The strategy, which has a 0.55% total expense ratio, will list tomorrow (15 January) on the London Stock Exchange. It is also available to European investors on the Börse Xetra and Borsa Italiana.

Classified as an article 8 SFDR fund, it aims to offer investors access to commodities associated with energy transition themes such as electric vehicles, transmission, charging, energy storage, solar, wind and hydrogen production.

See also: SJP equity fund aligns with SDR Sustainability Focus label

The ETF will track the underlying WisdomTree Energy Transition Metals Commodity UCITS Index.

Through a partnership with data solutions firm Wood Mackenzie, the selection and weighting of the underlying metals will be based on a forward-looking rating system.

The metals are given an ‘intensity rating’, which combines the demand growth forecast for the metal over three years with a market balance rating that reflects whether the metal is under or over supplied. The portfolio then rebalances twice a year.

Nitesh Shah, head of commodities and macroeconomic research, Europe, at WisdomTree, said: “Metals will be crucial to advance the energy transition. Whether it is to power more electric vehicles or create solar panels, it’s hard to see a world where the development of energy transition technologies is not dependent on the supply of some key metals. However, the challenge is to ensure that the technologies needed to achieve the energy transition are produced at scale.

“The challenge for investors is to navigate through the dynamics of technology shifts, trade policies and sudden increases in metal supply. The expertise offered by our partnership with Wood Mackenzie and a methodology that incorporates both supply and demand drivers help the strategy remain highly adaptive to the evolving market.” 

Bonthron brings over 20 years experience to the role, having managed positive impact funds most of his career. His most recent role came at Artemis, which followed a six year stint as an investment manager with Kames Capital – now Aegon Asset Management.

He also previously held investment manager and investment director positions with Scottish Widows Investment Partnership.

See also: EY: Investors display ‘worrying level of apathy’ to ESG

The appointment marks a return to KBIGI for Bonthron, who was a portfolio manager on the firm’s Water Strategy from 2008-2010.

Bonthron is the fourth hire for the Dublin-based asset manager this year, following the appointment of Ben Cooke as a portfolio manager, Jeanne Chow Collins as ESG and engagement analyst, and Robert Fullam as an equity analyst.

This is in spite of real yields and the US dollar remaining high, usually negatives for gold. But with a notable wobble over the past few weeks, could the party be about to come to an end?

Gold remains relatively lightly used among discretionary fund managers. The quarterly ARC Market Sentiment Survey found that 75% of managers had either no gold exposure or less than 2.5%. No manager had exposure above 10%. 

See also: IIMI urges launching boutiques to consider corporate structure

However, Graham Harrison, chairman at ARC, said: “An investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period.”

This pattern suggests discretionary fund managers could be about to turn more positive on the asset class. Equally, while the gold price has run up a long way, there are still supportive factors for gold.

George Lequime, manager of the Amati Strategic Metals fund, said: “The big driver in the past two or three years has been a massive pickup in central bank buying. Partly that’s been related to heightened geopolitical tensions, especially in the Middle East and Ukraine. Central banks in countries such as China, Turkey and India have increased the level of gold in their reserves.”

This is still happening. In its latest report, the World Gold Council said central bank buying slowed in the third quarter, but demand remained robust at 186t. Year-to-date central bank demand reached 694t, in line with the same period of 2022. Geopolitical tensions continue to be acute, and may accelerate with a new Trump administration starting in January. This should support demand.

Another factor to consider may be the incoming US administration’s tax, tariffs and deregulation agenda. The consensus is that this may be inflationary. Gold is often seen as an inflation hedge, though the strongest correlation has been during periods of hyper-inflation when investors start to have real fears over the value of their savings.  

Nitesh Shah, WisdomTree’s head of commodities and macroeconomic research, said that until recently investors had come back into gold exchange traded commodities (ETCs) after close to two years of selling between May 2022 and May 2024.

“Since May 2024, there have been approximately 3 million troy ounces of flows into ETCs (i.e. a 3.7% increase), worth $7.8bn (using gold prices as of 10/10/2024),” said Shah.

