New Index Combines Jim Rogers’ Top Two Profit Plays: Commodities and China

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Investing icon Jim Rogers and Australia's Macquarie Funds Group have teamed up to create an agricultural-commodities index that will help investors profit from shifting patterns of food consumption in the burgeoning market of Mainland China.

The Macquarie and Rogers China Agriculture Index is an investable index that will track price changes of the market "basket" of the agricultural commodities most commonly consumed in China. Macquarie Funds is the asset management arm of Australia's Macquarie Group.

Macquarie actually created the product in November, and continued to operate it in December, when the China agricultural index posted a return of better than 11% - outperforming most agricultural indices and handily besting most stock markets in that part of the world, Asian Investor reported. That provided Macquarie Funds with the two-month performance needed to actually launch and start marketing the index.

"Apart from being the world's most populous nation, China is [also] one of its fastest-growing and as such, Chinese dietary patterns should play an influential role in determining the prices at which agricultural produce is exchanged" Harry Krkalo, Macquarie Funds' Singapore-based head of Asian retail funds sales, told Asian Investor. "Developing an investable index which effectively tracks the price changes of commodities with reference to the quantities of each agricultural product consumed in China is an innovative and exciting way to invest in the sector."

Indices that track commodities are usually calculated utilizing so-called "supply-side" factors, and the commodity weightings are based on global production. The Macquarie and Rogers China Agriculture Index is unique because its component weightings are determined using current and projected data on commodities consumption in China.

The index allows investors to track - on a daily basis - the price changes of the agricultural commodities basket, and will ultimately enable investors to capture the price impact of current and potential changes in China's food consumption patterns. What's more, it also allows fund managers and other marketers of financial-services products to create and sell financial products that are linked to this innovative and topical theme. It uses exchange-traded futures contracts on physical commodities to do so.

The China agricultural index is the first one manufactured in Asia by Macquarie Funds, which is trying to use its geographic location to its advantage, and bolster its Asian presence. As of the end of September, Macquarie Funds had $53 billion in assets under management worldwide, including $1.5 billion sourced from investors in Asia.

"Macquarie is a leader in trading commodities futures. Jim Rogers has worked with other groups before but nothing specifically with China," says Krkalo. "So when we put those bullet points down, a Chinese consumption-based product made sense and it is an interesting first index for us to roll out."

From Investor to Icon

Rogers first made a name for himself with The Quantum Fund, a hedge fund that's often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor's 500 Index climbed about 50%.

It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the just-released "Bull in China."

He also made some historic market calls: Rogers predicted China's meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers' prescience is well known, and his candor and willingness to criticize the bailout strategies under way in Washington means that his comments almost always receive substantial media coverage.

Rogers sat down for extended conversations with Money Morning Investment Director Keith Fitz-Gerald twice in the past year. For the first of those two interviews, Fitz-Gerald traveled from his Oregon home all the way to Singapore, where Rogers now lives with his family. Rogers warned investors that there were tough times ahead for the U.S. dollar, and for the nation's central bank.

In the second interview, Fitz-Gerald met with Rogers in Vancouver, British Columbia, where both were to speak at a major wealth management conference. During that April discussion, Rogers warned Money Morning readers that the U.S. financial crisis was destined to grow much worse - an assertion that echoed Fitz-Gerald's own predictions and that's also proved to be highly accurate.

In all his discussions, however, Rogers remains highly bullish on two things: China and commodities. The new index addresses both.

"I bought more [commodities] recently. I know that one of the few bull markets that I can see going up in the next five to 10 years is in agriculture," Rogers said. "You may not have bull markets in cars or financial institutions or lots of other things, but I know the world is not going to stop eating."

Roller-Coaster Ride for Commodity Prices

Commodity prices across the board have been whipsawed over the past two years. Food-and-energy prices soared in the last part of 2007 and continued their climb in the first part of 2008. In fact, as Money Morning reported in early April, food prices rose so far and so fast in the early part of last year that the leader of the United Nation's World Food Programme warned that a "silent tsunami" of hunger was sweeping the globe.

But after the world commodities markets sold off sharply for most of the last half of last year, a committee made up of Rogers and key members of the treasury and commodities team in Macquarie Funds created the index.

