* Julius Baer funds to rely on under-used warehouses
* Funds will work with warehouses owned by Trafigura
* Aim to avoid controversy affecting physical metal ETFs
By Eric Onstad
LONDON, Sept 11 (Reuters) - A new series of industrial metals funds backed by physical metals aims to slash costs by storing the material in under-used warehouses owned by commodity trader Trafigura.
Swiss & Global Asset Management hopes the innovative structure enables the funds to avoid controversy that has swirled around other planned physically-backed funds over the potential impact on key raw materials supplies.
The Julius Baer (JB) Industrial Metals Funds in aluminium, copper, nickel and zinc are due to be launched on Oct. 1.
Swiss & Global, a manager for private bank Julius Baer BAER.VX, is part of GAM Holding (GAMH.S), Switzerland's largest listed asset manager with assets of $126 billion.
"What we've seen so far is no one has been able to really slice up the value chain in terms of costs and engineering (in base metals funds)," Stephan Mueller, head of product management and development at Swiss & Global, told Reuters.
While precious metals funds backed by bullion have been a roaring success, base metals funds with physical metal have failed to gain much traction due to high costs, analysts and investors have said.
In the UK, the ETF Securities Physical Gold fund (PHAU.L) has $5.1 billion in assets while its Physical Copper fund PHCU.L has $22.2 million and Physical Aluminium fund has PHALA.L $5.8 million.
The new JB aluminium fund plans to offer warehousing costs of only 1.3 percent of the value of the metal, a fraction of the expenses for competing funds, Mueller said in an interview.
For example, the ETF Securities Physical Aluminium Fund charges the usual warehouse rental fee for London Metal Exchange
(LME) approved warehouses of 48 cents per day per tonne, which works out at 9 percent a year at the current LME benchmark aluminium price CMAL3.
Both funds charge a separate annual management fee of about 0.7 percent.
Mueller said that by avoiding busy LME warehouses, the new funds are able to negotiate lower rental levels with Trafigura's warehousing unit and are prepared to swap positions to other warehouses if the original depots become more active.
Trafigura owns warehousing group North European Marine Services (NEMS).
"I'm more than willing to sell the metal back to Trafigura if they come along and say they have a buyer in that spot. Then I agree to take a position in another spot that's not in use," he said.
"In a nutshell, I do market trade finance. I help refinance stock which is not much in demand and I'm more than happy to change it to an equivalent position at the other end of the globe," he said.
The JB funds will also be good value in comparison with futures-based funds which can erode value when required to roll over to more expensive forward contracts, the so-called "negative roll yield", he said.
The new funds hope to avoid criticism levelled at physical exchange traded funds (ETFs), such as copper funds planned by the world's largest money manager, BlackRock (BLK.N), and Wall Street bank JPMorgan Chase & Co (JPM.N). [ID:nL4N0BP10E]
Critics have said those funds will inflate prices and squeeze supplies by removing a big chunk of metal from the market.
The new JB funds expect to gain support due to their focus on under-used warehouses, Mueller said.
"I think it will be well received by the industry because I will not be clashing with an already constrained price. I won't jump in like all the other people who are arbitraging a market that is already constrained."
The metals warehousing business has also stoked controversy as warehouse firms have made money by building up stocks and allowing queues to grow for clients seeking to withdraw material, all the time charging rent for storage.
Complaints by consumers about queues at warehouses and high premiums have led to a string of U.S. lawsuits and an LME proposal to overhaul its delivery system from next April. [ID:nL5N0F724I] [ID:nL2N0GD1PK]
(Editing by Stephen Nisbet)
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