However, there are also reasons for caution. On the negative side, the gold price has moved a long way, and investors appear to be growing increasingly cautious. The uptick in ETC interest reversed in November, when they saw outflows of $2.1bn. This may have been the Trump effect, which brought a surge in demand for ‘risk on’ assets such as bitcoin and the dollar, but it still should give investors pause for thought.

See also: Analysis: Is the end of the magnificent seven nigh?

The appreciation in the dollar is particularly worrying for gold bugs. Although WisdomTree believes dollar depreciation pressure is already pent-up – and Trump himself has said he wants the dollar to fall – that is not the early signs from the market. The twin deficits should already been exerting pressure on the dollar, but it remains stubbornly strong, and this could continue if Trump enacts his agenda.

If, as is widely expected, the Federal Reserve cuts rates again, and real yields drop, this would be bad for gold. While Trump’s policies are expected to be inflationary, he has seen how the US electorate treated the last administration that presided over ever-higher inflation and may curb his ambitions for, say, tax cuts.

Gold produces mixed feelings from multi-asset managers. David Coombs, head of multi-asset investments at Rathbones, had been holding gold through the iShares Physical Gold ETF, but has been selling it down as the price has risen.

“The yellow stuff hit a record high of $2,787 a troy ounce in October and has remained elevated since. In context, that’s 35% higher than where it started the year and 84% higher than the eve of the pandemic,” he said.

He said while it can be useful to hold a small allocation as insurance against periods of weakness in financial markets, he sees better value in government bond markets and believes locking in yields of 4-5% before the Fed cuts rates again makes more sense.

“Markets that price future interest rates give a 75% chance that the Fed will cut by 25 basis points again when it meets on 17-18 December,” Coombs added.

Rob Burdett, head of multi manager at Nedgroup Investments, is more comfortable with holding gold, saying it still has favourable demand/supply characteristics, can offer diversification and has the potential to offset geopolitical and inflation risks.

WisdomTree’s internal gold model has a forecast of $3,030 for gold by the third quarter of 2025, assuming the consensus economic forecasts hold true. In a bull case, where inflation remains relatively high, but the Federal Reserve continues to cut rates, gold could reach $3,360/oz. In a bear case, where the Federal Reserve doesn’t cut, or even raises rates, gold could fall back to $2,440/oz over the same period.

Amati’s Lequime pointed out investors do not have to buy the gold price. Gold mining companies are, in his view, as cheap as they have been in his lifetime in spite of the rising price. This is particularly true for small and mid cap mining companies. They would usually outpace the gold price, but instead have lagged.

See also: Will bond yields stay higher for longer?

He said: “It’s because we’re fighting against other asset classes that are doing well. The million dollar question is what’s going to take for capital to come back into the sector? And partly, you need other asset class to really underperform and for there to be a pull back in the broader markets.”

After a year in which equity markets have soared, but been led by a narrow range of expensive technology companies, a pull back of this kind is not implausible. It’s been a good run for gold, but predicting its trajectory from here is considerably tougher.

This article originally appeared in our sister publication, PA Adviser

The global commodity market faces an of challenges that could influence its volatility, such as new Trump presidency in the US, ongoing tensions in the Middle East, and natural disasters across the coasts of Mexico and North America.

However, there is also another factor that is probably the most underestimated one — the evolving economic deterioration of China. So why and how exactly is China influencing the commodities market, and what changes can we expect in the near future?

China’s economy has peaked

China has long been considered one of the biggest world economies, but today’s forecasts are not bright anymore — many analysts think the country’s economic peak already passed in 2021.

The main reasons behind this phenomenon is excess production capacity, a downturn in the housing market, and low consumer activity. All together, they will continue to put pressure on prices.

As a result, China’s consumer prices showed no growth in September, with a year-on-year increase of just 0.4%. Core inflation, excluding volatile energy and food prices, slipped to a modest 0.1%, marking a clear sign of a broader economic slowdown.

See also: Is China at a turning point, or will it disappoint yet again?

