A few institutional investors continue to commit sizable assets to commodities, bolstered in part by the lofty returns reaped by commodities investors in 1996.
Much of the interest is in the form of passive allocations. Like stock and bond index allocations, these passive commodity strategies seek to replicate the returns of a long-only commodities index.
Among the investors making commitments to commodities are the Michigan Bureau of Investments, Lansing, which can invest up to 2% of its $34.5 billion in state retirement assets in commodities, and the University of Michigan, which already committed 3% of its $2.2 billion to commodities.
Executives for two other investors, GTE Investment Management Corp., Stamford, Conn., which manages the $13.6 billion GTE Corp. defined benefit plan, and the University of Massachusetts' $55 million endowment fund, Boston, said they will at least consider commodities in coming months.
Barry Stevens, executive director of the Michigan Bureau of Investments, said staff members will research an allocation tied to the Goldman Sachs Commodities Index in coming months, after getting the go-ahead from board members to invest in commodities.
An allocation to commodities is attractive based on research that indicated either no correlation or negative correlation to stocks and bonds, Mr. Stevens said.
Michigan is working with executives from Goldman Sachs & Co., New York, on creating the allocation, although money may not be invested until July.
The University of Michigan tapped an incumbent investment manager, First Quadrant Corp., Pasadena, Calif., to manage its $66 million allocation to commodities, said Norman Herbert, treasurer.
First Quadrant will manage the allocation in a passive allocation to the GSCI, according to Mr. Herbert.
"Indexing is becoming more and more popular," said Greg Oberholtzer, vice president and director of commodity portfolio management for Jefferies & Co., New York, which has its own index, the Investable Commodity Index. The ICI was up 19.8% in 1996, while another index, the Daiwa Physical Commodity Index, was up about 40%. The GSCI returned 33.9%. (All returns include interest earned on cash not used for margin).
The variance of returns comes from differences in the index philosophies. The GSCI is production weighted, the Daiwa index is weighted through optimization techniques and the ICI is equal weighted.
Trading volume in the GSCI futures contract grew 58% in 1996, with current open interest representing about $1 billion in assets.
But industry experts say pension plan sponsors are not rushing to the asset class, even with last year's equity-beating returns.
Pension consultant RogersCasey, Darien, Conn., has seen "very little, if any" interest in commodities from pension plan sponsors. Most interest comes from endowments and foundations, said Greg Peeke, associate director.
Mr. Peeke said a long-term commodities investment seems to make the most sense based on the diversification argument - he hasn't heard a good explanation as to why there should be real returns in the asset class.
Unlike stocks and bonds, which have an expected return beyond the rate of inflation, it hasn't been shown why commodities should produce an investment return beyond the inflation rate, Mr. Peeke said.
Likewise, Gary Robertson, head of alternative investments for Callan Associates Inc., San Francisco, said: "We haven't seen anyone that's real interested in an inflation hedge."
People are looking at the GSCI in some instances as a way to gain access to energy prices, which rose quickly late last year and make up a big chunk of the GSCI, he said.
And on a broader scale, even in the endowment and foundation area, the interest in commodities has been overshadowed by other alternative investments such as timberland, private equity, venture capital and buy-out funds, said William McCarron, principal for Prime Buchholz & Associates Inc., Portsmouth, N.H., a firm that consults to endowments and foundations.
Investors who got into commodities last year, though, aren't complaining.
"It was an incredible year," said Dan Kingston, managing director for the $3.5 billion Stanford University endowment fund, Menlo Park, Calif. The endowment put about 1% of assets into a passive GSCI portfolio on a trial basis in late 1995.
In addition to the strong returns from the GSCI in 1996, Stanford benefited from some negative correlation to the bond market, he said.
There are no current plans to expand the portfolio, according to Mr. Kingston.
Other early investors in commodities include: Harvard Investment Management Co., Boston, which manages Harvard University's endowment; the University of Notre Dame, Notre Dame, Ind.; and the Teamsters, Central States Southeast and Southwest Areas pension fund, Rosemont, Ill. (Pensions & Investments, Jan. 22).
One difference between commodities indexing and stock and bond indexing is that a buy-and-hold strategy isn't possible because by definition futures contracts expire at regular intervals.
As a result, transactions costs of 100 to 150 basis points will be incurred directly or indirectly in commodities allocations, absent some type of futures roll management, according to Jeffrey Geller, executive director and portfolio manager for BEA Associates, New York.