According to David Zuckerman, CFP, CIMA with Zuckerman Capital Management LLC in Los Angeles, one great reason to add exposure to commodities is that commodities are one of the only asset classes that have demonstrated a negative correlation with broad equity markets.
In other words, commodities provide investors significant diversification benefits to the overall portfolio.
The debate over the likelihood of significantly higher inflation in the U.S. rages on.
Even if you’re not convinced that inflation will spike soon, there’s still an argument in favor of commodity funds as a long-term hedge.
Precious metals and commodities have outperformed U.S. equities over the last decade, notes John McAvoy, CFP with Waterstone Retirement Services in Canton, Mass., who believes this pattern is likely to continue until our debt crisis is dealt with. Until that time, it is possible that we will see gold go over $2,300 an ounce.
Why? In 1980, gold hit a high of about $880 an ounce, which on an inflation-adjusted basis is equal to about $2,300 an ounce.
Zuckerman points out that historically commodities have been one of the best places to be invested during periods of high inflation.
He believes and it is important for investors to obtain exposure to asset classes that can weather if inflationary pressures resume.
The global economic recovery is another reason that investors should pay attention to commodities, Zuckerman argues.
He believes that globalization means that industrial output is growing, and increased industrial output means increased use of basic materials and energy as inputs. As a result, he concludes, demand for commodities should remain robust.
McAvoy points to increased demand for commodities by emerging market countries, especially China and India, as factors likely to push demand higher.
How are these advisors positioning clients in commodities?
Zuckerman uses PIMCO’s Commodity Real Return Strategy Fund (PCRDX) and typically allocates between 5 percent to 10 percent of total portfolio assets to the fund.
He likes the fact that the fund provides exposure to industrial and agricultural commodities and instead of using cash as collateral for futures contracts, it uses TIPS as collateral.
This effectively gives his clients exposure to the only two asset classes that have exhibited a negative correlation with the equity market in one fund, he notes.
McAvoy uses Franklin Gold and Precious Metals Fund (FKRCX) for exposure to precious and the miners. He also places clients in the U.S. Global Investors Global Resources Fund (PSPFX), an energy and materials fund.