Greg Smith, Managing Director, Global Commodities Limited
Greg Smith is the Managing Director of Global Commodities Limited and has over 30 years’ experience in the commodity futures industry. After completing a trade certificate in 1980, he travelled to London where he was an accounts clerk at the International Commodities Clearing House. He returned to Australia in 1984 to gain a finance certificate with FINSIA and studied systematic investment techniques. From 1986 through to 1990, Greg was a commodity broker with Bain & Co which subsequently became a subsidiary of Deutsche Bank in the late 1980s. He advised clients on various speculative and hedging strategies that could be employed in the commodity futures and options markets using statistically based models. As trading manager, he was responsible for developing strategies for both hedgers and speculators. In 1990, Greg founded
IEM Global Trading Pty Limited (IEM) which managed investment portfolios in commodity markets for US, European and Asian investors using computer generated models. He was responsible for developing investment strategies, software design and compliance. IEM was the first registered Commodity Trading Adviser with the Sydney Futures Exchange. For IEM to manage US investment capital it was also required to be registered with the US National Futures Association and the US Commodity Futures Trading Commission and was one of the first Australians to do so. In 2004, Greg established Global Commodities Limited, which is registered with the Australian Securities and Investment Commission and applies an active risk management overlay within a commodity index framework. Global Commodities Singapore Pte Ltd was established in 2011. The
Global Commodities group manages funds for sophisticated investors from Asia, Europe, UK and Australia exclusively in commodities. Though based in Australia, Greg regularly attends global conferences presenting on the major factors influencing commodities, along with interviews at Bloomberg, CNN and CNBC.
You have long experience of trading commodities. Tell us about your background.
Having grown up in an Australian outback mining, sheep and cattle town, I became well aware of the impact of fluctuations in demand and supply for these natural resources and how that impacted the incomes of the community. Consequently, trading in commodities had my interest at a young age and obviously still has today. In the early 1980s, after working for the International Commodities Clearing House in London, I returned to Australia and commenced work as a commodity broker with a local firm that was bought by Deutsche Bank, advising both hedgers and speculators. Then, in the early 1990s, I began managing capital in commodities for Orix/Commodities Corporation and a number of family offices. My experience in commodities now
stretches over 30 years and I have an audited track record for the Active Global Commodities strategy (AGC), since December 1999 with many lessons learnt along the way. Although I have been focused on commodities for longer than most managers, I still feel there is much to learn. These markets are unique, dynamic and constantly shifting as factors such as global politics, economic developments, technology, weather, natural disaster and world population growth are ever shifting variables that impact the demand and supply for commodities. Commodities are a fascinating asset class and without them we would not have a functioning society.
Tell us about your flagship commodities investment strategy.
Our flagship is the Active Global Commodities (AGC) strategy which has been applied and evolved since the early 1990s. The AGC is a long only, unleveraged, using exchange traded commodity
futures strategy that reduces commodity exposure determined on the degree of implied yield and moved into cash. Our investment approach is to calibrate fundamentals which determine the degree of exposure to commodities and risk metrics to reduce exposure. The AGC is an alternative to a passive long only index. By managing the downside risk associated with commodity indices, we have generated superior risk adjusted returns to these benchmarks.
What differentiates Global Commodities from CTAs?
First, we trade only commodities, whereas most CTAs trade currency, financials and share indices. In my opinion, most CTAs should be referred to as MFAs (Managed Futures Advisors) as they trade the entire universe of futures across asset classes; whereas Global Commodities is true to the CTA meaning of a Commodity Trading Advisor (commodities only). Secondly, Global Commodities is not leveraged and does not short commodities. Thirdly, Global Commodities charges lower fees than most commodity managers.
Commodities investments are notoriously volatile which is why some investors avoid such exposure in their portfolios. How do you limit the downside risk associated with commodities?
Commodities are volatile due to supply variability that can be extreme. We manage the downside risk effectively with robust non optimised metrics and know how much the market can move against us before we get out. It’s crucial to have a clearly defined exit strategy and stick to it, which for me is ingrained in how I view the markets. Over time we have outperformed our benchmark by losing less which is the focus of the AGC strategy.
