EUROPE - Pension funds are likely to up their allocation to commodities this year as they look to diversify their portfolios and generate strong returns, says Diapason Commodities Management in Switzerland.
Stephan Wrobel, partner at Diapason, said commodities were a forgotten and underinvested asset class as they were sidelined after going through a secular bear market from 1980 to 1999.
But many pension funds, particularly in the UK, have begun showing recent interest in commodities on the back of poor returns from equities, Wrobel said.
“Stocks are expensive and will not provide the expected/needed returns as price/earnings will contract,” he said. “There are asset liability gaps and returns have to be found somewhere else. Returns as an investor come from buying a cheap asset class which has positive secular catalysts. That tends to generate long-term returns.”
At present, pension funds only allocate 2% to 4% to commodities on average but most don’t have exposure to the asset class.
“Pension funds with exposure to commodities are more the exception than the rule,” Wrobel said. But we are “highly likely” to see more funds allocating to commodities in 2005, as the level is still so low, he added.
Wrobel said the benefits in commodity investment for pension funds included portfolio diversification, inflation protection, return alternation and portfolio impact.
Commodity returns are negatively correlated to those of stocks and bonds, providing diversification. In addition, commodity exposure inclusion in a portfolio tends to improve the portfolio’s Sharpe ratio, Wrobel said.
“We are at the beginning of the trend [of increased allocation] as investors are rediscovering how they can use this asset class again to diversify their portfolio, find returns and protect against inflation,” he said.
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