This also coincides with China’s cheap labour resources nearing exhaustion, an increase in youth unemployment, an ageing population, and may countries in Europe and the slowing down imports their imports of Chinese goods.

The Chinese government is working to manage these changes, yet the situation remains challenging. And without further stimulus, China risks falling into a prolonged period of deflation similar to Japan’s experience in the 1990s.

These incentives will most likely be further increased in order to avoid the Japanese scenario and provide a gradual slowdown in economic growth to about 3.5 to 4.5% per year over the next three to five years.

China’s economy drives commodity markets

Economic shifts in China have a direct impact on global commodities. The country remains the world’s largest importer of key resources such as oil, and any changes in its purchasing behaviour are reflected in global markets.

The volume of China’s oil imports amounts to 11 million barrels per day, which is only slightly below the level of September last year and corresponds to the average figures for the last months. Overall, import volumes remain stable.

However, the average price of imported oil in September decreased as worries about demand from China pressured market sentiment. The oil price has since surpassed $60 per barrel.

See also: Fairview’s Yearsley: China becomes ‘story of September’

As for energy, it remains one of the key components of the Chinese economy. Despite the aforementioned economic hurdles, China has executed strategic adjustments to its energy sector that may soften its economic landing. From 2022 to 2024, the country managed to cut energy costs per unit of GDP by 5–15%.

The decrease occurred due to a few reasons. The first is linked to cheaper purchased resources since China mainly imports resources from countries in difficult economic conditions and offers them discounts of up to 30% relative to market prices.

Secondly, the country has modernized its own energy system, which has increased its efficiency and lowered prices.

How should investors adjust their strategies?

Faced with the problems within the Chinese economy, investors should pay attention to new opportunities in other regions and sectors.

It is worth looking at American companies, especially in promising areas such as energy, artificial intelligence, robotics, and big data. They are likely to increase their output, which also opens up new investment opportunities.

Indian and Mexican companies that can replace Chinese manufacturers in global consumer markets may also be promising. These two countries are actively developing their production facilities and becoming key alternative production centres.

At the same time, it is important to monitor the large volume of natural resources that China exports and look for alternative suppliers. This will help prepare for possible restrictions on Chinese exports or the introduction of export duties.

Some investors are already moving away from Chinese assets and switching to more reliable instruments such as gold or US bonds, with foreign direct investment in China turning negative for the first time since 1998. 

When is an alternative not an alternative? To answer this, it’s worth starting by defining what exactly constitutes an alternative investment. The UK asset management industry is responsible for some £2trn of alternative assets versus some £11trn in mainstream assets. The very size of this universe reflects that fact that the alternatives label encapsulates a broad range of different asset types and approaches.

For many, a simple definition may be something that isn’t categorised as equity, fixed income or cash which are considered the traditional components of portfolio construction. I’ve covered multi-asset funds as a fund analyst for many years and in this context, I’ve seen many different genres of funds banded and labelled under the broad alternatives banner.

Asset classes grouped into alternatives buckets include, among others, private equity and debt, digital assets, infrastructure, real estate and commodities such as gold. Within the hedge fund/absolute return sector alone there are further strategies that might fit under the alternatives label with long/short equity funds, global macro funds and CTAs (i.e. trend-followers) being some of the most familiar. While digital assets are a newer kid on the block, regulators and lawmakers are beginning to facilitate their more widespread use.

The growth of alternative allocations in multi-asset portfolios has been an observable trend for many years now. Popularity grew during the lengthy low inflation era when traditional bonds offered little in the way of yield and carried the risk of capital loss for those worried about a shift in the interest rate regime. In this environment, alternatives were a natural diversifier. More latterly, despite a regime change and a more attractive bond market, alternatives have maintained their appeal in portfolios. 

See also: Square Mile’s Fund Selector: IA UK smaller companies funds to watch

A recent look at well-known private client benchmarks showed that currently the ARC balanced benchmark has an allocation to alternatives of approximately 30%. Many DFMs and MPS managers are represented here.  Within the PIMFA conservative allocation, around 17% was allocated to alternatives and a 10% allocation now appears to be commonplace in high-net-worth portfolios. However, at a headline level, it can be difficult to see what type of strategies constitute these allocations because of the breadth of the definition. 

