January 27, 2014

Commodities: A Post-Mortem Shows Some Life

InsideETFs panelists consider inflation risk, market turmoil and currency hedging as reasons for embracing an unloved sector

There are more than 1,500 attendees at ETF.com’s InsideETFs conference, most of them advisors, so it’s a pretty crowded place.

But Credit Suisse commodities director Oscar Bleetstein pointed out the elephant in the room — or rather absent from the room hosting a session on commodities — by noting all the empty seats. (In contrast, the preceding session on emerging markets was standing room only.)

Commodities, nearly all of them, had a disastrous year in 2013.

The panel moderator, ETF.com’s Drew Voros, opened the session with a graph showing the performance of stocks (represented by SPY) and gold (represented by GLD). The two steep diagonals, one climbing up, the other plummeting downward, looked “like Jaws,” Voros said.

But for those focused on performance, Bleetstein offered an arresting detail: If you look at year-to-date performance of stocks and commodities (gold particularly) for 2014, you still see diagonals, but they look very different this time. Annualizing that performance would imply a 37% loss for stocks and 15% gain for commodities.

The message that Bleetstein and other panelists took is that commodities play a role in a portfolio and should not be shunned because of a bad year.

“Commodities did what they were supposed to. They reduced the volatility of a portfolio but at a significant cost in 2013,” is how David Cleary, a portfolio manager at Lazard Asset Management, put it. “But the intention is higher risk-adjusted return.”

Or as Bleetstein said, looking forward: “We may have an inflation shock. Surprises are by definition things that are unanticipated.”

And as Deutsche Bank’s Martin Kremenstein echoed: “We’ve had basically no inflation for some time; commodities are a hedge against unexpected inflation.”

The panel discussed a number of commodities-related topics, one of which was the need to be careful with the term “commodities.”

Said David Krein, head of research for Nasdaq Global Indexes:

“There are more than 30 different commodities markets…each with its own set of economics unique to that market. Ags [agriculture] are not same as energy, and within energy there are different considerations. For every 10 [commodities experts] you get for a given market, you’ll have 10 very distinct opinions,” he said.

Indeed, some of those differences were evident on the panel.

Lazard’s Cleary didn’t share Bleetstein’s and Kremenstein’s worries about inflation, saying “allocations to commodities today is zero in our portfolios,” seeing little cause for worry about inflation today.

However, Cleary did express interest in gold, seeing it as a “pure hedge to fiat currencies” such as the dollar and yen in which his investments are denominated; he therefore values the yellow metal as a hedge against central bank money printing and the expectation that the new Fed chief, Janet Yellen, will be accommodationist in monetary policy.

Kremenstein’s approach to gold and narrow selectivity was quite opposite:

“People buy gold and say ‘That’s my commodities exposure;’ but it has less in common with other commodities than you’d expect. Use a broad product,” the Americas head of Deutsche Asset and Wealth Management said.

The panelists offered some words of caution to commodity investors, more than one noting that they should not confuse spot market prices with those reflected in indexes.

While the prices accessible to index investors may be less favorable than spot market prices, what products like ETFs do is capture commodities portfolio characteristics in an accessible format.

“Commodities futures markets are kind of rough places,” Bleetstein of Credit Suisse said. “Wrapping them into ETFs really is much more user friendly than commodities exchanges. The London metals exchange is really difficult to figure out. You get all the good things you’re looking for without the headache.”

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Check out Gundlach Looks to ‘Giddily Despised’ Investments in 2014 on ThinkAdvisor.

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