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July 25, 2015 at 08:55 AM
Investing in a poorly performing asset class can be a tough sell with clients, especially those who have a tendency to chase winners. Broad-based commodity funds with a long bias—those that invest (but don’t short sell) in multiple, unrelated commodities—certainly have fallen into that category recently.
Consider the recent annual percentage returns of the Broad Commodity funds as categorized and tracked by Morningstar. (“Flat” funds can move to cash as a defensive maneuver.)
Those results aren’t surprising in light of the underlying performance of commodities lately.
| Fund Category/ Year |
Year-to-date (%) |
2014 (%) |
2013 (%) |
2012 (%) |
2011 (%) |
2010 (%) |
| Global Long/Flat |
-0.6 |
-5.9 |
-2.9 |
-5.5 |
0.6 |
12.6 |
| Long/Short |
0.9 |
-5.4 |
5.2 |
-11.4 |
1.6 |
11.4 |
| Long-Only |
-3.5 |
-24.4 |
-3.8 |
3.7 |
-5.3 |
23.6 |
| Long/Flat |
-0.1 |
-5.9 |
-2.1 |
-4.6 |
-1.6 |
17.4 |
| Short/Flat |
1.0 |
0.4 |
7.5 |
-7.5 |
3.4 |
-5.3 |
| Short-Only |
0.4 |
28.8 |
3.2 |
-9.4 |
2.4 |
-19.2 |
(Source: Morningstar Index Data. 2015 returns through 7/13/2015.)
In 2014, all 12 of the major categories were lower, ranging from gold (-1.5%) to gasoline (-47.2%). In contrast, in 2010 11 of the 12 commodities moved higher, led by cotton’s 91.6% increase.
Otherwise, though, since 2010 it’s been a tough slog for the broad-based funds with long positions. But does the recent underperformance mean advisors and investors should avoid this asset class?
Relying on Correlation?
The low correlations between commodities and stocks and bonds are a cornerstone of the diversification argument for including commodities in the portfolio.
Ed Egilinsky, managing director, head of alternatives with Direxion Investments in New York, managers of the long/flat Direxion Indexed Commodity Strategy Fund, believes it’s still a valid reason. Over longer periods, he notes, commodities do not have a significant correlation with equities and consequently can add diversification within a portfolio.
Despite the asset class’s poor recent performance, he says, advisors and investors need to consider past market cycles, as well as the current low interest rate, bullish stock market scenario.
“There’s going to be different market cycles and periods of time where asset classes perform better than others and commodities has had a number of headwinds to it over the last couple of years,” the portfolio expert explained.
Historic correlations can change, however, particularly during aggressive bear markets. Chicago-based Morningstar analyst Kevin McDevitt points to some funds’ performance in 2008 as an example. The long-only category funds dropped an average of about 34%, and several funds lost 40% or more of their value.
