The commodities landscape is evolving at a breakneck pace, and asset managers have their work cut out for them. From the rising popularity of crypto to supply chain disruption and currency inflation, things are changing every day, which can make it difficult for investors looking to keep their portfolios ahead As investment managers, it’s our job to communicate with clients in a way that helps them to understand the ever-shifting commodities space, so that they can make informed choices going forward.
Data As A Commodity
Given the complexity of the commodities landscape, when talking commodities with clients, it’s important for advisors to have a solid handle on both market fundamentals and supply/demand trends. Look at what kinds of disruptions are happening in the world—Covid, extreme weather events, supply chain disruptions, etc.— and consider how you can creatively express a thesis on how a given commodity is going to do going forward.
In my opinion, the smartest thing an advisor can do right now is start looking at data as a commodity—and not in an abstract way. Think about the last Zoom meeting you attended, the pixels on your screen making up your client’s face are just data—the meeting doesn’t happen without data.
The same is true for farmers who are moving toward automation in sowing their crops. All that technology is dependent on a sensor in the field which measures weather patterns and calculates the right timing for watering and harvesting. The information collected by that sensor is data, and nothing works without it!
When I say we need to be thinking about data as a hard asset, I mean we need to be looking at the hardware that enables the data collection. So, who creates the sensors that the famers are placing in their fields? Who is building the computer programs and composite parts that enable you to log onto Zoom every day?
These are the kind of high-level points you should be getting into with clients.
Commodities And Geopolitics
While the financial media uses the term geopolitics as a synonym for international relations, they’re not really one in the same. Geopolitics is actually just an approach to understanding the ways that states interact with one another using geography—not ideology or government policy—as a constraint to define “relation.”
For example, while coal has a reputation in the Western world for being a “dirty,” bad investment, when you look at coal through a geopolitical lens, most countries—especially countries with developing economies—are highly dependent on it. China, India, Taiwan and even Japan and South Korea are all deeply reliant on coal to power their systems and economies. While it may be popular to look at renewables or hydrogen, at the end of last year, coal prices were at a record high. The success of coal as a commodity is a direct result of geopolitics—the geography of these nations constrains them to coal.
When it comes to looking at commodities through a geopolitical lens, it’s important to take a macro approach and identify long term trends to build an investable universe around. Making money in this space is difficult when you do what everyone else is doing, so from my perspective, the best thing to do is get around the edges of what everyone else sees at a top level and find new ways to invest around that.
When you unpack the data stack, go vertical instead of horizontal. Right now, for example, we have a trend of increasing amounts of data. Yes, you could buy Google or Amazon for their web services, but everyone is already in those companies. The key here is considering the implications of this long-term trend. Get into the weeds. Data cannot exist without semi-conductors, which cannot exist without the machinery used to build them, right? So the question to ask yourself is: what companies make the machinery that builds the semi-conductors that creates the data? That’s where you get in.