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Can the raw run go on?

They say timing is everything. Those canny investors who bought the Aberdeen (now New Star) technology fund in the mid to late 1980s would have seen stellar returns rather than those that simply jumped on the bandwagon in early 2000 just before the bubble burst.

It is the same with gold. Who can forget Gordon Brown’s ill-timed decision to sell more than half of the nation’s gold reserves between 1999 and 2002 when the price was at a 20-year-low? The gold price has since trebled and the decision has cost taxpayers £2bn.

This leads me to commodities, the performance of which has been nothing short of phenomenal. Some of these funds have returned more than 150 per cent over the past three years. These mouth-watering returns are bound to catch the eye.

I know I have been tempted to wade in but I am in the same quandary today, as I was a year ago – and a year before that. Is now the wrong time and can this performance can go on?

My scepticism has been heightened by the launch of a new resources fund from Investec. Launches heavily promoted after a decent sector run often get caught out by entering the fold after all the easy money has been made.

But those, including myself, who have ignored the natural resources boom, may be cursing their luck. The sector has gone from strength to strength with the seemingly ever rising oil price playing its part and we are told that the price could go higher still, much higher even. Opec president Chakib Khelil of Algeria has speculated about crude hitting $200 a barrel while some analysts reckon that $250 is not far off the mark.

There is certainly a view that a correction in the sector is imminent, with some analysts drawing parallels with the technology phenomenon. They fear the worst. Those seemingly constant pessimists at Capital Economics reckon that the oil-related boom is akin to the technology boom of the late 1990s where traditional valuations did not apply any more.

The economist warns that it is notable how many times in history that a period of easy money and credit availability has set off a series of booms in stocks, property and often commodities as well, all at around the same time.

“Now that the latest bout of easy credit has come to an abrupt end and housing is a bust, the bubble in commodities is the next one to watch,” it scarily predicts.

Whether now is the optimum time to be investing in the commodity sector is questionable. For every bear, there is a bull – notably Ian Henderson who runs the JP natural resources fund (which incidentally has returned almost 500 per cent in the past five years). But the argument for investing commodities over the long term looks indisputably compelling.

According to the latest World Energy Report, the emerging nations are going to continue to support and fuel energy prices for the next two decades.

The report reveals that the world’s primary energy needs are projected to grow by 55 per cent between 2005 and 2030, at an average annual rate of 1.8 per cent per year. Demand for oil will reach 17.7bn tons compared with 11.4bn tons in 2005.

But it is the comments made in the Barclays Equity Gilt Study 2008, which analysed the natural resources phenomenon, that struck me the most. They suggest it is a no-brainer. “From an investment perspective, the outlook is reasonably clear, favouring a lasting secular rally in real natural resources prices. The current global slowdown will probably soften prices and some stage. However, unless one chooses to believe that the developing economies are willing to arrest their rising prosperity at prevailing levels, the long run trajectory for raw material and energy prices is firmly upward.”

It is not surprising that Henderson reckons it is madness not to have any exposure at all to natural resources in portfolios – this is despite his honesty that it could be a bumpy ride.

“Having 30 per cent exposure may be a bit much,” he says. “But certainly portfolios should have at least 15 per cent.”

Given Henderson’s credentials, it would be foolish to dismiss them out of hand.

Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing

50 Poland Street, London W1F 7AX


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