Barry Critchley, Financial Post
Published: Monday, August 10, 2009
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First it was gold, then it was silver. Now it is copper. We are referring to the structured products focused on physical commodities and offered to investors over the past few months. Of course, if we go back far enough, there have also been uranium-and molybdenum-focused funds.
ScotiaMocatta Physical Copper Fund is the latest issuer to enter the commodity space. "The trust ... has been created to provide holders of units with direct exposure to the price performance of physical copper," said the recently filed prospectus. In other words, the higher the price of copper, the better off unitholders will be.
Be warned: The price of copper is volatile. While the price is up so far this year, at the end of June it was down 44% from its high reached one year earlier -- and 25% lower than the three-year historical average.
So why buy it? There are a couple of possibilities: - Investing in a physical fund is an alternative to buying an equity stake in a copper producer. And presumably, that investment will be less volatile than an investment in a copper producer. In this way, an investment in the physical metal is a so-called pure play given that a number of the major copper producers also produce other metals. ScotiaMocatta's Copper Fund has one purpose: to buy and sell copper. - Copper is normally regarded as an indicator of economic performance. Over the past 48 years, for instance, copper usage has risen by about 2.8% on a annual compound basis. China is the world's biggest copper consumer.
ScotiaMocatta is offering a different structure than the physical gold and physical silver funds served up by Claymore Investments. The former fund closed with $433-million in the kitty, while the latter rounded up $36-million. Both offered units with each $10 unit consisting of a regular unit plus a warrant, which had a term of six months. Both deals featured low management fees: 50 basis points for the gold deal and 60 basis points for the silver deal. Claymore's gold deal was tax-efficient, particularly for non-Canadian institutional investors. As a result, the institutional interest was larger than with a normal closed-end fund.
But given its focus, ScotiaMocatta's fund is clearly trying to tap into institutional investor interest.
For its part, ScotiaMocatta is offering units priced at US$10 a time. (Having proceeds in U. S. dollars will avoid currency exposure, given that copper is priced in U. S. dollars.) But unlike Claymore's two deals, unitholders in ScotiaMocatta are being offered an annual redemption feature. For turning in their units once a year, holders will receive net asset value, an amount that should be higher than the trading price given that closed-end funds normally trade at a discount.
Claymore has a different approach: The goal is to ensure the fund trades in a narrow range, around net asset value (NAV). If it doesn't, after six months the two funds will automatically convert into an exchange-traded fund. Conversion will take place at NAV.
While there are differences, there are also some similarities. For instance, the physical gold and silver bullion in the two Claymore funds are stored at ScotiaMocatta. And ScotiaMocatta is the custodian for the copper fund. Indeed, the various units of Scotia are playing a large role in the fund. One unit is the trustee, another is the administrator (which receives 40 basis points a year), while another will be responsible for buying and selling the copper.
