By Barani Krishnan
NEW YORK, Dec 5 (Reuters) - Deutsche Bank, whichis quitting trading in most raw materials markets, will retainits near $9 billion commodities index fund business, a strategyindustry experts said helps the German bank profit from fees andmaintain ties with some of the largest investors.
It also shows that the world's biggest banks were not givingup yet on passive commodity investment tools such as indexes,despite research pointing to substantial outflows of money fromsuch products this year.
A top-five financial player in commodities, Deutsche Banksaid on Thursday it will cease trading energy, agriculture, basemetals, coal and iron ore, while retaining precious metals and alimited number of financial derivatives traders. It citedmounting regulatory pressure.
But the bank will continue to deal in commodity indexes,said spokeswoman Renee Calabro in New York.
Industry experts said commodity indexes were shielded fromthe lower profit margins, higher capital requirements andgrowing political and regulatory scrutiny that were forcingbanks out of proprietary and physical trading of commodities.
"What we need to distinguish here is that commodity indexesare fee-generating services where banks make profit forinvestments done on behalf of clients, without having any riskon their books," said Adam Sarhan, president at New Yorkfinancial advisory firm Sarhan Capital.
"It's the turnpike where they collect a toll each time acommodity client passes by."
Data from Lipper, a Thomson Reuters company, showed thatDeutsche Bank had at least seven actively traded index productsin commodities, including exchange-traded funds and mutualfunds, with total assets of about $8.8 billion as ofend-October. Of these, the largest was the Power Shares DBCommodity Trading Index, which alone had about $6 billiontracking it.
Fees, aside, index clients were often the biggest pensions,endowments and family offices, target investors that bankswanted to nurture.
"These are institutional investors who are likely clients toa bank in many other aspects," said Eliot Geller, managingdirector at Core Commodity Management in Stamford, Connecticut.
"If you're an investment bank that is exiting certain areasof commodities, it makes sense to continue with your indexes asyou'll continue working with extremely large, prominent andsignificant investors. It's probably a net benefit to overallbusiness and the reason I think investment banks in general wantto stay in that area."
But commodity index strategies have also not fared too wellwith investors lately.
Citigroup estimates that an all-time high of $36 billion hasleft passive commodities strategies to date this year, comparedwith net inflows of $27.5 billion in 2012.
Some think the outflows have been overplayed and thatcommodity indexes are far from their sunset days.
"What we have now is a very tough regulatory environment incommodities. That can change, and when it does, you want to besomewhere in the commodities business to get back in," Sarhansaid.
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