Commodity-related equities give investors a different type of exposure to the asset class. While these equities are somewhat correlated to commodity prices, they are far less linked than individual commodities, futures or exchange traded commodities (ETCs). In recent years, they have been more in line with equity indices and far more volatile, effectively making them a completely different play. Some argue that these equities do not really offer exposure to commodities at all.

For retail investors, these equities have proved to be one of the best ways to gain cheap exposure to commodities. However, with the arrival of ETCs, they now have different and more direct options. Nicholas Brooks, head of research and investment strategy at ETF Securities, believes the choice depends entirely on the investor’s goals.

He says: “Going directly versus going indirectly are two distinct areas with very distinct characteristics. Commodities and ETCs tend to have lower correlation to equities and bonds over time, so are good from a diversification point of view. They reduce volatility and can insure a portfolio against extreme events.

“On the other hand, when you are in a market like this, where risk is back in play and there is an upswing, equities will perform better.”

Mr Brooks also points out that inflation plays a huge part in which strategy can be more viable, but that this can go many ways. In environments where inflation and commodity prices are falling, commodity-linked equities can outperform because costs are falling. However, if inflation appears to be rising, such as commodity prices hitting $147 (e97.80) for a barrel of oil, equities can underperform because these prices can logically be viewed as unsustainable.

Consequently, the commodity-linked equity play is never straightforward, as many who manage the various types of commodity funds will attest. One of the most complicated aspects is, unsurprisingly, the commodity price itself. In a recent example, platinum maker Lonmin’s meteoric rise coincided with the metal also making big gains. So even though there is wide agreement among managers that equities might be less affected by price fluctuations, they clearly still matter, and can alter strategies for better and worse.

Evy Hambro, who manages BlackRock’s Gold and General Fund, explains that equity correlations to prices change all the time, and that the commodity price has an enormous effect on strategy and performance. He admits that timing fluctuations is incredibly difficult, and consequently advises investors to average in a position as opposed to making the entire investment in one day.

He asks: “Are gold companies making huge profits with higher prices? Not really. Gold companies are still making small margins. Sometimes higher prices mean less demand. Equities go up and down a lot more. I think the long-term average for a 1 per cent change in the value for gold results in a 3 per cent change for its equities. Sometimes it’s even 10 per cent, so it’s a much higher beta.”

His argument is that when the investor is buying these types of equities, the price must be considered, but it is not a simple formula whereby high prices equal good times for all of these companies. In his opinion, the best way to minimise the risk that comes with volatile commodity prices is to diversify broadly across the sector, because prices do not impact all companies in the same way.

However, the analysis then becomes even more complicated as in addition to the price, individual company risk factors have to be considered. Frequently, these issues are even more important. The price of gold might be going up steadily, but what if there is an accident at a mine, or a company’s workers decide to go on strike?

Returning to Lonmin, the company’s officials point out that in addition to the rise in platinum prices, results have been boosted by growing demand from car producers and those looking to lower emissions.

This article was first published in FT Mandate.