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Portfolio > Alternative Investments > Commodities

Commodity Funds Outperform for First Time in Years

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For the first time in years, commodities are doing something they haven’t done in a while: They’re outperforming major asset classes like stocks, bonds and real estate.

After several years of consecutive annual losses for major commodity benchmarks, a turnaround in the beleaguered group appears to be in the works. 

Since the start of the year, the Thomson Reuters/CoreCommodity CRB Index (CRY) has climbed 9.5% in value compared to a gain of just 3.6% for the total U.S. stock market (VTI), 4.4% for the total U.S. bond market (BND) and 7% for global real estate equities (REET).

Global commodity prices have been lifted by a rebound in precious metals and energy.

Broad basket commodity mutual funds as a group are ahead by 13.9% year-to-date (YTD), according to Morningstar. The BlackRock Commodity Strategies Inv A (BCSAX), AQR Risk-Balanced Commodities Strategy I (ARCIX) and Credit Suisse Commodity Access Strat A (CRCAX) funds are among the performance leaders in the commodities category so far this year. All three funds have gained between 16% and 19.2% since the beginning of the year.

BCSAX uses a dual approach of simultaneously investing in commodity-linked derivatives while maintaining equity exposure to commodity-related companies in the mining, energy and agricultural sectors. The fund has around $128 million in assets and charges a 5.25% sales load along with annual expenses of 1.5%.

(Related on ThinkAdvisor: Fund Managers Cut Cash, Buy Commodities and Emerging Markets)

In contrast to BlackRock’s approach, ARCIX and CRCAX only invest in commodity-linked derivatives that are actively managed. Also, both funds hold fixed income securities and cash instruments. ARCIX has $158.2 million in assets while CRCAX has just under $34 million.

What’s the best way to judge the performance of commodity funds? Most funds use benchmarks like the Bloomberg Commodities Index or Thomson Reuters/CoreCommodity CRB Index to measure returns.

The Bloomberg index tracks 20 different commodities, which are subsequently weighted by liquidity and economic significance. At the end of May, the top commodity sectors represented within the Bloomberg index were energy (34.30%), agriculture (34.4%), industrial metals (15.3%) and precious metals (15%).

The Thomson Reuters/CoreCommodity CRB Index is a collection of 19 different commodities, with 39% allocated to energy, 41% to agriculture, 7% to precious metals and 13% to industrial metals. The core index has existed since 1957 and is equal weighted.

Aside from benchmarking performance against indexes, some advisors will employ peer group analysis as an additional filter. This technique involves comparing the performance of a commodity fund against its peer group.

Other advisors forgo actively managed commodity funds altogether by simply using index based commodity funds or ETFs like the WisdomTree Commodity Index Fund (GCC), up 11.3% year-to-date. The investing cost for index-based commodity ETFs are generally lower and unlike traditional mutual funds, they offer intraday liquidity.

The traditional knock against investing in commodities is they are raw materials with too much volatility and little long-term upside. In contrast, securities like stocks have tangible earnings and pay dividends. Regardless of these arguments, some advisors still see value in commodities from both a diversification and risk management viewpoint.  

“I think commodities are a great inflation hedge,” said Ron Surz, oartner at Paladin FinTech. “Monetary stimulation will eventually lead to higher prices ahead.”

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