What is key when defining an alternative is a consideration of different risk and reward outcomes. Indeed, this is what makes alternative investment funds and strategies so useful for long-term investors and their portfolios.  They should offer a different risk/reward profile to the traditional asset classes investors are more used to seeing in their portfolios, namely equities and bonds.

A well-managed allocation to alternatives can offer a low and even negative correlation to these other asset classes helping with overall portfolio diversification. As an example of a compelling portfolio diversifier, we would highlight the BlackRock European Absolute Alpha fund which holds a Square Mile AA rating. This is a long/short equity strategy which is managed with a low net market exposure and which aims to deliver a positive absolute return over a 12-month period regardless of market direction. 

Another fund worth mentioning is the Square Mile A-rated WS Ruffer Diversified Return fund. This fund also aims to provide positive returns in all market conditions over any 12-month period with an emphasis on preserving capital. It adopts a multi-asset approach and its holdings will typically include a blend of growth (mainly global equities) and defensive assets such as cash, conventional bonds, index-linked bonds, precious metals and derivatives. This deployment of derivatives to hedge directional market risks is a particular feature of this strategy.

Portfolio diversifiers such as these aim to deliver strong performance (in absolute or relative terms versus markets) particularly during stressed market conditions, when volatility is high or rising.  It is this key characteristic that makes such funds attractive when held in a portfolio.

See also: Square Mile removes Jupiter Global Value rating on Whitmore exit

Which alternative to pick matters to ensure that an allocation to such assets and funds does indeed offer diversification. For example, a highly correlated equity focused absolute return fund will do little to offset the downside of equities during a sell off. Attitude to liquidity, risk and complexity are also pertinent to the selection decisions. Gold and infrastructure are relatively simple to understand while the black box perception of CTAs and global macro funds are more complex and often less transparent. This doesn’t necessarily make them bad but a higher level of due diligence will be needed.  

In addition, those who also value non-financial objectives may find the broad church of alternatives appealing.  For example, private markets and real assets can be one of the most impactful ways of gaining exposure to sustainable or responsible investment themes. It is worth noting that, while many alternatives strategies have daily liquidity structures under the UCITs framework, others such as private markets may be less liquid, but can be invested through closed-ended vehicles.

It is therefore important that portfolio managers and fund analysts are on top of allocations to alternatives and understand with granularity as well as in totality, the risks and rewards that an allocation to these strategies are contributing to portfolios. Most importantly, it is key to ensure that they are fulfilling their job of diversification alongside traditional assets, stocks or funds that are held in the portfolio… otherwise an alternative may not end up being one.

It now anticipates underlying dividends in the UK to fall 0.3% to £86.8bn by the end of the year, down from the 0.1% growth it had projected three months ago.

But this downgrade is even steeper when compared to Computershare’s initial forecasts at the beginning of the year. In the first quarter, it expected underlying dividends to grow 2% by the end of 2024 to £89.8bn.

Buybacks and a burgeoning pound

Widespread share buybacks in the UK have been one of the main reasons for this sizable reduction, according to Computershare’s latest report.

“Share buybacks represent a valuable means of returning surplus cash to shareholders, but fewer shares in issue mean the total dividend expense is lower,” it said.

“This is not bad news in itself because the cash just comes to shareholders in a different way. In the absence of buybacks, we might reasonably expect that capital might instead be distributed as a dividend.

“Since buybacks have grown markedly in the last few years, dividend growth alone understates the true growth in cash distributions by UK companies.”

See also: Octopus: UK small caps will overtake the FTSE 100 as the biggest dividend payers by 2025

This, in conjuncture with the strengthening pound, is expected to cost the total dividend payout by UK companies £3bn this year.

The Bank of England’s decision to keep rates high for longer than other central banks has boosted it 5.7% against the US dollar over the past year, which has proven a headwind to the two-fifths of UK dividends payers that declare in the US currency.

