Once a diversifier, commodities now correlate highly with equities
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Coller Capital collects $9 billion with latest secondaries fund
      Directional signs respresenting types of traditional and alternative investments
      Setter: Alternative secondary deals drop 27.7% in 2020
      Kennedy Lewis raises $2.1 billion for latest opportunistic credit fund
      Emma Davies
      Octopus Ventures chooses co-CEO
    • Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
      Amy Hsiang
      Meketa picks new public markets manager research director
      Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
    • Multiemployer pension plans could soon see relief
      Yellen calls for more COVID relief, retirement access
      A healthcare worker provides care for a COVID-19 patient in the intensive care unit at the Saint Joseph hospital in Marseille, France, on Nov. 20, 2020.
      World must act to strengthen against future pandemics – report
      New York State Common challenges Tyson’s dual-share stock structure
    • Kenneth J. Munro III
      Empower names new national sales director
      Fidelity cuts target-date asset threshold for lower fees
      DCIIA looks to spark engagement with plan sponsor institute
      Ascensus, Empower acquire Truist record-keeping business
    • Ontario Teachers commit to net zero emissions by 2050
      LaSalle Investment Management taps 2 for new ESG roles
      Sovereign credit ratings vulnerable to ESG risks — Moody’s
      JPMAM names head of investment stewardship, Asia ex-Japan
    • Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      Galina Churkina
      Building research earns honor from Aquila Capital
      MacArthur Foundation invests in women’s safe housing fund
      CAIA’s expansion to online exams yields big results
    • Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
    • Famed value investor and co-founder of Boston-based GMO Jeremy Grantham
      Grantham warns of Biden stimulus further inflating epic bubble
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
      Ontario Teachers commit to net zero emissions by 2050
    • Marques Benton
      Loomis Sayles chooses first chief diversity officer
      Standard Life Aberdeen CEO Stephen Bird
      Standard Life Aberdeen CEO: Some staff won’t get bonuses
      Nuveen sells holdings in sanctioned Chinese stocks
      Northern Trust to take $55 million charge for job cuts
    • The Great Seal of the State of New Mexico in the House of Representatives chamber within the New Mexico State Capitol in Santa Fe
      New Mexico PERA executive director taking new position
      ABP calls for clarity over funding ratio rules
      CalPERS CEO Marcie Frost
      CalPERS’ pick for new CIO expected soon
      Ohio Public Employees returns 11.35% in 2020
    • The Great Seal of the State of New Mexico in the House of Representatives chamber within the New Mexico State Capitol in Santa Fe
      New Mexico PERA executive director taking new position
      Marques Benton
      Loomis Sayles chooses first chief diversity officer
      Charles Wu
      State Super appoints chief investment officer
      Kenneth J. Munro III
      Empower names new national sales director
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Chiang Ling Ng
      Hines hires first head of Asia-Pacific real estate investments
      Brand new apartment building on sunny day in spring with blooming trees
      Real estate returns forecast to trend lower – report
      Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Houston Firefighters puts $180 million into 3 funds
      LACERA allocates up to $442 million with 6 managers
      BBC Pension Scheme re-signs HSBC as global custodian
      Stanislaus County Employees earmarks $20 million to buyout fund
    • Houston Firefighters puts $180 million into 3 funds
      LACERA allocates up to $442 million with 6 managers
      BBC Pension Scheme re-signs HSBC as global custodian
      Stanislaus County Employees earmarks $20 million to buyout fund
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
      Gold Outlook 2021
      Bond ETFs show maturity during Covid market mayhem
      2021 Outlook: A rousing recovery
    • Charles E.F. MIllard
      Commentary: It’s time to make 401(k) plans into real pension plans
      Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By Moody's Analytics
      The Industrialization of ESG Investment
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
August 06, 2012 01:00 AM

Once a diversifier, commodities now correlate highly with equities

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Changing: Ewen Cameron Watt said supply is now a key factor in commodities.

    Increased volatility, negative roll yields and a correlation spike with equities are forcing institutional investors to separate the wheat of commodities strategies from the chaff.

    “The commodities story is changing subtly from one where the tide is lifting all boats to one where the supply side of the equation is becoming really important,” said Ewen Cameron Watt, London-based managing director and chief investment strategist for BlackRock Investment Institute.

    Excluding gold and precious metals, which Mr. Cameron Watt described as a “substitute for currency,” certain commodities will outperform others in an environment where demand is likely to grow more slowly. Volatility in the underlying prices will also vary.

    Historically, there are two favored rationales to invest in commodities — diversification to equities and inflation protection, said Tapan Datta, principal in the global asset allocation division at Aon Hewitt based in London. “Both characteristics have become problematic,” he added.

    The S&P GSCI composite index of commodity sector returns only added 0.52% so far this year, compared to 11.99% for the S&P 500. During the same period, the weekly correlation between the S&P 500 and the S&P GSCI has been about 0.49, compared to an average of about 0.15 between January 1976 and December 2011.

    “Regarding the inflation aspect, that depends on your horizon,” Mr. Datta said. “In the shorter term, a lot of the swings in inflation do rise and fall with commodities; that's a no-brainer. But this close link runs into difficulties on a longer-term basis because it is also influenced by economic activity. After a while, commodities respond to demand and don't necessarily provide as close a hedge to inflation as (investors) might hope.”

    Institutional investors have been boosting commodities allocations in the past several years; among the largest U.S. defined benefit plans, assets in commodities grew 13% in the year ended Sept. 30, according to P&I data. And a survey of investment consultants by investment data analytics provider eVestmentAlliance and money manager consultant Casey, Quirk & Associates showed alternatives categories — including commodities — dominating the list of “most-sought” asset classes forecast for 2012.

