[December 06, 2013]NEW YORK (Reuters) — Deutsche Bank,
which is quitting trading in most raw materials markets, will retain
its near $9 billion commodities index fund business, a strategy
industry experts said helps the German bank profit from fees and
maintain ties with some of the largest investors.
It also shows that the world's biggest banks were not giving up yet
on passive commodity investment tools such as indexes, despite
research pointing to substantial outflows of money from such
products this year.
A top-five financial player in commodities, Deutsche Bank said on
Thursday it will cease trading energy, agriculture, base metals,
coal and iron ore, while retaining precious metals and a limited
number of financial derivatives traders. It cited mounting
regulatory pressure.
But the bank will continue to deal in commodity indexes, said
spokeswoman Renee Calabro in New York.
Industry experts said commodity indexes were shielded from the lower
profit margins, higher capital requirements and growing political
and regulatory scrutiny that were forcing banks out of proprietary
and physical trading of commodities.
"What we need to distinguish here is that commodity indexes are
fee-generating services where banks make profit for investments done
on behalf of clients, without having any risk on their books," said
Adam Sarhan, president at New York financial advisory firm Sarhan
Capital.
"It's the turnpike where they collect a toll each time a commodity
client passes by."
Data from Lipper, a Thomson Reuters company, showed that Deutsche
Bank had at least seven actively traded index products in
commodities, including exchange-traded funds and mutual funds, with
total assets of about $8.8 billion as of end-October. Of these, the
largest was the Power Shares DB Commodity Trading Index, which alone
had about $6 billion tracking it.
Fees, aside, index clients were often the biggest pensions,
endowments and family offices, target investors that banks wanted to
nurture.
"These are institutional investors who are likely clients to a bank
in many other aspects," said Eliot Geller, managing director at Core
Commodity Management in Stamford, Connecticut.
"If you're an investment bank that is exiting certain areas of
commodities, it makes sense to continue with your indexes as you'll
continue working with extremely large, prominent and significant
investors. It's probably a net benefit to overall business and the
reason I think investment banks in general want to stay in that
area."
But commodity index strategies have also not fared too well with
investors lately.
Citigroup estimates that an all-time high of $36 billion has left
passive commodities strategies to date this year, compared with net
inflows of $27.5 billion in 2012.
Some think the outflows have been overplayed and that commodity
indexes are far from their sunset days.
"What we have now is a very tough regulatory environment in
commodities. That can change, and when it does, you want to be
somewhere in the commodities business to get back in," Sarhan said.
