With commodity prices on the rebound over the past 15
months, is it time for investors to join the trend?
There may never be a good time, some money managers and
analysts say, as commodities arent a viable long-term
investment. Rather, theyre a vehicle for speculation with
a grim track record: On an inflation-adjusted basis, The
Economist commodity-price indexwhich tracks agricultural
commodities, metals, industrials, and energyhas returned
about zero since 1871.
Commodities arent an asset class, says
Atul Lele, chief investment officer at money manager Deltec
International Group. I dont think they should be a
permanent part of the portfolio.
While Lele says it may make sense at times to own
commodities for short periods to bet on price appreciation, he
views them as an input into global growth that
affects asset prices and corporate earnings. They dont
produce any cash flow of their own, he notes, making them
difficult for investors to assess.
Technology has been a large contributor to the long-term
weakness in commodities returns, as innovations drive
down the cost of production. Prices drop as it becomes easier
to mine for a commodity, eroding investors gains.
Commodities are extremely volatile because supply cant
easily adjust to changes in demand, which increases as
economies expand. By the time a mine is built, demand for a
particular commodity may already be falling, leading to excess
supply that pressures prices.
You dont build a mine overnight, says
Charles Lieberman, chief investment officer for Advisors
Capital Management in Ridgewood, New Jersey. Investment
lags behind the cycle of demand, so you end up with booms and
There are other challenges. Investing in physical
commodities generates storage and insurance costs, plus
theres the risk that agricultural commodities may
deteriorate in storage. While many investors opt for commodity
futures, rolling over expiring contracts can be tricky. For
example, as commodity prices soared in the mid-2000s, futures
prices jumped too, making the rollover more expensive. The past
decade hasnt been easy for investors.
From December 2004 to June 2015, the S&P
GSCI commodity index, one of the most widely used indexes
of global commodity futures prices, registered an annualized
price return of 3.39 percent, compared to a 9.3 percent
annualized loss on rolling over futures contracts during that
period, according to a
paper entitled Conquering Misperceptions About
Commodity Futures Investing, which cited Bloomberg as the
source of its data.
To be sure, commodities do sometimes produce super cycles,
or multiple years of gains. The last one ran from 2005 to 2015,
Lieberman says, when Chinas thirst for commodities to
build out its infrastructure fueled much of the price
appreciation. But then concerns about slowing economic growth
in China led to a selloff in 201516.
One argument for including commodities in an investment
portfolio is they provide diversification from stocks and
bonds. But Philip Straehl, head of capital markets and asset
allocation for Morningstar Investment Management in Chicago,
doesnt buy it. A lot of commodity prices, such as
those for energy and metals, are related to the business
cycle, he says. They are clearly
Plus, with a diversified portfolio including companies in
commodity-related industries, investors can use stocks to gain
exposure to commodities. Stocks are a lot easier to value than
commodities because companies generate cash flow.
You can forecast and discount to present value,
Straehl says. Thats more of a challenge for
Looking at a miner, you can analyze its costs, its commodity
mix, and the benefit from dividends and possible buybacks. But
with commodities, its not clear how the data
interplay, says Frances Hudson, global thematic
strategist for Standard Life Investments in Edinburgh,
Another way to gain exposure to commodities without directly
investing in them is to take positions in the currencies of
countries that produce a lot of natural resources. You
might go long the Brazilian real and short the Chilean peso to
wipe away the Latin American risk, Hudson says, adding
that putting such currency holdings into money market
instruments can earn an attractive yield, too. The theme
is sustainable income, she says.
Generally, though, the long-term equation just doesnt
add up for commodities, according to many investment
professionals. Take crude oil prices, which had dropped 63
percent to about $53 a barrel on April 17, from $145 in July
2008. The S&P
500 index, which returned almost 60 percent in the decade
through April 17, is generally less volatile by comparison.
There arent many ten-year periods of negative
returns for the S&P 500, says Martin Fridson, chief
investment officer at Lehmann Livian Fridson Advisors in New