Commodities to become a core asset class, FSA predicts

The UK Financial Services Authority (FSA) predicts commodities will become a core asset class for all diversified portfolios.

According to a report by the FSA, the commodities market has grown in recent years on the back of new investments from pension funds, high-net-worth individuals and some retail investors. The FSA expects the money to remain in the market and to continue to grow, especially as buy-and-hold investors like pension funds are just discovering commodities. Retail exposure to commodities is available through an increasing number of products, such as futures contracts and exchange-traded funds.

According to the FSA, firms face several challenges with the growth of the commodities market. As the market expands and firms increase their operations, the limited number of experienced staff becomes stretched. Accordingly, firms must focus on hiring and retaining top talent. The FSA also underscored the point that increased volatility in some markets could raise the cost of trading and risk of financial failure. The FSA recommends that firms have adequate risk-management systems in place to handle these new challenges.

In a response to the FSA report, Dawnay Day Quantum, the structured investment arm of the Dawnay Day group said: “We firmly believe that commodities are not an asset for high-risk portfolios, but that they will be recognised as a core asset class for all diversified portfolios.”