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4 Benefits Commodities Bring to a Portfolio: DoubleLine

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What role can commodities play within a client’s overall portfolio?

Jeffrey Sherman, portfolio manager of DoubleLine’s new Strategic Commodity Fund, explained the rationale for investing in commodities during a conference call hosted by the firm on Tuesday afternoon.

Since its inception, the DoubleLine Strategic Commodity Fund, which was launched on May 18, has outperformed the Bloomberg Commodity Index by close to 200 basis points as of Aug. 31.

“We’ve been running various permutations of commodity strategies here at DoubleLine inside our macro-centric funds for about three and a half years,” Sherman said, adding, “There’s nothing specific to the timing of the launch of the [Strategic Commodity Fund], although we do think it’s more attractive to be thinking about an asset allocation to commodities. But, what we’re really trying to do is really find what the right opportunity set is and deliver something that we think has an evergreen approach.”

The objective of the DoubleLine Strategic Commodity Fund (DBCMXDLCMX) is to seek long-term total return through long exposures to one or more indexes of commodities and through long and short positions on individual commodities.

It does this through exposures primarily through derivatives contracts, securities or other instruments that provide a return tied to a commodities index, a basket of commodities, individual commodities or a combination thereof.

From a long-only perspective, Sherman explained why any investor would think about having assets allocated to commodities. He outlined four specific benefits of exposure to a long-only commodity investment.

First is the diversification benefit. He says there is a potentially low-to-uncorrelated return source relative to traditional asset classes.

“I think anyone who’s been in this space the last couple years sees that commodities have performed in a lot of different directions over the short, medium-term period,” he said. “Commodities have exhibited not a perfect correlation to any sector of the market – you have low correlations to some sectors of the market and then negative correlations from others. From a diversification standpoint, this could help lower and dampen overall portfolio volatility when thought of as a multi-sector portfolio.”

Another benefit that commodities can provide is the potential to hedge against unexpected inflation, Sherman said.

 “Especially with the Federal Reserve and really talking about inflation being on the precipice,” he said. “Commodities can provide – and you’ve seen this over time – as a potential rise or hedge against unexpected inflation.”

Looking at unexpected inflation from Dec. 31, 1997 through Dec. 31, 2014, compared with excess returns of a broad-based commodity index (CMCI) over the same time period, DoubleLine finds that commodity performance over the long term has tended to rise and fall with unexpected inflation.

Commodities can also provide incremental returns from each individual commodity’s market structure, Sherman said.

“For those that are familiar with investments in the commodities markets, there’s also a potential incremental return stream from trading different aspects of the market structure within commodities,” he explained. “That is, they have different term structures, they look kind of like fixed income instruments and sometimes there’s an ability to add volume to that over time.”

The final benefit Sherman outlined is how commodity supply and demand is generally correlated to the cyclicality of the global economy.

“A lot of the rationale for thinking about investing in the commodity market is really the cyclicality of the global economy,” Sherman said. “If you think about supply and demand, the response mechanism to that it tends to be pretty positively correlated to the cyclicality of the global economy.”

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