Desjardins Group has marketed its first commodities linked guaranteed investment certificate (GIC) in 2017. The five-year Natural Resource GIC - Feb17 which is linked to a basket comprising copper, corn, crude oil, gold, natural gas and sugar, does not offer any dividend to lower the option cost. The certificate offers a cap of 15% on the return compared to the 13% capped return offered on a play linked to equity basket (Priority Terra Guaranteed Investment - Feb17).
The additional 2% potential return comes on the back of the high volatility of these commodities, compared with equity markets, where the average historical volatility is currently at 32%, according to Yahoo Finance. "We want to optimize the product and take advantage of the opportunities, given the current price environment," said Marie-Claude Boutin, senior advisor, Desjardins. "We are currently doing a revision process for this product and will address the mix of resources as well as the method of calculation or even the selected underlying."
The low correlation between the commodities has also helped to justify the choice of the basket, according to Boutin, "mainly to add an element of diversification into the basket itself". The certificate is also the result of several requests by Desjardin's sales force with many of their clients showing an interest in commodities, especially gold and crude oil, said Boutin.
Although commodity-linked products are more expensive to hedge than equity-linked structures, due to the high costs of rolling-over positions, Canadian investors have recently taken an interest in this underlying. Year-to-date, there are 33 products linked to commodities registered on the Canada database, including offerings from Bank of Montreal, CIBC and TD Securities, compared with just 10 commodity-linked products that were sold during the whole of 2016.
"We've been offering that type of basket since 2006 to give our clients the opportunity to add diversification to their investment portfolio," said Boutin. "It seemed appropriate to give access to a less traditional asset class."
According to Boutin, the product allows investors to terminate the product every year from the third year onwards in case of an urgent need of liquidity. "The termination periods are offered for all of our five-year terms products (including the Natural Resources)," said Boutin. "It's a way for the client to redeem the product at a lower cost if an unexpected event occur in his life."
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