Many farmers have used futures contracts to manage some of their pricing risk. For example, it could be Winnipeg Commodity Exchange canola contracts or perhaps Chicago Mercantile Exchange live cattle futures.
Managed futures are the investing of futures contracts by professional traders or commodity trading advisers. These professional money managers specialize in the futures market, trading international financial and non-financial asset sectors such as currencies, interest rates, stock indexes, grains, livestock and meat, metals and “softs” such as coffee and cotton.
These are a separate asset class whose returns are not well correlated to equity and bond markets. Performance of managed futures are not necessarily dependent on the same economic issues that move equity and bond markets. They can perform when the market moves up and down, and so provide more balance in a portfolio.
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The market apparently has accepted the asset class with open arms because its growth has been astounding.
According to Fred Hirshfeld, managing director with Tricycle Asset Management, a Canadian firm that specializes in managed futures, the asset class has grown to $60 billion from $25 billion in a little more than three years. Proven performance in all markets has provided a catalyst for this growth.
From January 1980 to March 2004, according to the Center for International Securities and Derivatives Markets, the Fund-Pool Qualified Universe Index managed futures provided annualized returns of 13.34 percent, after fees.
This compares favourably with the ScotiaMcLeod Bond Universe and the S&P/TSX Composite Index that returned 11 percent and 9.7 percent, respectively, for the same period.
Tricycle Asset Management recruits and manages commodity trading advisers who use strict risk management procedures and invest in global markets on up to 50 different futures exchanges. The company has raised about $1 billion for the private client market.
Tricycle Asset Management has developed products for Canadian crown corporations, such as the Canadian Wheat Board, which provide the AAA credit quality of the government of Canada.
Recently, the board has come to the retail market to raise capital in the form of managed futures notes. In the past it has raised money in Canada and around the world solely from institutional investors and financial institutions.
It uses the money to support its operations such as credit sales and cash advances to farmers.
The CWB note comes with principal protection and a minimum yield guaranteed by the government of Canada. If the product is held to maturity, the CWB guarantees a minimum redemption of $108 for each $100 invested. It’s also possible to generate even more returns, but this isn’t guaranteed because it is based on the success of the commodity trading advisers in the execution of their trading strategies.
The product has a term of eight years and there is a redemption fee. No redemption is permitted before Dec. 31, 2005. The redemption schedule is such that in the first year a five percent redemption fee is applicable based on the market value of the note. Thereafter, the fee declines by one percent per year over five years. Minimum investment in the note is $2,000. The product is eligible for Registered Retirement Savings Plans.
For those phasing out their Net Income Stabilization Account funds, a guaranteed investment of this nature could be considered. Contact your financial adviser for more details.
Adding managed futures to a diversified portfolio of stocks and bonds accomplishes several objectives: It has the potential to add returns and because managed futures are not well correlated to equities and bonds, it reduces volatility.
As well, the investor gets downside protection. Therefore, you may want to consider allocating five to 10 percent of your assets to managed futures in a balanced portfolio.
Ian Morrison is an Investment Adviser with CIBC Wood Gundy in Calgary and is licensed to sell insurance products.
He can be reached at 800-332-1407 or by e-mail at Ian.Morrison@cibc.com. His views do not necessarily reflect those of CIBC World Markets Inc. or the Western Producer. This article is for the information of investors only and does not constitute an offer to sell or solicitation to buy securities mentioned.
CIBC World Markets Inc. is not permitted to recommend buying, selling or holding securities of any issuer to which it is related, and in the course of a distribution, to which it is connected, unless it makes a complete statement of its relationship, if any. CIBC World Markets Inc. is not permitted to recommend buying of any secondary market securities of an issuer for whom it is actively engaged as an underwriter of a new issue.
