UK - Pension funds making a foray into commodities in search of uncorrelated returns might have missed the boat, industry experts have warned.
Mounting investment in the asset class may have led to a point where the correlation risk, which commodities are meant to address, has become even more acute.
Michael Shaoul, chief executive officer at New York Stock Exchange broker dealer Oscar Gruss and Son Incorporated, said: “People have gone into [commodities] to reduce correlation risk and in fact all they are doing is magnifying it.
“Everyone has suddenly discovered commodities and they think this is a non-correlated asset class. It certainly was during the 20 years in which there were very few financial flows into it, but today, when there are massive financial flows, we expect them to be extraordinarily correlated.”
Credit Suisse recently advised institutional investors that arguments the asset class may have had its time in the sun were secondary. The ability of commodities to diversify a portfolio more effectively than other conventional and alternative asset classes over the intermediate and long term was still a key characteristic in its favour, the firm argued.
But Shaoul warned any investment to commodities should be made with caution, pointing to its volatile characteristics.
“There is nothing special about commodities, it just happens to be the market du jour,” he said. “We don’t think blindly allocating additional funds to commodities really makes sense at the end of 2005 or the beginning of 2006, although it certainly did in 2002.”
As an alternative solution, Michael Aronstein, chief market strategist at Oscar Gruss, advised funds to look for sectors with return characteristics independent of the financial flows they themselves were a part of.
An example would be private businesses not structured in a way to attract private equity money, and with no necessary exit strategy, he said.“Fifteen to 20 years ago, that was the appeal of commodity investments – the fact that it wasn’t being done and investors who could afford to take a very long-term view were receiving an enormous premium for sacrificing liquidity,” he said.
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