How can investors use commodities as a hedge against unexpected inflation?
Historically, any unexpected inflation impacts commodities lifting prices, so if you believe like me that inflation is coming, then you need to be long commodities.
In addition to the Active Global Commodities strategy you also have a market neutral and an agricultural only strategy. What is the rationale behind these strategies?
The market neutral Alpha strategy is designed to capture the risk premium associated with markets trading in structural contango, or backwardation. This is unique to commodity markets as the structure of forward commodity prices is impacted by factors such as seasonality, cost of carry, and the capital intensity of the physical market. This is a low volatility offering being unleveraged and applying the same risk management process as the AGC. It allows investors to better tailor their portfolios based on their risk profiles and has low to negative correlation to both commodity
and share indices. Returns are independent of directional moves, as this risk premia can be captured in both rising and falling commodity markets. The agricultural only strategy is designed for investors wanting exposure to this sector of the commodity spectrum. The same risk management approach as the AGC is applied.
You have expanded Global Commodities from Adelaide, Australia to include operations now in Singapore. Tell us about it and the thinking behind the dual office set-up.
The rational for Global Commodities establishing an office in Singapore is to be located in a financial hub that services Asia and to replicate the investment process as a backup to the Australian operation. Singapore is one of the fastest growing financial centres in the world. We believed it was important to be part of that growth. Also we like to visit with our investors in Europe, UK and Asia regularly, being based in Singapore has us closer to them.
What do you say to investors that currently are bearish on commodities?
Now is the time to stop being bearish. There are a number of factors developing from continuing unrest in oil producing regions, frequent extreme weather events, to the unprecedented printing of money and some of the factors worth considering, that could trigger higher commodity prices. Collectively or individually, the development of these scenarios will push commodity prices higher; also, of the 22 markets we trade, eight are currently below their average cost of production with others below the marginal cost of production. Although it is not unusual to see commodities trade below cost of production, it is rare to see this situation maintained in the long term as operations simply become uneconomical and respond by shutting down. Demand is relatively constant for fuel and food while supply is highly variable. Over the longer term, it is hard to fathom how commodity prices cannot continue to rise. Global population growth, economic growth and increasing standard of livings (particularly in Asia) point to demand pressure for energy, food and metals for decades ahead. Although we are not exhausting commodities any time soon, it is certainly getting more difficult to access metals and energy having to drill and dig deeper in more remote locations. Factors such as weather, reductions in arable land and declining water reserves, there are others as well that are making production more difficult and costly. Technology improvements have certainly assisted the production cycle in the past 30-40 years but there is growing concern that marginal impact of improved technology is tailing off and demand will continue to outstrip supply, it’s just a matter of time. Also, commodities are a hedge against the cost of living and inflation. Both scenarios impact investors so it’s logical to include commodities in a balanced investment portfolio. From a timing perspective, the downside risk is low relative to potential returns if any of the above scenarios develop. A commodity driven inflationary spiral is a real possibility and will significantly impact countries like Japan for example that are major importers of food and fuel. I believe this will happen and again it’s just a matter of time. The days of being bearish commodities are at one’s own peril, particularly for investors who rely on imported resources to sustain themselves.
Where do you see commodities investments going from here?
Commodity markets have been on investors’ radars for over a decade now and their acceptance as an alternative asset class is increasing. However, in more recent years, investors have become somewhat disillusioned by negative returns and volatility specific to their commodity exposure. Passive investors in benchmark indices and some of the enhanced roll indices have suffered the full extent of the market decline since the Lehman crisis. Ultimately though, it comes back to the nature of these markets. They are dynamic and very different to equity and bond markets. I believe it takes focus and specialist knowledge of these markets to ensure that risk/return opportunities can be identified and the downside risk can be effectively managed and minimised. If you are investing in commodities, like you do shares, or bonds, it is a very expensive lesson as they behave differently. I see the marketplace beginning to recognise this and consequently there is growing interest in commodity managed solutions and a trend developing away from passive and pure algorithmic strategies in non-managed formats.
(Sep 2013)