The case for commodities as an asset-class: strategic and tactical issues
, Benno Meier
, presented the well knownarguments for an investment in commodities which are: Risk-return profile enhancement, Correlation and portfolioefficiency benefits, strong returns in rising inflation regimes (especially in the US when Heating Oil entered the US CPImethodology in 1983. However the trend to more service oriented economies has reduced the commodity-CPI impact),transparent compared to other alternative investments, such as Private Equity or Hedge Funds.
Components and drivers of return for commodity investments
, Robert Greer’s, Real Return Product Manager, Pimco, presentation explained the fundamental economic drivers of those returns, in the context of a commodity index, including:What is the basis of returns you could expect from commodity indices?Components of Return: Causes of Return:T-Bill Rate
Expected Inflation (plus real rate of return)Risk Premium
Price Uncertainty (producers vs. processors)Rebalancing
Uncorrelated Volatility (mean reversion)Convenience Yield
Low Inventory Relative to DemandExpectational Variance
Unexpected General Inflation; Plus… Individual market “surprises”Economic factors that are favorable for commodities:
Mitigated by excess global supply of labor and manufacturing capacity
Commodity infrastructure has suffered from low investment
Commodity demand continues to grow (Increase in per capita demand in emerging economies)Leading to:
Producers need expectation of stable prices to spur investment
Processors will require “convenience” of secure supplies when inventories low
Bottlenecks may mean that “surprises” are more likely to be to the upside
Real insights on real assets: a practitioner's perspective on commodities
, Adam C. De Chiara
, presentation emphasizedon the role of Alpha
and Beta within the asset class. How you own commodities can be more important than whatcommodities you own. Index construction (Rollover schedule) becomes crucial. Adam recommended a dynamic vs. a staticRollover schedule to generate outperformance.
Benno, Investment Strategist, Barclays Global Investors, is the Head of Commodity Strategy within Europe's Global Index and Markets Group. Thisincludes assisting with efficient distribution of commodity products, product development, monitoring demand and competitor developments, andresearching optimal portfolio holdings and investment strategy. Before focusing exclusively on commodities, Benno was a member of the InvestmentSolutions group, which utilised BGI's range of capabilities to design investment solutions for strategic clients. He has also served as the assistant to the Co-CEO and Head of the Global Index and Markets Group, fulfilling the role as project manager on designated initiatives within the group.
Presentation is not available as a PDF-document.
Mr. De Chiara is the Co-President of Jefferies Financial Products, LLC ("JFP"), a wholly owned subsidiary of Jefferies Group, Inc. Founded in 2003 by ateam of experienced commodities professionals, JFP is a company uniquely dedicated to providing institutional investors with exposure to commodities asan asset class. JFP provides exposure to all major commodity indices and also provides customized solutions for obtaining exposure to real assets. Prior to joining Jefferies, Mr. De Chiara founded and ran the commodity index department of AIG Trading Group. Over his 9-year career at AIG, Mr. De Chiarawas responsible for a number of business initiatives including the design, launch, marketing and trading of the Dow Jones – AIG Commodity Index. Prior to joining AIG, Mr. De Chiara traded commodities for the J.Aron division of Goldman Sachs, where his duties included trading futures, swaps, notes andother derivatives linked to the Goldman Sachs Commodity Index.
Alpha is a measure of the return generated by a investor relative to the market. Alpha is a coefficient measuring the risk-adjusted performance,considering the risk due to the specific underlying, rather than the overall market. A large alpha indicates that the underlying has performed better thanwould be predicted given its beta.