Pimco Commodity Strategy - PCRIX, Is it Equities or Bonds

[midareff]

I hold a small % of my portfolio in this fund and was reviewing the portfolio allocation (Equities/FI) in my spreadsheets with that at VG's portfolio analysis tool. Sincve the fund deals with commodity futures I had been counting it as equities, VG counts it as bonds due to the securitized base of short term TIPS used. Somehow it just does not feel right counting this as FI, at least to me. What do you think?

[Beat The Street]

I count it as equities based on the volatility/risk. It may not be right, but it's just the way I do it.

[Optimistic]

Commodities aren't equities or fixed income. Their low correlation is the only reason to include them. (Rick Ferri suggests they still don't belong in a portfolio as they offer no real return.) So, give them their own classification. Larry Swedroe says if you are going to use commodities (he finds it acceptable in contrast to Rick), then you reduce your equity allocation to make room for them. Thus, if you were 60/40 stocks to bonds and want to have 5% commodities, you would be 55/40/5.

[larryswedroe]

AS Optimistic noted the are not either stocks nor bonds. They hold the bonds in the fund only as the collateral to make sure that they will be there when contracts mature. The yield basically offsets the yield implied in the futures.

They should be treated as a hard asset, just like gold would be. And also some consider RE as hard asset

Larry

[midareff]

Thanks Larry.... counting them as equities I'm 53/44/3, as bonds 49/48/3, .. if I lump them with REITS it takes that asset class to near 15%. I'm quite sure I would not be measurably richer or poorer ten or twenty years from now by which pile I count them in, but do have an interest in a thorough understanding of the what, why and how! Thanks again for your contribution to that understanding.

[lomo1d44BOY]

Pleasantly surprised to see PCRIX in here!

T

[MasonStorm@TheBogleheadsF]

I'm also holding an allocation to PCRIX, but am unsure how best to characterize it; the situation became as clear as mud today when I looked at the 9/30/12 Portfolio Holdings report from their website. It reports that about 89.7% of the fund's holdings are TIPS! There is an enormous list of other bond holdings, as well, such that in the end, less than 10% of this fund is actually in commodities instruments.

When looking over my asset allocation, should I count 90% of this holding as bonds?

[Socrativestor]

IMHO there a number of issues embedded in the OP's question, most of which have been touched upon by the previous posts:

1) The whole point of investing in CCFs is to break out of the "2 dimensional" stock-bond paradigm by adding a new asset class to create a "3 dimensional" stock-reals-bond paradigm. Thus, each asset class should get its own allocation. (And although many people prefer to put the real allocation AFTER the bond allocation -- e.g. 60/30/10 -- I prefer to put it in the middle because it characteristics are closer to stocks -- e.g. 60/10/30.)

2) On the one hand the CCF allocation should "come out of" the stock allocation because you are substituting one volatile asset for another in order to reduce overall volatility. Thus a 70/30 portfolio might become a 60/10/30 portfolio. On the other hand, once you acknowledge a third asset class ("real assets") then really (no pun intended ) you should stop thinking of "robbing Peter to pay Paul" but actually develop a 3-way allocation that makes sense in its own right. This also requires that you define for yourself what the "real asset" class comprises. Some folks for instance consider REITs to be part of the real asset class; some consider them a stock sector. (IMHO, they exhibit both characteristics but over the medium to long term are a distinct asset class.)

3) In the case of PCRIX in particular, because the collateral is held in TIPS as part of PIMCO's "Double Real", the performance of PCRIX is the sum of the performance of DJ-UBS Commodity Total Return Index *plus* the performance of the TIPS portfolio. See: http://raddr-pages.com/research/CommodityFutures.htm Thus some folks have been tempted to count their PCRIX allocation TWICE: once as CCF and once as TIPS! In other words, a case can be made that PCRIX should be counted as part of the bond allocation (thus adding to it rather than subtracting from it!)

IMHO, there is no "perfect" answer to the OP's question -- and no need for one. But there is need for both an approximate answer as well as an informed understanding of the shortcomings in the approximate answer.

