Institutional investors plunging into commodity futures may not get the returns they're expecting.
About two-thirds of nearly $70 billion in passively managed commodity futures investments tracked the Goldman Sachs Commodity index as of Sept. 30, according to Goldman Sachs & Co., New York. David Burkart, senior portfolio manager and strategist at Barclays Global Investors, San Francisco, said institutional investors poured $35 billion into commodity futures in 2005, and he expects another $35 billion to flow into the asset class next year.
For the past 45 years, investors in commodity futures have been rewarded handsomely. The asset class has generated equity-like returns with slightly less than stock-market volatility, according to a widely read paper by Gary Gorton, a professor at the University of Pennsylvania's Wharton School, Philadelphia, and K. Geert Rouwenhorst, a professor at Yale University's School of Management, New Haven, Conn.
What's more, commodity futures returns tend to go up in value when stock and bond markets go down, making them important diversifiers, the academics found. That's especially true during periods of rising inflation, they wrote.
Major pension funds, including Dutch giants ABP and PGGM, Ontario Teachers' Pension Plan, Pennsylvania State Employees' Retirement System, Nestle USA Inc. and others, have made allocations to the asset class. The $200.2 billion California Public Employees' Retirement System, Sacramento, plans to consider making a pilot investment in commodity futures this spring.