    While institutions such as the $24.4 billion Texas Permanent School Fund, Austin, are still adding commodities, others have steered clear.

    The Illinois Teachers' Retirement System, Springfield, announced in May the termination of its commodities strategy. Schroder Investment Management Ltd. and Gresham Investment Management LLC managed a total of about $340 million in dedicated commodities portfolios for the $37 billion retirement system, while Wellington Management Co. LLP ran a global tactical asset allocation strategy with an estimated value of $360 million.

    The decision was made because of volatility within commodities, according to a statement from the fund at the time. Spokesman Dave Urbanek declined further comment.

    The $146.8 billion California State Teachers' Retirement System, West Sacramento, is putting its long-only active commodities strategy on hold.

    CalSTRS approved a $150 million allocation to commodities investments in 2010 but “the funds are not yet invested nor do we have a timeframe established for when to do so,” spokesman Ricardo Duran said in an e-mail. “The market environment is volatile, thus our strategy includes careful consideration of our entry points. By being active, investment managers will have the discretion to find entry and exit points for the positions that account for this volatility. ”

    A market environment where the (West Texas Intermediate) oil contract can fall 10% during a month and then rally 9% in a single day is one in which “commodities strategies — and investors — must be conservative or patient, preferably both,” said Jonathan Berland, managing director at Gresham Investment Management LLC, New York.

    Fragile outlook

    The medium-term price outlook for commodities is fragile, Mr. Datta said. “But even thinking strategically for the long term ... there remains substantial uncertainty over the level and volatility of returns,” Mr. Datta added. “That may be deterring some investors.”

    Most institutional commodities portfolios are dominated by long-only passive strategies using derivatives, which not only capture the underlying price of the assets but also roll yields and collateral returns, sources said.

    “The problem in the last five years is that commodity prices have been relatively OK, with some exceptions,” Mr. Datta said. However, roll yields that historically added as much as a few percentage points in returns have been persistently negative. As a result, commodities returns have been affected negatively, he said.

    Some institutions have attempted to mitigate the volatility and risk of long-only strategies by investing in active and/or hedge fund commodities strategies. For example, about 75% of the Sacramento-based $235 billion California Public Employees' Retirement System's $3.6 billion commodities portfolio tracks the S&P GSCI Total Return index and the remainder targets active commodities strategies.

    “Investors do recognize the potential difficulties of long-only strategies, but the snag is that when you get into long/short, it's hard to say whether investors are getting systematic exposure to commodities, and therefore, it becomes a question of the degree to which it belongs in the commodities bucket at all,” Mr. Datta said.

    Others have focused on niches. For example, forestry and timberland are commodities in which “biology is entirely on your side,” BlackRock's Mr. Cameron Watt said. Storage cost for timber is a benefit to investors. In comparison, the storage cost of corn or copper can hurt returns when supply exceeds demand.

    “Investors make money from the nexus between supply and demand,” Mr. Cameron Watt said.

    To help mitigate the effect of negative roll yields, S&P Dow Jones Indices LLC has introduced several new indexes looking “more closely at the relationship between contract expiration and the futures curve,” said Jodie Gunzberg, New York-based head of commodity indexes at S&P Dow Jones Indices. The most recent, launched in January 2011, is the S&P GSCI Dynamic Roll index. Using a combination of actual and back-testing data, the S&P GSCI Dynamic Roll index returned an annualized 14% in the five years ended June 30. In comparison, the S&P GSCI lost 24.5%, according to data provided by the firm.

    Another index — the S&P GSCI Enhanced index — returned -6.4% during the same five-year period. The S&P GSCI Enhanced dynamically and seasonally attempts to minimize the effects of negative roll yields for eight of the 24 underlying energy and agricultural commodities that's most difficult to store. “It's not only the roll (yield) itself, but also the impact from the roll (yield) in different sectors,” Ms. Gunzberg said. As of Dec. 31, about $80 billion in assets tracked the S&P GSCI family of indexes.

    Roll yields

    Mr. Berland at Gresham believes that investors “can't own commodities without roll yields; it's the cost of storing, feeding and insuring what you own. When you think about owning a piece of property —if you have to pay taxes or undertake maintenance on that property — you wouldn't call that cost roll yields, would you?”

    The argument that commodities do offer diversification benefits to equities and bonds still stands, said David Hemming, commodities portfolio manager at Hermes Fund Managers Ltd., which manages a total of about £29.3 billion ($46 billion). “Within an economic cycle, commodities and equities perform at different times. Equities are more forward-looking and do well on the expectation of growth, while commodities (do well) on the realization of growth.”

    Hermes, which is owned by the £35 billion BT Pension Scheme, London, manages about $2 billion in active commodities strategies.

    Data going back to the 1970s indicate “there were only four years in which the S&P 500 and the S&P GSCI were both negative,” Ms. Gunzberg said. Every time this has happened, there has been a demand crisis, and in each case, the magnitude and duration had a direct relationship to the magnitude of the crisis. We would expect that correlation will drop back to normal lows given the same fundamentals.”

    Slowing growth in China has also been a major impetus for the heightened volatility recently in certain parts of the commodities sector, largely due to demand generated by the world's second largest economy. However, Mr. Cameron Watt said, there are also opportunities for active management as a result.

    “We're looking at an economy that is still growing. It's not a question of it being in recession, the demand is still growing,” he added. “This is a country that's generating between 40% and 50% of the world demand for many commodities.”


    Data Editor Timothy Pollard contributed to this report.

    Related Articles
    Investors feasting on amber waves
    Commodities strategies turn active as client interest booms
    Drought devastation has sunny side for investors
    Graphic: Commodities, equities in sync
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    2021 Outlook: A rousing recovery
    Climate change and emerging markets after Covid-19
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center