In my own case, I divide my portfolio into 3 broad asset classes and include PCRIX among the "real assets", along with REITs and a few other things. My overall portfolio is roughly 50/25/25, which some might consider a little aggressive for an early 50's investor. To my mind, however, the third asset class really does provide diversification that allows me to have a somewhat lower bond allocation than I otherwise might have (especially since I have access to TIAA's Real Estate Account). Nonetheless, I am mindful of the fact that some of my "reals" have "stock-like" attributes and that some others of my "reals" have "bond-like" attributes. Thus, one way of viewing my portfolio (using the "cascading asset allocation" format -- http://www.bogleheads.org/forum/viewtopic.php?f=10&t=106505) is:


[Large version: http://i46.tinypic.com/5c0qqu.jpg]

By using color this way I am trying to remind myself that my stock allocation is really "47%-plus" (and for some purposes might be considered as much as 58% -- or even 75%) and that my bond allocation is really "25%-plus" (and for some purposes might be considered 35% [since TIAA REA has very low volatility] -- or even, at a stretch, 42%). The precise numbers don't matter so much to me as being able to remember/visualize the dynamics of the portfolio under various conditions -- e.g. stock market crash, war, inflation, deflation, flight to safety.

I realize that I am probably at the extreme end of the S&D spectrum and that not everyone would go along with this approach. But it makes sense to me and seems to have worked well over the past decade -- i.e. since I became a Boglehead.

[dbr]

By using color this way I am trying to remind myself that my stock allocation is really "47%-plus" (and for some purposes might be considered as much as 58% -- or even 75%) and that my bond allocation is really "25%-plus" (and for some purposes might be considered 35% [since TIAA REA has very low volatility] -- or even, at a stretch, 42%).

Why do you present a long, eloquent, and eminently correct discourse on multi-asset investing and then conclude with a sentence that countermands the whole thought process?

[Socrativestor]

By using color this way I am trying to remind myself that my stock allocation is really "47%-plus" (and for some purposes might be considered as much as 58% -- or even 75%) and that my bond allocation is really "25%-plus" (and for some purposes might be considered 35% [since TIAA REA has very low volatility] -- or even, at a stretch, 42%).

Why do you present a long, eloquent, and eminently correct discourse on multi-asset investing and then conclude with a sentence that countermands the whole thought process?

You got me!

Thank you for neatly skewering my inconsistency. The true answer to your question is that my own thinking operates according to both the "2 dimensional" (asset class) and "3 dimensional" (asset class) paradigms -- and that I suppose that I think both are useful for different purposes. The "2 dimensional" paradigm is both what most of the world uses most of the time and I try to maintain a connection with that. E.g. how is my portfolio relative to an "ordinary" 60/40 portfolio. Similarly (but slightly distinctly), I suppose, "stock" and "bond" also serve as synonyms/metonyms for "risky" and "riskless (more-or-less)" and I find it useful to occasionally back up thinking about a baseline allocation of "risky" vs "riskless".

On reflection, in the penultimate paragraph I would change the "is really"s to "can be thought of as"s: e.g. "my stock allocation can be thought of as "47%-plus".

[dbr]

Thank you for neatly skewering my inconsistency. The true answer to your question is that my own thinking operates according to both the "2 dimensional" (asset class) and "3 dimensional" (asset class) paradigms -- and that I suppose that I think both are useful for different purposes. The "2 dimensional" paradigm is both what most of the world uses most of the time and I try to maintain a connection with that. E.g. how is my portfolio relative to an "ordinary" 60/40 portfolio. Similarly (but slightly distinctly), I suppose, "stock" and "bond" also serve as synonyms/metonyms for "risky" and "riskless (more-or-less)" and I find it useful to occasionally back up thinking about a baseline allocation of "risky" vs "riskless".

On reflection, in the penultimate paragraph I would change the "is really"s to "can be thought of as"s: e.g. "my stock allocation can be thought of as "47%-plus".

I wonder if the best path out of the risk/riskless category is to observe that in fact there is only one risk, and only one return, and that is the risk and return of the portfolio as a whole. A lot of discussion on this forum is wasted trying to discuss assets in isolation when almost all of us own portfolios as a whole. The soundness of multi-asset thinking lies precisely in the fact that one is building a portfolio and not that one is collecting asset classes.

Anyway, I really like your discussion and the charts.

[Akiva]

I'm also holding an allocation to PCRIX, but am unsure how best to characterize it; the situation became as clear as mud today when I looked at the 9/30/12 Portfolio Holdings report from their website. It reports that about 89.7% of the fund's holdings are TIPS! There is an enormous list of other bond holdings, as well, such that in the end, less than 10% of this fund is actually in commodities instruments.

