A case for owning commodities when no one else is

Sometimes following where money is being invested is a solid course of action to gain alpha; other times, a better opportunity lies in going the opposite direction, i.e., thinking contrarian.

Take commodities, energy and materials, which may be the most unappreciated areas of the market these days. According to Bank of America Merrill Lynch’s Global Fund Manager Survey of 250 participants who collectively manage $725 billion, energy, materials and commodities are extremely under-owned.

As you can see below, the global asset class positioning during the first week of April compared to historical data shows that energy positions are close to three standard deviations below the long-term average. An allocation to materials is more than two standard deviations below its long-term average and commodity exposure is close to two standard deviations below its historical measure.

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Take note of the timing, though, as it appears that it may make sense to own the most under-owned areas of the market. Compare today’s portfolio weightings to the last time fund managers had such a significant underweight in these asset classes. Each bar below indicates whether allocations in energy represented a net overweight or underweight position. Most of the time since 2003, managers maintained an overweight allocation, which means they likely anticipated outperformance in energy companies during this period of time.

However, the last time they had such a big underweight in global energy for this long was at the end of 2008 and the beginning of 2009.

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