Olam to boost financial commodity unit with 'half dozen funds'

Olam International, among the world’s three biggest suppliers of rice and cotton, plans to expand a pilot fund that invests in commodities more than fourfold and add about six new investment vehicles.

Using its markets knowledge as supplier of more than 20 raw materials, the Singapore-based trader will grow its Ektimo Commodity Relative Value Fund LP to US$250 million ($320.2 million) from US$60 million currently, Olam Chief Executive Officer Sunny Verghese said in an interview yesterday. “Tailor-made” commodity funds will follow, he said.

“We will launch probably half a dozen other funds over the next five, six years alongside that fund and they could be much larger,” Verghese said. “We have a ton of information. Why not monetize it?”

 

Investors have increased their allocations to edible commodities as the Standard and Poor’s GSCI Agriculture Index advanced 80% since July 1 last year to capitalize on rising prices. Flows into global agriculture index swaps, exchange-traded products and medium-term notes tripled to US$5.7 billion in the three months ended Dec. 31 from the previous quarter, Barclays Capital said in a Jan. 27 report.

 

New investments in agriculture-related products totaled US$2.6 billion in December, compared with US$1 billion in November and US$1.3 billion a year earlier, according to the report.

 

TAPPING EXPERTISE

Olam is among commodity merchants tapping into their market expertise and offering asset-management services. London-based Armajaro Holdings, founded in 1998 to trade cocoa, coffee and sugar, set up its fund unit about four years later and opened six funds.

 

Louis Dreyfus Group, the world’s biggest trader of cotton and rice, introduced its agriculture-focused fund in November 2008. Its commodity hedge fund stopped accepting money from new investors this month as assets climbed to US$2 billion from US$100 million, two people with direct knowledge of the matter said.

 

Commodity hedge funds returned on average 10.65% in 2010, the Newedge Commodity Trading Index shows.

 

“Investors are interested in commodities and real assets in general due to their historically uncorrelated returns to global equity markets,” said James Skeggs, London-based head of research at Newedge’s prime brokerage business.

 

Olam started its Singapore-based Ektimo fund in July with initial capital of US$30 million, according to the firm’s annual report. The commodity fund makes money from differences between commodity futures prices rather than making outright bets on price directions, Verghese said.

 

Revenue from Commodity Financial Services Group grew 20% to $16.2 million in the six months ended Dec. 31, compared with a year earlier, the slowest gain of Olam’s five business segments, according to the company’s recent earnings presentation. The services unit accounted for 6% of earnings before tax in the year ended June 30. Olam forecasts that it will bring in 7% of earnings before tax by 2015.

 

Olam is working on index, momentum and other kind of funds that will be started over the next three to four years, Verghese said during a Feb. 14 conference call.