“The commodities market is volatile, that's what makes it interesting”

Published on: 4 May 2021

568 billion euros. That's the total amount of invested assets of APG globally (position in February, 2021). Goal: good and sustainable returns for the participants of the funds. The portfolio is obviously diversified. From investments in wind parks in Zeeland to shares in international hotel chains. And from safe bonds to the more volatile trade in gold or soy. Who are the people behind those investments? What is it that drives them? What choices do they make? And why?


In this first episode: Peter Verbaken, Head of the Team Commodities of APG.


In 2019 a plus of 17%, in Corona year 2020 a minus of 16%: people investing in commodities must have nerves of steel. Are commodities such as oil, gold, soy or sugar too risky for a pension investor like APG? No, says Peter Verbaken, Head of the Team Commodities of APG Asset Management. “Commodities are a great instrument for applying risk diversification to the total investment portfolio.” A good conversation about the approach, opportunities and dilemmas of APG - also when it comes to sustainability.



What causes those enormous fluctuations in the prices of commodities?

“Multiple factors are responsible for the volatility. The price decreases on the commodity market in the past decade can mainly be attributed to the weak economic growth. An apparent pick up of the growth is immediately reflected in the prices of commodities. Furthermore, major shifts occur very rapidly in supply and demand, as for example on the oil market. The oil price dropped extremely hard last year and even noted negative for a while. Throughout the year 2020, copper, gold and silver actually performed really well, the same as a number of agricultural commodities, like soy, corn and cocoa. Where shares, bonds and property investments often move in the same direction, commodities show much more opposite price movements. In other words, the correlation between the different commodities is very low. That offers opportunities for investors like us, investors who invest from a perspective of active management. That means we are not just following a commodities index, but choose our own commodities to invest in. One of our goals is to achieve a higher return than such index which is considered to be a benchmark.”



Some experts predict a new ‘super cycle’ in commodities; a long period of price increases due to the Corona vaccines, the monetary support packages offered by central banks and eventually economic recovery. What do you expect?

”That is indeed a real possibility. The prices of commodities usually increase when the global economy grows, but also when the inflation remains low. You also need a fundamental outlook: a growing demand for some commodities is often very likely. Take copper for instance, a commodity that will play an essential role in electrification within many markets. Or lithium, used for batteries integrated by producers in, among other things, electric cars. The demand for such commodities will increase, while the supply is not significantly increasing. However, that doesn't mean that the prices of these commodities will immediately rise in a straight line upwards. And besides that, the current prices already include some of those expectations.”


How do you explain the enormous leaps in the price of oil? And in what direction will that price be going?

“The latter is very hard to predict. The oil price may very well be the most volatile of all commodities. With the outbreak of the Corona crisis, the demand for oil naturally declined rapidly as a result of all those lockdowns. At the same time, the two major oil producers Saudi Arabia and Russia increased their production due to a mutual conflict. As a result, the oil price decreased to an all-time low of about 20 dollars in April. And for a very brief period of time the price was actually negative. After that the OPEC countries, including Russia, still reached an agreement to restrain the oil production. This resulted in a steady rise of the price. In the beginning of April, the oil price was slightly over 60 dollars per barrel. An enormous increase compared to last spring.”


But if the climate goals are taken seriously worldwide, wouldn't the demand for oil structurally decrease in the years to come? 

“The oil price will rise in the short term due to the expectation of economic recovery, meaning the demand for oil increases. But indeed, it will be crucial to see the effects of the climate transition in the years to come. What alternative fuels will be emerging further? And what happens on the supply side? We have seen a large supply of (relatively expensive) shale oil from the US in the past years, but the oil producers there were hit hard by the low oil price. In short, everything is possible both on the demand side and on the supply side.”


The annual report 2020 states that ‘APG uses its influence as major investor to encourage CO2 reductions’. Doesn't that contradict the simultaneous investment in fossil fuels such as oil?

“A lot of attention is paid to fossil fuels from a societal point of view. From APG's point of view, we therefore look carefully at the effects of the energy transition. It will be very interesting to see the rate at which sustainable energy sources will become widely available. The fact that the demand for fossil fuels, such as oil, has to decrease in order to meet the climate goals, is evident. In order to achieve this goal, governments, companies and consumers have to take responsibility and start initiating or accelerating big changes.”


Should APG also assume that responsibility, among other things when it comes to investments in commodities?