When looking over my asset allocation, should I count 90% of this holding as bonds?

Commodity futures are "mark-to-market" which means that on paper, at certain times it will look like it doesn't have much commodity exposure because the market value of the futures contract is close to zero.

This fund goes long commodity futures (which is just a contract, no cash changes hands except for a small performance bond) and then uses the capital it doesn't need for the performance bonds to invest in TIPS.

[MasonStorm@TheBogleheadsF]

Thanks Akiva.

I couldn't help but notice on the TD Ameritrade site that when I looked at the holdings for the competing product DBC (the commodity ETF by PowerShares) it lists its "Top 10 Holdings" as all actual commodities futures, with these 10 listings making up 85.39% of its content. But PCRIX's "Top 10 Holdings" has only 23.48% in their very own Cayman Commodities Fund, and the rest in US Treasuries.

So is this enormous difference due simply to accounting procedures differences, such that we should still consider PCRIX to truly be a CCF? Or is it truly only 23.48% in commodities, with the rest consisting of an actively-managed bond play?

I realize that PCRIX has done better in terms of annualized return, but if the purpose of holding a CCF product is to provide portfolio-level diversification effects, wouldn't it be better to hold a product such as DBC that is genuinely, largely, made up of commodities futures? I read Mr. Swedroe's "The Only Guide to Alternative Investments You'll Ever Need," and largely chose PCRIX based upon it. But if I recall correctly, his recent posts elsewhere in the Bogleheads Forum have indicated that he no longer owns it himself.

[Akiva]

Thanks Akiva.

I couldn't help but notice on the TD Ameritrade site that when I looked at the holdings for the competing product DBC (the commodity ETF by PowerShares) it lists its "Top 10 Holdings" as all actual commodities futures, with these 10 listings making up 85.39% of its content. But PCRIX's "Top 10 Holdings" has only 23.48% in their very own Cayman Commodities Fund, and the rest in US Treasuries.

So is this enormous difference due simply to accounting procedures differences, such that we should still consider PCRIX to truly be a CCF? Or is it truly only 23.48% in commodities, with the rest consisting of an actively-managed bond play?

I realize that PCRIX has done better in terms of annualized return, but if the purpose of holding a CCF product is to provide portfolio-level diversification effects, wouldn't it be better to hold a product such as DBC that is genuinely, largely, made up of commodities futures? I read Mr. Swedroe's "The Only Guide to Alternative Investments You'll Ever Need," and largely chose PCRIX based upon it. But if I recall correctly, his recent posts elsewhere in the Bogleheads Forum have indicated that he no longer owns it himself.

I haven't read their investing materials thoroughly, but my understanding is that they are investing in commodities derivatives with an exposure that roughly tracks the underlying commodities index, and then instead of posting the full value of the futures contract as collateral (which is unnecessary and wasteful), they post only what is required and invest the rest in bonds. (And this difference probably accounts for whatever historical over-performance there is. But it's is giving you exposure to *both* TIPS and commodities, so it could do strange things...)

I don't know enough about how these various websites actually decide what counts as a "holding". I'm pretty sure there's not a very sensible answer for futures. If you count the futures at the full value of the contract, then you end up double counting when the money that isn't posted as collateral is invested in bonds. OTOH, if you only count the performance bond, then you are under-estimating your exposure to commodities prices because futures are massively leveraged.

[MasonStorm@TheBogleheadsF]

Thanks again Akiva.....I think I understand what you're saying!

This post is also to serve as a 'bump' to request more replies about this issue.

[matt.danley]

Has anyone looked at the actual [latest] holdings of this fund? There are a lot of TIPs, but there are also mortgage bonds, credit default swaps, international bonds, etc. This is almost like a Total Return Bond/Derivative Fund with Commodity exposure overlaid.

Edit: It's decidedly a small percentage of the fund, it just surprised me. Especially the Forex exposure.

[Akiva]

Thanks again Akiva.....I think I understand what you're saying!

This post is also to serve as a 'bump' to request more replies about this issue.

We had a discussion about commodity funds over here:
viewtopic.php?f=1&t=108867

And the bottom line is that the ETFs and indexes have problems and that more flexible funds like the DFA one or the PIMCO one should be better.

Personally, I'm not too happy with any of the available funds because the indexes they are based on are highly flawed, and even though the DFA and PIMCO funds work around some of the problems, they are still tied to a bad index to begin with.