Can a Commodities Fund be a Long-Term Investment?

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Gropes & Ray
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Can a Commodities Fund be a Long-Term Investment?

Post by Gropes & Ray »

I have seen a few commodities funds offered and recommended for young, aggressive investors recently (including a fund in my 401k that I was in until I learned about the three-fund portfolio). But my understanding of most commodities (leaving aside gold) is that you're taking a short term bet on a shortage. Say, you're buying wheat futures because you're betting there will be a bad harvest next year. But the very nature of wheat and other agricultural commodities is that we get a fresh start every year, so aside from inflation, I don't understand how they can be long term investments.

I'm sure I'm missing a lot, so could someone fill me in on how a commodities fund anticipates long-term growth, if it does at all? Just looking at DBC and GSG, it appears that commodities remain mostly flat, and spike when equities fall sharply, so is it just a hedge against equities? That would require some pretty on-the-ball rebalancing, and doesn't seem appropriate for a portfolio that I largely prefer to ignore.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by dbr »

Some people advocate that commodities are a "diversifier" for a stock and bond portfolio (needing an understanding of what diversify means in this context). In that case the holding would be long term. Note that what is usually advocated is a collateralized commodities futures fund and not an actual holding, fund or otherwise, in metals, oil, wheat or frozen pork bellies nor stock in mining, oil, or food companies, nor holdings in MLPs or commodity trusts. Note that there is some difficulty finding an actual CCF fund at a low enough ER to be a convincing portfolio addition. Also note that the expected real return would be about zero less costs, so you need a good lack of correlation argument.

An alternative conversation you can investigate is the "Permanent Portfolio," which is 25% gold. I doubt it will ever be resolved that the PP is or isn't a good idea.
technovelist
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by technovelist »

I don't see the benefit in commodity funds either, other than of course for their sponsors. :moneybag
However, with respect to the PP, I don't consider gold a commodity, but more of a hedge against official malfeasance and failure.
The PP has a pretty good long-term track record with fairly low volatility; much of the latter is apparently due to the low correlation of gold with the other assets.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Tigermoose »

Here's why I recently put 3% of my portfolio into DBC.

1. Futures contracts are a different asset class than bonds or stocks. This adds diversification to the portfolio.
2. One of the largest deep risks is inflation. Buying commodities futures acts as inflation protection

My thinking is that the fractional reserve banking system is unavoidably inflationary, and therefore commodities will keep up with inflation. My plan is to get to my target % and then rebalance twice a year. Hopefully the rebalancing will provide a bonus over and above the inflation protection. I think this will be a larger bonus due to the greater volatility that commodities futures possess.

My other thinking on this is that having another asset class in my portfolio allows me a better option of buying these shares when they are down (while bonds and stocks are expensive).

I have also purchased a wee amount of Vanguard Precious Metals & Mining fund. Bernstein recommends this type of stock as inflation protection.

Another inflation protection option is TIPS, but since bond prices are expensive right now, I am picking up the above "cheaper" inflation protection options while they are out of favor.

Short answer to the OP's question: Yes, commodities can be a long-term investment as long as you rebalance regularly with a tighter band for this asset class.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by dbr »

DBC at an ER of 0.85% would be an example of the difficulty of beating the expenses to own a CCF.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by topos »

Tigermoose wrote: 2. One of the largest deep risks is inflation. Buying commodities futures acts as inflation protection
This is not my understanding: commodity futures protects against unexpected inflation. And even more correctly, unexpected inflation of commodity prices. That's quite different from inflation. There can be a high inflation in commodity price for a long time. Once the inflation is expected, the inflation will be priced in the future contracts.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Kenkat »

There is a difference between owning commodities themselves and owning commodities futures.

Commodities tend to increase in price at the rate of inflation, so you are correct - there's really no expectation of any growth there.

Commodities futures are different in that:

1) they represent a form of insurance against price uncertainty for businesses that are dependent on commodity prices. Yes, they can be used as speculative investments but they are more commonly used as a hedge to reduce risk - i.e., a manufacturer who is heavily dependent on a particular commodity can use futures as insurance to reduce price risk for future operations
2) they are typically a leveraged investment, so not only do you get a return from the utility value of the commodity future, but you also can get return from money invested as collateral against the leverage

They are complicated instruments for sure and I do agree the jury is out on how much benefit is obtained vs. cost to implement.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Tigermoose »

kenschmidt wrote:There is a difference between owning commodities themselves and owning commodities futures.

Commodities tend to increase in price at the rate of inflation, so you are correct - there's really no expectation of any growth there.