A strengthening pound caused dividends in the third quarter to come in £706m lower than expected – double what Computershare had forecast, namely due to sterling rallying sharply in the summer.

Cuts to special dividends

The decision for UK companies to cut their special, one-off dividends has also been a source of disappointment to income investors.

Computershare had already anticipated “a quiet quarter” for special dividends at £500m, but this still came in at less than half the forecasted amount at £238m.

See also: UK companies drop special dividends by 79% in 2023

The report said: “Special dividends are very volatile and, because they usually depend on specific corporate actions like a discretionary asset disposal, they are very hard to predict.”

However, the firm expects these special payouts to push total UK dividends over the line this year. Underlying dividends may be forecast to drop in 2024, but headline payouts – which include special and regular dividends – are anticipated to grow 2% to £92.3bn, down from an initial 3.8% estimate.

Declining payouts from miners

Most of the cuts to dividends in the third quarter came from the mining sector, which dropped their payouts by £2.6bn over the three-month period.

Some 90% of this decline was on account of Glencore, which has been preserving cash to fund its recent $6.9bn acquisition of Canadian steelmaker Teck Resources.

See also: Global dividends hit fresh record high in Q2

Computershare noted that “lower profits from weaker commodity prices have played a role too and also explain lower payouts at Anglo American and Antofagasta”.

But cuts from this sector alone are shielding a much healthier outlook for UK dividends. When you exclude miners, underlying dividend growth was actually up 2.5% over the quarter, with the rest of the market increasing its dividends by £298m at the headline level.

Underlying dividends were up 2.5% to £557m over the period without miners, almost half of which came from the pharmaceutical sector thanks to increased payouts from AstraZeneca.

From September 2021, new regional, sector and asset classes were created, such as Latin America, healthcare and infrastructure, as well as commodities and natural resources. Consequently, the specialist category was cleaned up and went from about 330 funds to the current 130. This was a welcome and necessary development.

A broad church

The specialist sector remains an exceptionally diverse ‘catch-all’ cohort that incorporates single-country funds, absolute return, sector funds, targeted return, fixed income, money market and commodities, among others. It is noteworthy that passive penetration, which is ubiquitous and growing rapidly elsewhere, is entirely absent here.

The IA sector classifications are rules based, and presided over by the sectors committee, who regularly review the definitions to ensure they remain relevant and to check that the constituent funds continue to meet the inclusion criteria.

In the case of the specialist sector the inclusion criteria set out by the IA is: funds that have an investment universe not accommodated by the mainstream sectors. Performance ranking of funds within the sector as a whole is inappropriate, given the diverse nature of its constituents.

To put this into sharper focus, and to illustrate the variety within the sector, mapping across the constituent funds leads to inclusion in upwards of 50 Lipper classification categories, including around 18 mixed asset funds with various objectives from aggressive to conservative, 14 bond/money market funds, 10 single country offerings, largely made up of Korean and Russian funds, nine emerging market equities, seven gold and precious metals products and four biotech funds, resulting in a very broad church.

While the specialist category is somewhat of a curate’s egg, it is home to significant investor assets. At the end of June, the unweighted average size of the funds was around £940m and total invested across the sector was £118.7bn, although the top 10 largest vehicles accounted for two-thirds or £78bn of the funds under management.

The sector is dominated by Allianz Income and Growth at over £38bn in size or around a third of the total assets within the sector.

At the opposite end of the spectrum there are 24 funds that are sub-£50m in size, accounting in aggregate for £510m of assets and with an average unweighted fund size of £21m.

Given the focus on niche and arguably less mainstream investment themes this tail of smaller funds is perhaps not surprising. The arguments for and against smaller funds are nuanced, though fixed costs can be a negative drag on a smaller pool of assets, and they may also be unappealing to larger investors that tend to avoid overly high ownership levels within funds.

Macro influence

Given the sheer breadth of strategies contained within this asset class, the macro environment has wildly differing effects on the performance of the various constituents.

A more benign interest rate environment might, for example, be a tailwind for the bond, infrastructure, stylistically growth-orientated or long-duration assets and a headwind for the short-term money market funds.

