Dutch Institutional Investor | October 2017
Engagement at a glance
This Dutch institutional investor sought to allocate approximately EUR 110m to an enhanced passive commodities strategy targeting a c. 1.5% p.a. outperformance of the BCOM commodities index with a tracking error of not more than 5% p.a.
The client already had existing passive commodities exposures. Through this search they were seeking a manager that could provide an enhanced value-add return whilst maintaining some ‘passive-like’ characteristics (a fully systematic investment approach coupled with liquid, low cost, fully transparent implementation).
- The client was flexible on the proposed investment vehicle, and was able to consider both swaps and certificates as well as commingled funds or segregated accounts. As such, bfinance were able to invite participation from a broad range of providers. In addition to asset managers, both large scale and >$1bn boutiques, banks and specialist index providers were also considered.
- The 24 offers received spanned both low tracking error (c.2-3% p.a.), and higher tracking error (upwards of 4% p.a.) solutions, and covered a broad range of investment approaches including pre-roll as well as backwardation-type strategies. Most of the proposals were implemented across the range of markets specified by the BCOM index (22 at the time of this search), but some elected to employ either a restricted subset or an extended range of markets.
- Key to success in this search was the ability to offer a straightforward systematic investment approach that was clearly supported by established economic theory.
- In addition to investment approach suitability, cost was also a key consideration for the client. bfinance assessed not just headline management fees, but total implementation and trading costs too. In this respect, swap based solutions, on average, were found to be more competitive than fund based solutions.
- After detailed qualitative and quantitative analysis of the 24 offers, ten were retained for more detailed analysis, with five providers ultimately invited to due diligence meetings with the client and one selected.
Our specialist says
Commodities have been a challenging asset class for many investors to navigate over the last few years, both in terms of absolute passive performance, as well as the volatility associated with the space, most notably the energy sector. In seeking a best-in-class enhanced passive commodities strategy, the client has made their strategic asset allocation to the space work harder for the benefit of the overall portfolio, without moving away from their core ‘passive-like’ implementation philosophy.