"Macquarie is one of the largest traders of agricultural commodities globally and Jim Rogers is one of the world's leading commodity investors so it's a great partnership," Matthew Long, Sydney-based executive director of Macquarie Funds, said in an interview with Asian Investor. "The index methodology is a refreshing way to approach investing in commodities and over time we believe that consumption patterns, particularly those of China, will increasingly influence agricultural prices. We expect the index to perform quite differently from existing agricultural indices."

Macquarie Funds plans to launch, in the near future, a series of funds linked to the Macquarie and Rogers China Agriculture Index in the Asian region in addition to issuance in Switzerland, according to published reports.

"The investing public is still worried about where to put their money so any product launch for the next six months is going to be a carefully thought-out launch," Krkalo says. "But this commodities index is interesting for both short-term and long-term reasons."

In view of the projected demand for food over the next decade - especially with the emergence of the world's largest middle class, taking place right now in China - the decline in food-based commodities was badly overdone, Macquarie's Krkalo says. From a profit standpoint, the short-term opportunity stems from attractive valuations, while the long-run outlook is all about massive and growing global demand.

Krkalo and Rogers both make a strong case that everyone should be invested in commodities. Even with the big decline in prices that took place in the last half of last year, here in the U.S. market alone, for instance, prices for food in U.S. grocery stores jumped 6.6% last year - the biggest spike since 1980. If anything, that underscores yet again that inflation is a much bigger problem than government officials, or most economists, say it will be. It also calls into question the veracity of the statistics that say there was such a drop-off in prices.

Last year was the second one in a row in which U.S. consumers were forced to pay a lot more for their groceries, Money Morning reported. In 2007, food prices at supermarkets rose 5.6%. Prices rose only 1.4% in 2006.

Of all food categories, prices for cereal and baked goods hit U.S. consumers the hardest, zooming 11.7% in 2008 over 2007. Prices for meats, poultry, fish and eggs gained 5.1%. Fruits and vegetable rose 3.4%, while dairy products advanced 2.7%.

Asia's Promise

Commodities indices actually outperformed stock markets in December, with the Dow Jones-AIG Agriculture Total Return Index and the Macquarie and Rogers China Agriculture Index posting returns of approximately 9.8% and 11.6% respectively, Asian Investor reported.

Most major Asian stock-market indices - including Japan's Nikkei 225, Hong Kong's Hang Seng, MSCI Singapore, Kospi 200 and the MSCI Taiwan - posted positive returns, the largest of which was the Kospi 200 with a performance of around 6.2%.

The worldwide financial crisis and the sell-off in stocks that's resulted have singed the mutual-fund industry. Mutual-fund assets in Asia - excluding Japan - could drop by nearly 20% this year, and won't equal last year's record levels until 2010, Boston-based financial researcher Cerulli Associates reported back in October.

Assets in Asian funds soared 86% to $1.126 trillion in 2007, before dropping 12% in the first half of last year. Macquarie's Krkalo told the China Daily that when markets improve, the region's investors would scramble to find opportunities.

"Asian investors are really quick to move," Krkalo said.

Asia's fund industry is dominated by such heavyweights such as ING Groep NV (ADR: ING), Schroders PLC, JPMorgan Chase & Co.'s (JPM) JF Asset Management unit, and Prudential PLC, as well as Nomura Holdings Inc. (ADR: NMR) and Citigroup Inc.'s (C) Japan-based Nikko Asset Management unit, which the U.S. banking giant is trying to sell.

[Editor's Note: With the U.S. financial markets in tatters from the global credit crisis, Money Morning and its affiliated monthly newsletter, The Money Map Report, have trained their profit-seeking sights on markets outside U.S. borders. Of all those markets, one dwarfs all the others put together. And that's China. Investing icon Jim Rogers is such a believer in Asia's future, that he moved his entire family to Singapore, and counsels America's parents to make sure their children can speak Mandarin Chinese. That's not hyperbole, either. Back in 2008, when filmmaker Michael Covel traveled to Singapore to interview Rogers for his documentary, "Broke" The American Dream," the director said "it was amazing to see [Rogers'] 5-year-old, blue-eyed daughter speak Mandarin Chinese."  Even under the weight of the financial crisis, China remains the fastest-growing market on the planet. And Rogers' best-seller, "A Bull in China," is like a profit playbook that will help you zero in on the Mainland China companies best poised to make you rich. In fact, check out our new report, which shows you how to get a free copy of this book. Just click here.]

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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