Commodities futures are different in that:

1) they represent a form of insurance against price uncertainty for businesses that are dependent on commodity prices. Yes, they can be used as speculative investments but they are more commonly used as a hedge to reduce risk - i.e., a manufacturer who is heavily dependent on a particular commodity can use futures as insurance to reduce price risk for future operations
2) they are typically a leveraged investment, so not only do you get a return from the utility value of the commodity future, but you also can get return from money invested as collateral against the leverage

They are complicated instruments for sure and I do agree the jury is out on how much benefit is obtained vs. cost to implement.
Good points. Just to go further in explaining futures contracts. The return on commodities futures comes from one of the following:

1. The "roll" as futures contracts are renewed -- negative is called contango, positive is called backwardisation. Newer ETFs such as DBC use "Dynamic" rolling in an attempt to better control this effect. This is largely caused by increases or decreases in the costs of storage. Commodities like oil require more storage, and thus are more affected by this.
2. The underlying commodity prices go up -- this is the part that really keeps up with inflation. Unexpected inflation just causes this asset class to outperform more than expected in my understanding.
3. Interest returned from T-Bills (etc) that exist in the fund to act as cash to buy up new futures contracts
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

Was just looking into this using Simba's spreadsheet. I think you'll find that commodities are a poor long term investment, although they might help to hedge certain short-term equity drawdowns (not in 2008, however). I compared 100% VFINX (S&P 500 index fund) returns to the returns with 90%, 80%, 70%, 60%, and 50% VFINX with the balance held in commodities (PCRIX) for the 40-year period 1974-2013. Holding 100% VFINX produced the highest compound return over this period with the same risk-adjusted return as holding commodities. So, if you want to add an asset to your portfolio that will be a drag on long-term returns, commodities should serve that purpose quite well. You might get an occasional thrill if there's an unexpected spike in commodity futures prices, but it's likely to be short-lived. Over the long run you're better off without 'em.
Last edited by Browser on Fri Aug 22, 2014 11:38 am, edited 1 time in total.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by dbr »

In any case a 3% allocation would be meaningless.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

Few quick thoughts (if interested read section on commodities in my alternative investment book)
a) commodities hedge two things, unexpected inflation and SUPPLY shocks --but not demand shocks
b) negatively correlated with bonds and about zero with stocks--demands on whether we have more supply shocks and unexpected inflation or not
c) they typically have long periods of poor returns and short bursts of very high returns so must be disciplined rebalance and very patient and not confuse strategy and outcome--you don't want the supply shocks or unexpected inflation--in other words CCF is a form of portfolio insurance, though not against all types of risks, but some
d) if adding CCF would suggest also adding bit more duration due to negative correlation with bonds (you earn the term premium and the risks mix well together

I suggest 5-10% of equities, depending on how exposed to the above risks you are and how risk averse you are--ccf cuts tail risks, both sides
Hope that is helpful
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by dbr »

larryswedroe wrote: I suggest 5-10% of equities, depending on how exposed to the above risks you are and how risk averse you are--ccf cuts tail risks, both sides
Hope that is helpful
Larry
I am curious if you actually have numbers that show how an allocation that small, say 5% of a 50/50 portfolio would actually have an effect on the things you mention that would be large enough to be noticed in the noise. Intuitively that seems unlikely, but I am not so confident of my intuition.
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Gropes & Ray
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Gropes & Ray »

Thanks for all of the great responses. I asked mostly out of curiosity, but you've reaffirmed my belief that I'm really not interested in watching anything closely enough to try to rebalance during spikes in commodities. I don't even know how much I "lost" in 2007-2009 because I never bothered to look. I've taken up rebalancing when I get my bonus in December, and that's good enough for me.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Buddtholomew »

Gropes & Ray wrote:Thanks for all of the great responses. I asked mostly out of curiosity, but you've reaffirmed my belief that I'm really not interested in watching anything closely enough to try to rebalance during spikes in commodities. I don't even know how much I "lost" in 2007-2009 because I never bothered to look. I've taken up rebalancing when I get my bonus in December, and that's good enough for me.
Congratulations. I would look less frequently if I didn't have a 5.5% allocation to GDX - Precious Metals & Mining.