Meanwhile, higher inflation and firmer energy and commodities prices act as a fillip for those funds investing in precious metals, energy and wider resources.

Recent seismic changes in the geopolitical landscape (ie Russia/Ukraine) and the unwinding of low interest rates as higher inflationary pressures emerged, have showcased the magnitude, thematic range and diversity within the specialist sector and its potential appeal to investors.

The heterogeneous nature of this cohort is illustrated in the extreme divergence in volatility seen through the sector over the past three years. Those funds exposed to gold-related assets and emerging European assets have, not surprising, been subject to extremely elevated levels of volatility, in the order of two to three times the magnitude of what might be expected from broad global equities.

At the other end of the spectrum, money market, and some absolute return-type strategies have exhibited exceptionally low levels of volatility as measured via their three-year standard deviation.

The resultant constituent three-year performance also exhibits significant dispersion from the top-performing fund’s return of 83% to the worst performer at -64%, a difference of 147%. Comparing this with a more homogeneous category such as IA UK All Companies, the difference between the best- and worst-performing funds (+41 and -36%) is 77 percentage points.

Since the IA review in 2021, the specialist sector has shrunk in terms of number of funds but remains extremely heterogeneous which, as the IA itself states, limits the use of the specialist category as an effective comparator peer group.

Read David Holder’s funds to watch by assets under management, three-year performance and newcomers in September’s Portfolio Adviser magazine

Of greater importance in the near term are underlying supply-demand dynamics. Supply remains constrained, underpinned by rising costs and production difficulties. However, demand-side dynamics are likely to change. Gold ETFs have experienced outflows in 24 of the past 36 months. This trend aligns with the recent surge in real yields. Surprisingly, as shown in the chart below, gold prices have remained strong despite their usual negative correlation with real yields. However, sanctions against Russia likely triggered fears of de-dollarisation, driving a surge in central bank demand for gold across many emerging economies, especially China.

As western central banks now begin to ease, a shift in western demand for gold is expected as real rates – the difference between nominal rates and inflation – decline. This, coupled with strong demand from emerging economies underpinned by an increasingly negative perception of the dollar as a reserve asset, will provide significant support for gold prices.

See also: Knacke’s money maps: Health is wealth

Beyond the base case, gold offers attractive ‘optionality’ as a hedge against unpredictable events including geopolitics, trade wars or changing market liquidity. When uncertainty rises, gold’s appeal as a safe haven only grows stronger, which is invaluable given the risks of financial repression are misunderstood, and those posed by macroeconomic and geopolitical turmoil underappreciated.

With gold under-owned by western investors and strong underlying price trends, the outlook for the metal is bright. Indeed, its status as a store of value is unlikely to change, whether you live in America, Africa or Asia. For investors looking for a stable, long-term asset with capital preservation characteristics against both inflation and geopolitical instability, gold remains an essential asset. The shiny metal is just getting started.

This article originally appeared in the September issue of Portfolio Adviser magazine

The September expectations of a soft landing include the largest proportion of investors so far this year. Those predicting a hard landing have also slightly dropped off from August, now including 11% of those surveyed, down from 13%. This has fallen significantly from the same time last year, when 21% of investors anticipated a hard landing.

In addition, over half of investors believe there will not be a recession in the US within the next 18 months.

Michael Hartnett, investment strategist for Bank of America, said: “Macro pessimism was centred on China in the September Fund Manager Survey… China growth expectations fell to a record low with net 18% expecting a weaker Chinese economy (most in 3-year history).

“In contrast, US growth outlook improved slightly in September with net 51% expecting a weaker US economy next 12 months, down from net 56% in August.”

See also: Legal & General hires asset management CEO from PGIM

As market sentiment looks slightly more sunny, surveyed investors took a small chunk from cash investments, from an averaged 4.3% of assets under management to 4.2%. Yet, a net 11% of those surveyed say they remain overweight in cash. Investors also remain overweight in bonds, with September marking the largest overweight since December 2023, at net 11%.