“Certainly. However, it is a significant difference when you, as we do, invest through derivatives and mainly futures in the oil price or when you invest directly by means of shares or bonds into oil producing companies. Those latter investments are effectively contributing to more production by financing the activities of these companies. That's why investments in commodities, in my opinion, are more difficult to relate to the ambitions of CO2 reduction. Our investments in an oil future, for example, are not contributing to higher levels of oil production; it is quite a neutral investment in terms of CO2 emission. But indeed, the difference is hard to explain sometimes.”


The returns of commodity investments can be quite volatile. Is it a wise decision to use the pension contributions for this purpose? 

“That point is rightly emphasized. We are always considering the total investment allocation for our clients. That allocation may vary per client, depending on the returns they are looking to achieve and at what risks. We determine the ideal mix in close consultation with the client based on those factors. This means the percentages we invest in respectively shares, bonds, property and a number of other assets, such as private equity, infrastructure and commodities. Some clients find the risks too high, but most of them like for us to also invest a small part in commodities. The logic behind this is that commodities are a great instrument to apply better risk diversification to the entire investment portfolio.”


When do you exceed the expectations of investing in this market?

“We use commodity futures. When doing so, we usually opt for forward contracts with a one month's duration. Our starting point is a benchmark composed of 22 different commodities, including oil, gold, silver, copper, coffee, wheat and cocoa. We have developed our own quantitative model. Based on this model, we decide for each of these commodities whether we want our weighing to deviate from the benchmark. That is the only way to beat that benchmark. Our goal? To beat the benchmark annually with an average of 0.65%. The benchmark in 2020 performed minus 20% and we achieved a minus of 15%. I know it sounds a bit weird, but that means we have done very well relatively speaking.”


Gold has always been considered a ‘safe haven’ by many investors and the price often increased in times of turmoil on the financial markets. Is that still the case?

“Gold is performing well in times of high levels of stock market volatility. But the same applies to low levels of real interest rates, as shown for many years now. Gold actually is an outsider in our mixture of commodities, as it is often recognized more as a currency instead of a commodity.”


The interest has slightly increased recently. Is that immediately reflected in a decreasing price of gold?

“Yes, it is. But it's better to look at the long term. Central banks have hinted that they want to keep the interests low for now to not hamper the economic recovery. So, that's beneficial to the price of gold. Even though a straight line can never be drawn in terms of that relation.”


What can private individuals do if they want to invest in commodities? Commodity futures are quite difficult for them…

“I do not give advice. But for private individuals who are open to the idea, increasingly more commodity ETFs have been witnessed lately. ETFs are products you can use to invest in a basket of commodities quite easily. Also for private individuals, commodities can add great risk diversification to their portfolio. The investors have to keep in mind that the risks are also quite significant because of the high level of volatility which means the investment in commodities should not represent a significant part of your portfolio.” 


You have been investing in commodities since 2008. Why are those investments so much fun?

“LOL, good question. I started working as a junior portfolio manager at the Commodities Desk of APG in the beginning of 2008. That was exactly the time at which the previous super cycle in commodities came to an end, mainly driven by the demand from China. And just before the crash of Lehman Brothers, bringing about the financial crisis. Investors with thirty years of experience were staring at their monitors flabbergasted during those months. The fall in share prices, but also in commodities, was unprecedented that year. I always continued to invest in commodities after that, because its volatility is exactly what makes this market so interesting. That can offer investors plenty of opportunities, as it does now. I have been leading the Commodities Team since 2015. The team members together have a lot of experience and knowledge of both the model-based side and the fundamental developments in the commodities market. That combination has resulted in us structurally beating the commodities benchmark in the past decade.”



Facts & Figures


What are the commodities in which APG invests?

APG invests in oil, petrol, gold, silver, aluminum, copper and nickel, but also in agricultural commodities, such as wheat, corn, sugar, coffee, cocoa and soybeans. The trade volumes in ‘large’ commodity contracts, like oil, gold and copper, are huge. Tens of billions of euros are traded every day in the derivatives on these commodities.


For how much?

33 billion euros (approximately 5.7% of the total invested pension assets). 


And what is the rate of returns?

2016 +11%

2017  +7%

2018 -13%

2019  +17%

2020 -16%

2021 up to and including mid-April +19%

Since 2015 on average around 2.5% per year