It is a special fund offered by DNCA Finance, the investment boutique of Natixis Investment Managers. On the one hand, it invests in precious metals such as gold and silver and, on the other, in industrial metals such as copper, nickel, zinc, tin and aluminum. The active strategy is implemented indirectly through futures, that is, on the futures market, where liquidity is high. The benchmark to beat is the Goldman Sachs Metal Index. As Portfolio Manager, Alexandre Carrier is responsible for DNCA Invest Strategic Resources, launched in February 2024; the fund currently has assets of around 785 million euros.

Carrier began his career in 2006 at a Japanese asset manager in London as a buy-side analyst. In 2009, he moved into the commodities market as a commodity portfolio manager at Edmond de Rothschild in Luxembourg and Japan. Since 2011, he has worked for the Natixis Group in Paris and since 2020 for DNCA (the first three letters stand for the initials of the three founders and the A for Associés). A few weeks ago, Carrier was in Switzerland for investor meetings. finews took the opportunity to discuss with him the peculiarities of investing in these metal markets. The meeting took place in Natixis's offices in Zurich.

Mining stocks or metals?

Especially in Switzerland, precious metals have long been part of standard asset allocation. In recent years, many banks have significantly increased their allocation, especially to gold. The situation is somewhat different for industrial metals. Here, the majority of investors are likely, if at all, exposed through their equity allocation, that is, in shares of metal mining companies.

Carrier knows both sides, having managed an equity fund of metal producers himself 15 years ago. "Shares are a riskier investment because these companies often operate with a lot of leverage. But if things go well, you can also make a lot of money." By contrast, his fund is positioned somewhat more defensively via futures and is not vulnerable to company-specific events. For example, if a large supplier cannot produce for an extended period because of an accident, its share price will fall, but the price of the corresponding commodity will rise.

Better hedge against inflation

Commodities also offer better protection against inflation than mining stocks. There, investment is often cyclical, which additionally drives up costs and erodes profitability.

But does it generally make sense to gain exposure to markets as different as precious and industrial metals through one vehicle? Gold, for example, is used mainly as an investment and for jewelry, whereas copper plays a key role in the energy transition away from coal, oil and gas.

"Precious metals are scarce and protect against the debasement risk."

This is also a question that Swiss investors often ask him, and it does not surprise the Portfolio Manager. "Our idea behind the product is that the world is currently changing particularly rapidly: geopolitics, reshoring, the return of mercantilism, galloping public debt and stubbornly high inflation. That is why precious metals make sense; they are scarce and protect against the debasement risk, the danger that the value of the dollar and other major currencies will be eroded by inflation or other policy measures."

The debt of the G-7 countries. (Graph: DNCA)

On the other hand, this environment is also favorable for industrial metals. Financial market history has been shaped by cycles in which commodities alternated between a leading and a supporting role. "Today, resources such as energy, industrial metals or rare earths – where, unfortunately, we do not have liquid markets – are once again strategically important. Until a few years ago, everything was about efficiency and price; nobody cared about dependencies. Today, all innovation is metal-intensive."

"Resources such as energy, industrial metals or rare earths have once again become strategically important today."

Carrier also sees Switzerland in a relatively good position in this respect: unlike other Europeans, it is less dependent on importing cheap energy thanks to substantial domestic power production.

Alongside the change in policy comes real additional demand: the transition away from fossil fuels and the associated electrification of the economy (expansion of power generation and grids) is one factor, while the rapid expansion of data centers around the globe, driven above all by artificial intelligence (AI), which is also now considered strategic, is another. The rebuilding of defense capabilities neglected mainly in Europe after the end of the Cold War also cannot be achieved without metals.

Central banks are also increasingly turning back to gold, as reflected in the composition of currency reserves. (Graphic: DNCA)

Precious metals, and gold in particular, are well suited for a debasement trade. But if one fears that the currency and financial system in its current form is heading toward a rough end, shouldn't one rely on physical holdings rather than on a fund with futures contracts? "There is no easy way to invest in gold," Carrier replies, pointing to the costs of storage, security and tax considerations. For certain investor categories such as life insurers, physical holdings are hardly an option. At least access to the fund's strategy is to be made easier. DNCA will soon offer an active exchange-traded fund (ETF) for this purpose.

Active versus passive

The commodity futures markets are not easy terrain for investors. Futures with a nearer maturity can trade at a premium (backwardation) or at a discount (contango) to those with a more distant maturity – and financial investors generally do not seek physical delivery of the underlying asset anyway. Wouldn't it therefore make sense to invest passively according to pre-known rules, which would also come with lower fees than active management?

Carrier dismisses that idea. "Even as a passive investor, you cannot escape the pitfalls of the futures market. And traditional ETFs on individual metals are highly volatile." Metal prices have different levels of correlation with one another, and these can change over time. Carrier keeps exactly such developments in mind. "For diversification reasons, it would, for example, be beneficial to have crude oil in the mix, but that is not a metal." And for certain metals such as uranium, no liquid futures market exists.

The regime has shifted, toward a commodity-intensive economic cycle. (Graphic: DNCA)

The key metric for deciding whether to overweight or underweight a metal is a medium-term estimate of the supply-demand balance. "The greater the supply deficit over the next five to ten years, the higher the weighting should be in our fund." However, Carrier is also aware that long-term forecasts of supply and demand are tricky. For example,  in the past, the silver market was surprised by the pace at which digital photography replaced analog photography, and the with the photo industry one pillar of silver demand disappeared.

"That is exactly what makes our job so demanding, but also so exciting," Carrier notes, adding that silver is now once again very much in demand for solar panels. "We have to keep reviewing our quantitative models, with an eye on technological innovation and substitution." For example, lithium is increasingly being used instead of nickel in batteries today. However, substitution also has its limits.

Copper supply cannot be expanded overnight

In general, supply is easier to estimate than demand. This is because it often cannot be ramped up quickly. According to Carrier, it takes eight to 15 years from the initial go-ahead to the start of production at a new copper mine. For him, that also explains why Argentina, despite its large deposits, has hardly brought any copper to the global market to date. "Today, most copper comes from Chile and Peru; by the time Argentina gets there, it will be 2030."

There is not only change, but also continuity. "Metals such as copper, silver, lead and gold have been used by mankind for thousands of years. And we still cannot do without them today because they have excellent properties." In the context of decarbonization, they are indispensable, for example as very good electrical conductors.

The curse and blessing of higher interest rates

The impact of higher interest rates is ambivalent. Gold, for example, suffers because it is a non-yielding asset. However, if the rise in rates intensifies fears that major countries will no longer be able to control debt dynamics, this makes the debasement trade and thus the yellow metal more attractive again. The same applies to industrial metals. Higher interest rates can weigh on economic growth, which dampens demand for industrial metals. At the same time, higher rates may also reflect expectations of strong AI-driven economic growth, which would boost demand.

Carrier believes that in a world marked by exceptionally high sovereign debt and rapidly rising interest expenses, a large allocation to real assets is appropriate. "In addition to precious metals, industrial metals and other commodities, that of course also includes infrastructure, energy and real estate."