CHICAGO — Pension funds and other investors should not make a strategic allocation to commodities because vast inflows into the asset class are distorting prices, according to a new study by Ennis Knupp & Associates Inc.
Investors that want to invest in commodities should do so on a tactical basis and avoid indexing in favor of active managers that employ a fundamental approach, the paper argues.
The cautionary advice comes amid an explosion in commodity investing in recent years. Institutional investors have poured money into commodities as a hedge against inflation and because the asset class has very low correlation to stocks and bonds.
Institutional investors have $160 billion invested in commodities estimates Keith Black, who wrote the paper with Satya Kumar. Both are associates at Chicago-based Ennis Knupp. That figure is up from $40 billion five years ago, Mr. Black said in an interview.
Daniel Raab, managing director at AIG Financial Products Corp., New York, estimates $155 billion is invested long-only in commodities, mostly passively tracking either the Dow Jones AIG Commodities index or the S&P GSCI. That total amount is up from $110 billion in at the end of 2006, Mr. Raab said, with about half of the growth from rising prices and half from inflows of new money. About $42 billion, largely passively invested, tracks the DJ AIG index, Mr. Raab said.
David R. Guarino, communications manager at S&P, estimates the S&P GSCI had $70 billion tracking it as of Dec. 31. That's up from $60 billion at the end of 2006, and he figures that by the end of this year, $90 billion will be tracking it. Most of that money probably is passively invested, he said.