WSJ: Large Pensions Cutting Commodity Funds

[Rick Ferri]

Pension Funds Cut Back On Commodity Indexes

"Pension funds and other institutions are retreating from popular investments linked to commodities after finding they did little to protect their portfolios against inflation risk and the unpredictable returns of stocks..."

I am shocked!

Rick Ferri

PS: The Great Commodities Debate of 2008

"Ferri: It's not correct to say that CCFs are negatively correlated. They've been both negatively and positively correlated. It really depends on the period measured. There are many periods, such as the last three years, when the correlation is positive with stocks and bonds. At best you can say correlation varies and is dynamic. That said, the risk reduction benefits of commodities are period-sensitive."

[NYBoglehead]

^Just as surprised as you'll be after they get back in after these funds have a good year or two! And the cycle continues.

[Rick Ferri]

You mean like becoming infatuated with international bonds?

I'm not being nice today. Sorry.

Rick Ferri

[NYBoglehead]

You mean like becoming infatuated with international bonds?

I'm not being nice today. Sorry.

Rick Ferri

We're on the same sheet of music. It drives me crazy to read articles like these when these funds dump funds that they shouldn't have been in to begin with. I read a lot of article on pionline.com and it has been talking about pension funds putting more money into hedge funds. It drives me absolutely nuts to see money wasted investing in these. I don't understand why these guys never learn. They are the worst offenders of irrational investment plans.

[Wagnerjb]

From the article:

Among those scaling back is the California Public Employees' Retirement System. Calpers, the nation's largest pension fund, pulled out 55% of its holdings in commodities indexes in October, after losing about 8% annually over five years, according to the fund's most recent financial statement.

Well, the Total Stock Market fund is up about 4.5% annually over five years. And if commodities are negatively correlated to stocks, why is an 8% annual loss a surprise? Or do you think they were greedy...chasing performance, expecting to repeat the nice gains of the previous five years?

[NYBoglehead]

From the article:

Among those scaling back is the California Public Employees' Retirement System. Calpers, the nation's largest pension fund, pulled out 55% of its holdings in commodities indexes in October, after losing about 8% annually over five years, according to the fund's most recent financial statement.

Well, the Total Stock Market fund is up about 4.5% annually over five years. And if commodities are negatively correlated to stocks, why is an 8% annual loss a surprise? Or do you think they were greedy...chasing performance, expecting to repeat the nice gains of the previous five years?

California...nuff said.

[nisiprius]

Investing fads and fashions are always presented as durable facts... but when it comes to the asset flavor-of-the-year I keep thinking of the Donovan song:

"First there is a mountain
Then there is no mountain
Then there is."

In this case: first there is no commodity exposure, then there is a commodity exposure, then there isn't...

The funny thing, though, is that the cases for thing like commodities are always presented on the basis of many-decade-long runs of data, yet the vogue for commodities is, I think, only four or five years old. How does anyone expect to see the long-term effect of a commodities allocation if they don't hold that allocation for the long term?

[rj49]

Well, Roger Gibson has been studying the diversifying benefits of commodities since 1998. How many of us invested in REITs, ibonds, or TIPS prior to the 2000 crash? Are those not fads just because they have been highly profitable?
I think most of us did similar performance-chasing in the 2000s after LV/SV/international as well--how many invested in those prior to 2000? Let he who is without sin throw the first chunk of gold

Here's a Forbes article about his results:

http://www.forbes.com/sites/greggfisher ... investing/

[Wagnerjb]

How many of us invested in REITs, ibonds, or TIPS prior to the 2000 crash? Are those not fads just because they have been highly profitable?
I think most of us did similar performance-chasing in the 2000s after LV/SV/international as well--how many invested in those prior to 2000? Let he who is without sin throw the first chunk of gold

There is a HUGE difference between chasing a hot asset class and adding an asset class after you become aware of it. And...the performance chasers are jumping out of the asset classes once they turn cold, while the disciplined investors are staying put.

Don't forget - the Vanguard TIPs fund wasn't even opened until mid-2000, so it shouldn't be a surprise that people took a little while to become aware of it and to become comfortable with the concept. In addition, the benefits of value and small cap investing didn't become widely understood and accepted until later in the 1990's. The only area where I would be more suspicious of a sudden interest in 2003 would be international. The benefits of international investing have been known and documented for many decades, so those suddenly discovered them in 2003 were undoubtedly performance chasing IMO.

Best wishes.

[larryswedroe]

No surprise here
IMO typical example of performance chasing, recency and so on.
Institutions subject to the same behavioral mistakes as individuals, after all they are run by humans
Also many may have been oversold on the benefits, thinking in terms of returns instead of as portfolio insurance.

Best wishes
Larry

[jvclark02]

I can't help but wonder how much Calper's has paid over the years for such 'great' investment advice?

[wesleymouch]

Maybe this is the time to be buying commodities.

[Random Musings]

Sounds to me like if you have commodities as part of your portfolio - stay the course.

RM

[paper200]

When the pro's get out it is time to get in

[Browser]

Ben Inker at GMO has said that the investment surge in commodity futures by hedge funds and individuals seeking diversification has had the unintended side effect of driving correlations between CCFs and other assets higher; particularly during periods of market stress which causes forced liquidation of CCF holdings - witness the gigantic spike in the correlation between CCFs and Stocks in 2008. So they now offer very little diversification benefit during bad markets, which is when you want it. He also surmises that the presence of large institutional investors, such as pension funds, has driven the expected returns going forward to zero or negative. So, it's hardly surprising that investors are beginning to head for the exits on these things. Rick was absolutely correct.

[RenoJay]

It blows my mind when massive purchasers of anything are unaware that their purchases, in and of themselves, move markets. One reason I like Warren Buffet is because he seems to be aware that he's wielding a huge arsenal of cash and that he cannot simply jump on every underpriced asset because he'll turn them into overpriced assets. Pension funds do not seem to possess such self-awareness.