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For immediate distribution 28 April 2009 COMMODITIES ATTRACTIVE FOLLOWING HUGE PRICE FALLS – BUT BE CAREFUL WHAT YOU BUY, WARNS HFM COLUMBUS Excellent potential gains for oil and mining over the longer term – but be wary of exchange traded funds’ propensity for negative roll yields JP Morgan, Investec and BlackRock on recommended list … COMMODITIES could be a good buy now following big price falls, reckons wealth manager HFM Columbus – but investors need to exercise caution as to which investment vehicle they should use. Investment director Rob Pemberton suggests investors access potentially excellent longer term gains via a unit trust fund investing in commodity related equities such as oil exploration or gold mining companies, or in the case of precious metals, a proven exchange traded fund (ETF), which tracks the commodity’s performance. “Cast your mind back to summer 2008 and the oil price peak of over $140 a barrel, when gold touched the magic $1,000 an ounce, base metals surged and even wheat and soybeans joined the party,” said Pemberton. “But since then prices have collapsed – and let’s face it, who wants commodities in a deflationary environment? But forward looking investors will be assessing the possibility that the huge amounts of money being pumped into the global economy may in time prove to be strongly re-flationary. “While the outlook for industrial commodities is not bright in the short term, accumulation now after big price falls is a sensible hedge against a possible surge in commodity demand or an inflation scare in the next couple of years,” he added. If going into a commodity exchange traded vehicle, Pemberton reminds investors that these do not necessarily track the spot price of the commodity but frequently the price in the futures market. “Because of the mechanism of trading in this market, the investor can suffer a ‘contango’ or ‘negative roll yield’ effect (in practice a large additional cost) if the curve of future prices is sloping upwards, which is currently the case,” he explains. “In the first quarter of 2009 for example, energy spot prices rose strongly but investing in an ETF of underlying one month future contracts could actually have lost you money due to this contango effect. “A general fund investing in commodity related equities such as oil exploration or gold mining companies is the often the best bet for all but the most risk embracing investor.” HFM Columbus recommendations include funds JP Morgan Natural Resources for general commodity exposure and Investec Global Energy or BlackRock Gold and General for a more specific approach, as they avoid the contango issue, have no counterparty financial strength issues (unlike some ETFs) and have daily liquidity (unlike ‘managed future’ funds or hedge funds). “Their correlation with the underlying commodity can leave something to be desired in the short-term,” notes Pemberton, “but over the long term they should prove to be a decent proxy.” On the issue of gold and other precious metals, Pemberton reminds investors that they ‘behave’ very differently to other commodities. “Gold is an excellent portfolio diversifier and is regarded as a traditional safe haven and store of value,” he says. “It is a ‘fear asset’ which has historically risen at times of banking crisis, high inflation, collapsing currencies or sovereign government defaults when paper assets such as equities and bonds are tumbling. “Unlike most commodities, tracking the spot gold price is possible through an exchange traded vehicle which is collateralized by gold bullion held in a bank vault. Silver and Platinum can be bought in a similar manner – but timing an investment in gold is difficult,” he warned. “Gold has no income stream and as such is difficult to value. Its main price driver often appears to be the degree of financial distress in economies and financial markets. As such, when bought it should be held over the long term, often proving its worth to a portfolio when least expected.” – Ends – General enquiries: www.hfmcolumbus.co.uk 01932 870000 Press enquiries: Rob Pemberton, HFM Columbus Group 01892 500450 / 01932 870000 Editorial Consultants David Andrews Media Ltd [email protected] 01273 737352 Cathy Tully, Consultant David Andrews Media Ltd [email protected] David Andrews, Senior Consultant - Director David Andrews Media Ltd [email protected] 01273 737352 / 07747 196854 01273 737352 / 07941 255855 Editor's notes HFM Columbus is a joint wealth management operation utilising the expertise of IFA firms Hoyland Financial Management and Columbus. The company targets the higher net worth end of the market and offers in-depth solutions ranging from mortgages and investments to employee benefits, retirement and IHT. Hoyland Financial Management was established in 1986 by Jeremy Hoyland to provide indepth, independent financial advice primarily to high net worth individuals and business owners. It has dedicated departments for high net worth financial planning, including investment, pensions and tax advice, mortgages and employee benefits. The team of financial advisers is led by Jeremy Hoyland whose previous career background was in International Banking. All advisers are professionally qualified and continue to pursue an ongoing programme of specialist technical development. HFM maintains an in-house department dedicated to product and fund research. Columbus, based in Tunbridge Wells, Kent, was founded in 1990. Today, directors Marcus Carlton and Charlie Walker head up a team of four other consultants each with many years of experience advising wealthy individuals and their families. Columbus has forged an enviable reputation for its tax structure work through a combination of leading edge thinking and careful due diligence. Columbus is proud to have been awarded chartered status in 2008, a reflection of their dedication to advancing the knowledge base of their consultants and support staff. Columbus maintains an in-house department dedicated to product and fund research.