Reuters

February 23, 2006

Japanese investors are flocking into funds that track commodity indexes in a move to diversify and hedge their assets, which currently run heavily towards bank deposits and the conventional securities market.

Cash-rich investors are buying the index-linked investment trust funds as attractive financial instruments rather than stepping directly into the volatile commodity physical and futures markets.

Since Japan’s first publicly placed commodities-linked investment trust fund was launched in December 2004 with a value of 8 billion yen, three others have followed suit, and their total value as of Tuesday was 52.7 billion yen ($444 million), according to Investment Trusts Association of Japan data.

Another fund is set for launch this week.

We all consume commodities every day, while only a few actually hold them as an investment, said Kazuya Sugiura, managing director at AIG Global Investment Corp. Most investors are still heavily exposed in bank deposits and bonds. Demand is there due to a belief that commodity prices will stay in an uptrend in the medium and long term.

Investment trust funds sold in Japan invest mostly in securities. Commodities-linked trust funds invest in securities, such as index-linked bonds, that track the performance of commodities indexes.

By contrast, domestic commodity funds, which have been available for years, invest the majority of their money directly in the commodity markets.

They can invest in securities or other types of financial instruments, but this investment has to be less than half the total.

Investment trust funds are mainly sold at banks, while commodity funds are offered by commodity brokerages, although securities firms can offer both.

The older type of funds had a total value of 42.7 billion yen in January, according to the Japan Commodities Fund Association.

Japanese individual investors have a mind-boggling 1,400 trillion yen ($11.8 trillion) in personal savings, and most of it is believed to be held in bank deposits.

AIG Asset Management plans to launch an investment trust fund today that will track the Dow Jones AIG Commodity Index, which is composed of 19 commodities, including crude oil, gold and wheat.

Of the four commodities-linked investment trust funds already operating in Japan, three have been launched since September, drawing strong demand and exceeding expectations, fund managers said.

Investors want to diversify, said Koji Ohno, associate director at Japan Investment Management Co Ltd’s planning department. Demand was much bigger than we originally expected.

Japan Investment Management launched an investment trust fund on January 27 that also tracks the Dow Jones AIG index. The value of Japan Investment’s fund totalled about 3.9 billion yen as of Tuesday.

Daiwa Asset Management offered a fund in December 2004 that tracks the Rogers International Commodity Index (RICI) an index set up by Jim Rogers, co-founder of the Quantum Fund with George Soros.

The value of the Daiwa fund was about 10.5 billion yen on Tuesday.

Among the four outstanding funds, Nomura Asset Management’s fund, launched on September 21, which also tracks the Dow Jones AIG has the biggest value, totalling about 36.4 billion yen.

The fourth fund, managed by Sumitomo Trust & Banking’s STB Asset Management, has a value of 1.9 billion yen. That fund, set up on September 30, is also linked to the Dow Jones AIG index.

Investors who are keen to hold commodities in their portfolios take the view that prices will continue to rise over the long term and deliver good returns, supported by demand for raw materials from the countries like China and India.

Some commodities have outperformed other financial instruments in recent years.