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Published: Monday 07 October, 2013

store online store online ?Should the average investor hold commodities as part of a broadly diversified portfolio



Many mutual funds sell asset allocation products which include appropriately sized investments in a variety of asset classes meant for a prototypical investor. Some of these, such as PIMCO, even include direct commodity investments in the portfolio. Pension funds often base their investments on a model portfolio, store online which increasingly includes alternatives such as commodities. Wealth advisors and investment advisors are increasingly steering their clients towards including some small allocation to commodities, often touting the diversification benefits.



Question: Should the average investor be holding some commodities? Are these allocations in the interests of the client? Are there real diversification benefits to be had?



Although there seems to be more research on the yes side, I would caution against concluding that this is the consensus. I have not yet found more solid no research pieces, but the one I did find seemed more convincing than all the others comb store online ined, most of which are actually trying to sell a product. FYI, I have done some of my own research on this topic as well, and based on that information my employer has decided not to include commodities in our strategic asset allocation product or even in our inflation product, for which commodities are arguably see PIMCO more appropriate.



The controversy surrounding commodity futures flows from Gorton and Rouwenthorst 2004. stocks beginning in the 1950s through 2004 or so.



In essence, why should holding a basket of futures contracts earn a risk premia of similar magnitude to holding claims on risky streams of future consumption?



Keynes floated the idea of normal backwardation, a situation where the futures price trades at a discount to the expected spot price an insurance premium provided by producers attempting to hedge future sales. This is, however, an unobservable phenomena regardless of whether commodity futures prices are in actual market backwardation or contango downard or upward sloping price term structures.



So the search goes on to explain why a simple basket of commodity futures performs the way it does. Evidence points to the equalweight portfolio having favorable exposure to roll yields during the 20th century. Similarly, time series momentum also seems to work in commodity futures, moreso with winners than losers. Hence, holding a longonly portfolio of commodity futures gives exposure to the timeseries momentum effect of winners.


It may be beneficial to hold commodities, however a longonly strategy may indeed be an inefficient vehicle for accessing premia associated with roll yields and time series momentum. store online

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