Long-only commodities futures investments have caught the attention of some large tax-exempt institutions.
The interest comes during negative publicity surrounding the use of futures, and declining use of returns-based futures strategies. Still, some commodities indexes are posting strong returns, and commodity index futures volume is high.
The movement to commodities is most likely not a play on high returns, but a way to add return diversification.
Institutions investing in or interested in commodities include:
The $13 billion pension fund of the Teamsters, Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill. The fund received government and Department of Labor approval in December to hire London-based BZW Asset Risk Management Ltd., according to court documents. The amount BZW will invest in commodities for the Teamsters fund was not specified. Morgan Stanley Group Inc., New York, the fund's court-appointed named fiduciary, sought that permission. Putnam Investments, Boston, was hired earlier as a commodities manager.
The endowment fund of Stanford University, Menlo Park, Calif. Late last year, the endowment implemented a pilot program devoted to a passive, unleveraged investment in the Goldman Sachs Commodity Index. The pilot program represents about 1% of the endowment fund, which has $3.6 billion in assets, according to the 1996 Nelson's Directory of Plan Sponsors. Stanford officials declined comment.
While unconfirmed, industry sources say the endowment fund of the University of Notre Dame, Notre Dame, Ind., also established a commodities investment allocation last year. Notre Dame officials did not return phone calls. According to Nelson's, Notre Dame has $932 million in assets.
A $1.5 billion endowment managed by the University of Texas System, Austin. Brian Borowski, investment officer, said endowment executives have set an allocation of 10% to inflation-hedging assets, which is likely to result in commodities investments of some form, depending on implementation costs.
Mr. Borowski said a commodities allocation makes sense as a hedge against rising prices.
The endowment fund has to pay out a fixed amount of its assets whether asset values are climbing or falling, Mr. Borowski said. Commodities would act as a hedge against rising inflation, which is likely to result in falling stock and bond prices. (Likewise, Mr. Borowski said endowment officials invest in bonds mainly as a deflation hedge.)
Mr. Borowski noted that endowment officials have not yet figured out if commodities investments can be done in a cost effective manner.
John Minderides, director and chief investment officer of BZW Asset Risk Management, would only discuss its investment strategy in general, and declined to comment on the Teamsters.
Mr. Minderides said BZW actively manages commodities, but closely following the GSCI. BZW won't go net short any asset class, meaning its exposure will never be negative (which is a bet on falling prices). The firm's publicly traded trust, BZW Commodities Trust Ltd., has about $140 million in assets, and other derivatives assets under management total $650 million.
Institutional investment in commodities is not a recent innovation, but it is happening at a time when inflation concerns are not prominent - commodities are viewed as an inflation hedge - and the stock market is providing far better returns than commodities.
The better-performing indexes in 1995 were largely a result of gyrating oil markets at year end, not because commodites prices were generally rising.
The widely watched Goldman Sachs Commodities Index returned 20.3%, of which 10.2% came in December when oil prices ran up. Oil fell in January.
Meanwhile, the Daiwa Physical Commodity Index was up 16.4% for the year, up 4.9% in December; the J.P. Morgan Commodities Index was up 14.4% in 1195, 7.9% of which came in December. Futures on the KR-CRB Index, a price index, posted a return of just 2.78%.
Futures trading in 1995 on the GSCI at the Chicago Mercantile Exchange was up 69.6% from the year before, with 285,638 contracts trading, compared with 168,464 contracts trading in 1994. Overall futures volume was down last year.
Robert Greer, vice president for Daiwa Securities America Inc., New York, said returns from commodities have been competitive with stocks and bonds, particularly on a risk-adjusted basis.
Mr. Greer said in 1994 and 1995, a portfolio with an allocation of 50% stocks, 35% bonds, and 15% in the Daiwa index would have an average monthly return of 1.17%, and a standard deviation of 2.16%. A 60/40 split between stocks and bonds for the same period would have had an average monthly return of 1.2%, but with a standard deviation of 2.42%, he said.
But some pension consultants are not enthusiastic about the asset class, largely because of commodities' expected low returns. Michael Beasley, managing director, with Strategic Investment Solutions Inc., San Francisco, said he wonders if the diversification is worth the risk, time and effort needed to put a commodities program in place.
"Maybe we've got enough diversification from (existing) asset classes and (multiple) investment managers," Mr. Beasley said.
Gary Robertson, head of alternative investments for Callan Associates Inc., San Francisco, said research shows the returns from commodities to be about the same as inflation, making equities a better alternative.
Mr. Robertson said one newer argument says while commodities' returns may lag stocks, the added diversification alone is the goal. The commodities' return diversification, which reduces overall price volatility, allows an investor to become more aggressive with its equities allocation, while not increasing overall price risk.
One source of inspiration for institutions may be an established and respected investor in the commodities markets, Harvard Management Co., Boston, which runs the $7.2 billion endowment for Harvard University. Harvard had about $230 million into commodities more than a year ago (Pensions & Investments, Nov. 14, 1994). About $123 million was direct placement into commodities strategies, such as energy-related oil drilling and gold mining, and the balance was in long-only futures positions. Harvard officials repeatedly have declined comment.
Also at about that time, the pension fund of E.I. du Pont de Nemours & Co., Wilmington, Del., was taking a look at a GSCI approach, if not actively involved with it, according to a former fund official. DuPont officials didn't return phone calls, although a P&I survey form they completed shows they use managed futures.
Straight commodities investment generally is fully collateralized and seeks long-only price-related returns.
