Institutional investors are wondering whether investing in commodities is worth the trouble, as the asset class has suffered an annualized return of -6.46% in the 10 years through June 30.
Indeed, the Bloomberg Commodity index has been negative each month for the past 12 months. The Bloomberg Commodity Total Return index, which includes the return of the collateral, showed a return of -5.48% over the same 10-year period.
Asset owners traditionally have invested in commodities as an inflation hedge and for diversification. While some are maintaining their allocations to protect against unanticipated inflation, the asset class' volatility and poor returns have other investors moving out.
Last year in particular, was a tough year for commodities managers, according to Pensions & Investments' asset owner data. The number of large defined benefit plans with commodity portfolios among the largest 200 retirement plan sponsors dropped to 55 from 60 in 2014 with total assets held by these investors down 19% to $22.5 billion.
Some investors have thrown in the towel.
Earlier this month, the $266 million Spokane (Wash.) Employees' Retirement System jettisoned its 4% commodity allocation when it adopted a new asset allocation.
“From our perspective, the risk-return trade off of commodities wasn't great,” said Jayson Davidson, partner and managing director at Portland, Ore.-based consulting firm Hyas Group, the Spokane fund's general investment consultant.
“The added volatility of commodities is not being offset by an added return benefit,” Mr. Davidson said.
Spokane is not alone.
The Orange County Employees Retirement System, Santa Ana, Calif. began phasing out of commodities in 2014. Last year, the board continued redeeming the commodities portfolio while retaining “toe-hold positions” through its multistrategy real-return managers, Girard Miller, chief investment officer of the $12.6 billion pension plan said at the time.
“If we begin to smell inflation in the future, we will be able to proactively reinstitute exposure quickly without starting another round of manager searches,” Mr. Miller wrote in an April 2015 e-mail to P&I.
Mr. Miller declined to comment on pension officials' current views on commodities as they await guidance on the pension fund's overall allocation from its new general investment consultant, Meketa Investment Group Inc.
“We retain a real-return position comparable to many public funds, and made significant energy investments as that market bottomed,” Mr. Miller said.