The sentiment movements have swayed Bank of America to mark commodities as a contrarian market play. Currently, allocation to commodities sits at a seven-year low among those surveyed. In the last four months, allocation to commodities has dropped 24 percentage points.

September’s global survey included 206 respondents, with 36 CIOs, 93 portfolio managers, 64 asset allocators, strategists, and economists, and 13 uncategorised. Of the group, 91 ran mutual funds and 58 ran institutional funds, with the rest in hedge funds, proprietary trading desks, or others. The average investment time horizon sat at 7.3 months.

See also: BNP Paribas: Nine in 10 investors now familiar with thematic investing

However, focusing on ‘old energy’ options seems a backward-looking approach, and may fall foul of increasing regulatory pressures.

The BlackRock Energy and Resources Income investment trust aims to bridge this gap, investing across the entire spectrum of energy generation. At any one time, the portfolio will include traditional fossil fuel companies, renewable energy and supply chain providers, and mining companies.

The trust started life in 2005 as the Commodities Income Investment trust, launched by the then-Merrill Lynch commodities team. It was inaugurated amid the commodities supercycle, a once-in-a-generation bull run for commodities prices fuelled by the industrialisation of China and India. It initially targeted an income of 4.25%, but also significant capital growth.

See also: More rigorous ESG fund classification necessary as uncertainty remains

Investors may be familiar with the rest of the story. China’s growth slowed, the supercycle ebbed and mining companies struggled to shake off the legacy of excessive capital spending. The Commodities Income trust continued to invest in mining and conventional energy until June 2020, when it became increasingly clear that a change of strategy was needed.

Portfolio manager Tom Holl says: “The trust had a focus on income, but also growth because of the supercycle. As that supercycle matured, the trust became a lot more focused on just the income element. Both the mining and conventional energy sectors were less ‘growth’ and more ‘value’.

“When we and the board reflected on the trust, we came up with two challenges to address. The first was structural growth – mining and conventional energy are not areas of structural growth. China is still the world’s largest consumer of most commodities and the growth rate has clearly slowed. On the conventional energy side, oil demand grows at around 1% per year. You might fund sub-sectors within it, but it’s lower than the wider market.

“So we thought, how can we introduce a growthier element?”

Introducing sustainable energy was the obvious choice. This was also made possible by the growing maturity of the sector. When the trust was first launched, sustainable energy companies were still niche, technology was in a breakthrough stage and very reliant on subsidies.

See also: 94% of investors consider defence stocks ESG friendly

Holl adds: “Companies were immature, small-cap and unprofitable. But those same companies had now grown up. While there were still venture-stage businesses and new technology, there were also very established companies.

“The breadth of what was defined as ‘energy’ had really changed. We wanted to introduce the energy transition into the portfolio to really capture that broader definition.” The trust set a neutral weighting of 30%.

Read the rest of this article in the September issue of Portfolio Adviser magazine

The fund is also available on the Borsa Italiana and Börse Xetra exchanges and comes with a 0.49% management expense ratio.

WisdomTree European Natural Gas ETC seeks to track the performance of the BNP Paribas Rolling Futures W0 TZ Index, which is designed to pride exposure to gas traded on the Dutch Title Transfer Facility — the benchmark for European gas prices.

See also: UK inflation stays at 2.2% in August – but a rate cut still seems unlikely

Nitesh Shah, head of commodities & macroeconomic research, Europe, at WisdomTree, said: “The Russia-Ukraine war that started in 2022 profoundly changed the natural gas markets of Europe. Pipeline flows of natural gas from Russia to Western Europe, which used to be the main source of natural gas for the region, are now negligible.

“Western Europe is far more reliant on Norwegian pipeline flows and global liquified natural gas imports. As the European Union navigates an energy transition, it will still be reliant on natural gas. With that in mind, there will be periodic sharp increases in European natural gas prices as the fuel is used to make up shortfalls in renewables.

“The Dutch Title Transfer Facility is the most representative and liquid natural gas benchmark in Europe and thus the best tool for tactical exposure to these price jumps and for hedging purposes.”

