG adoption are bullish: Transition to renewables creates a new source of demand for key commodities (demand growth), while institutional ESG adoption has increased the cost of capital for traditional resource companies (supply constraint).
4. Investor demand/flows likely to provide a strong tailwind: We expect ongoing and elevated inflation to create a large source of financial demand that has been absent for the better part of a decade.
5. Hedge against geopolitical uncertainty: Russia and Ukraine are globally significant producers of key commodities, including oil & gas, wheat, corn, aluminum, and platinum-group metals. Commodities exposure can be an effective portfolio hedge against the price consequences of this crisis.
Purpose Diversified Real Asset Fund (PRA)
PRA is a diversified portfolio of global commodities and equities linked to real assets designed to capture these tailwinds, providing beneficial diversification in an environment where traditional asset classes tend to struggle.
The fund has exposure to six asset class sleeves weighted using a risk parity framework that normalizes risk across sleeves and smooths volatility relative to an equal-weighted notional approach.
In this period of commodity price inflation (beginning March 2020), PRA has demonstrated strong growth relative to competing real asset funds. Given the specific commodity-centric nature of the inflationary threat currently passing through markets, we believe the fund’s specific strategy is well-positioned to continue delivering strong results.
— Claire Vaughan is a Product Analyst and Graeme Cooper is a VP of Product at Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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