Debt peaked past $313trn at the start of the year after borrowers added around $100trn of new debt to their books since 2015, according to the Institute of International Finance (IIF). It noted that $89.9trn of that was made up of government debt.

These lofty debt levels made Pidcock cautious and led him to make gold mining company Newmont the sixth largest holding in the portfolio, representing 4.8% of the £1.9bn fund.

“Fiscal policy globally is very loose, and that is a concern,” he said. “Budget deficits – even when economies have supposedly been strong – have been way too high. And that’s why we invested in gold mines.

“We thought the gold price is probably going to go up because these paper currencies are just going to get more and more diluted as governments have to print more money to pay the interest on the debt they’ve accumulated.”

Global debt (in USD) since 2015

Pidcock’s exposure to the precious metal may not seem high, but he said “everyone should have some exposure to gold, whether it’s as an insurance policy or just sensible diversification”.

And an allocation to gold may be all the more important now that its purpose within portfolios is rivalling the role traditionally held by bonds.

“If there was a new geopolitical shock, I think gold would be seen as a place to hide,” Pidcock said. “Government bonds are traditionally seen as that, but if that political shock required a lot more government expenditure, then government bonds might not be the safety net that they have been in the past.

“We saw in Covid that government expenditure ballooned and created a lot more inflation, which wasn’t great for bonds, and that’s probably where we are again now. The first reaction of governments in a crisis is to spend even more money, so I would say everyone should have a little bit of gold.”

See also: Crisis point: Concerns grow over mounting government debt levels

This was echoed by Sotirios Nakos, multi-asset fund manager at Aviva Investors, who agreed the precious metal was encroaching upon the downturn protection function historically reserved for fixed income.

“Gold is challenging the traditional role of bonds in portfolios,” he said. “While gold is generally negatively correlated with real interest rates — meaning higher real rates increase the opportunity cost of holding gold —this relationship is not stable and varies over time.

“Particularly during periods of high inflation, the real rate effect on gold becomes smaller, making it a valuable asset in a diversified portfolio, potentially rivalling bonds. For cautious portfolios, however, the volatility associated with gold can limit its overall allocation.”

While gold does have its appeals as a safe haven in a high debt world, Rathbones multi-asset manager Will McIntosh-Whyte questioned whether its rallying price can be maintained.

An ounce of the precious metal will set investors back £1,951 today, which is 25.5% more expensive than it was a year ago. But McIntosh-Whyte said its price may have been artificially accelerated by central bank buying.

See also: Gold hits record high: Fund picks to play precious metals

The World Gold Council estimates that central banks bought 2119 tonnes of gold in 2022 and 2023, which was three times higher than they had in the prior two years combined. And they pushed their buying even higher in 2024, purchasing an additional 484 tonnes in the first half of this year.

A slowdown in the central bank buying that has fuelled a powerful rally could see gold’s soaring price come to a standstill, according to McIntosh-Whyte. Fixed income could therefore keep its seat as the best protector in the case of a downturn.

“My issue with gold is that it has obviously had a very strong run,” McIntosh-Whyte added. “It’s always tricky to rationalised movement, especially when there’s been a decent amount of buy from places like China. With a weak property market, I think a lot of Chinese households are turning to gold, and the same is happening in Japan in light of the country policy that we’ve seen there.

“There has just been a significant amount of central bank buying over the past year or so – it’s my view that US treasuries are a more reliable instrument to help protect portfolios in the majority of scenarios.”

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Yet the US government’s towering debt levels have not gone amiss on McIntosh-Whyte. The nation’s $35.3trn of debt accounts for around a third of all global government debt, making McIntosh-Whyte slightly more sceptical of his US treasury holdings.

“Earlier this year, we started slightly diversifying our exposure away from the US and into a number of European nations where we see the fiscal situation being a bit stronger, and where we’re more relaxed about the inflationary environment,” he said.

“But that’s coming from a position where we’ve actually held a lot. So I’m not rushing to sell my US treasuries to put it into gold – I’d rather just keep a little bit of dry powder.”