Surprisingly, I saw a chart posted recently that showed Emerging Markets demonstrated a wider range of returns (positive and negative extremes) than Commodities funds.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by galeno »

Any asset class with a long term NEGATIVE expected real return, (i.e. commodities, gold, etc) is not a long term investment but a short term speculation.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Kenkat »

galeno wrote:Any asset class with a long term NEGATIVE expected real return, (i.e. commodities, gold, etc) is not a long term investment but a short term speculation.
But you aren't investing in commodities, you are investing in commodities futures. They behave differently. Plus, even pure commodities like gold don't have a negative expected real return, they have a zero expected real return.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

dbr,
first remember I'm suggesting two things not one, if adding ccf add duration also,
So you gain some term premium on entire bond portfolio. Also with a highly volatile and at times negatively correlating asset can help even small amounts, like in 73-74

Larry
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by heyyou »

Over long periods of time, equities out perform inflation.

Commodities futures funds (CCF) only help with unexpected inflation, not other inflation. If CCFs will help you stay the course when stocks are falling due to unexpected, sudden petroleum price increases, you could benefit from owning CCFs when that happens. If you are experienced at tolerating market drops without panicking, then you would be better off without the lost opportunity costs of owning a low performing asset sub-class.

My PCRIX shares are worth half the price that I paid eight plus years ago. I'm going to sell them on the tenth anniversary of their purchase, and never pay PIMCO another fund fee. Bernstein was right, the futures markets have been overwhelmed by speculative, institutional money. The backtesting of the effectiveness of CCFs was done when the producers and users were mostly selling and buying among themselves. This time is different, at least as long as the Straits of Hormuz are kept safe for oil tankers.

Valuethinker has posted that owning a fuel efficient car, and striving for low use of petroleum powered energy (well insulated house, buying local foods, etc.) is a way to buffer your personal energy costs. Seems to me, there is more opportunity there than in a passive investment that only buffers energy supply shocks.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

One problem with PCRIX is that it's returns are correlated to the returns of TIPS used as collateral. Since October, 2006 the correlation has averaged 0.25 and ranged as high as .80. By comparison, the correlation between the DJP etf (which uses the same commodity index as PCRIX) and TIP has averaged about zero. So, PCRIX not giving you the diversification you think if you're also holding TIPS.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by ASUGrad »

But you aren't investing in commodities, you are investing in commodities futures. They behave differently. Plus, even pure commodities like gold don't have a negative expected real return, they have a zero expected real return.
1. Why would you invest in something that has a zero expected real return and a very high degree of fluctuations?

2. Gold's long term historical real returns are negative. Keep in mind all of those years that currencies were pegged to gold there was still inflation so gold had constant negative real returns for "centuries." Even after currencies were no longer pegged to gold its track record hasn't been very good. After centuries of negative real returns, and with current valuations reflecting as much 'fear' as the actual value of the metal I wouldn't be surprised at all if gold continued to have negative real returns.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by nedsaid »

I do not own a commodities fund except as part of a Target Date Retirement Fund that I own. I want to own asset classes that have real returns above inflation over time. I think of these as an insurance policy against certain unforeseen events.

If I had Larry Swedroe as my advisor and I invested with him, I would buy into his investment philosophy and own these as part of my investment portfolio. It would be part of the package and I would be getting professional management. But as an individual investor doing this mostly on my own, I would not own these.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

heyyou
If the CCF were in fact overwhelmed by institutional money please explain to us how the oil futures have been in large and persistent backwardation for well over a year--though it has been shrinking lately again.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Ketawa »

ASUGrad wrote:
But you aren't investing in commodities, you are investing in commodities futures. They behave differently. Plus, even pure commodities like gold don't have a negative expected real return, they have a zero expected real return.
1. Why would you invest in something that has a zero expected real return and a very high degree of fluctuations?

2. Gold's long term historical real returns are negative. Keep in mind all of those years that currencies were pegged to gold there was still inflation so gold had constant negative real returns for "centuries." Even after currencies were no longer pegged to gold its track record hasn't been very good. After centuries of negative real returns, and with current valuations reflecting as much 'fear' as the actual value of the metal I wouldn't be surprised at all if gold continued to have negative real returns.
Zero expected real return doesn't mean anything. What matters is how an asset mixes with the rest of the portfolio. Depending on the timing of the high degree of fluctuation, it can improve the results of a portfolio. That is the case being made by the proponents of commodities.

TIPS with 5 years or less maturities have a negative expected real return, and investors still hold them.

The SEC yield of Vanguard Total Bond Market is 2.07% with a duration of 5.7 years. If inflation averages much over 2% the next 6 years, it will have a negative real return. Even so, it is the most popular fixed income holding on Bogleheads.

(I don't hold commodities, but I wouldn't benefit much from them anyway; my fixed income duration is zero due to the G Fund.)
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

Zero expected real return doesn't mean anything. What matters is how an asset mixes with the rest of the portfolio. Depending on the timing of the high degree of fluctuation, it can improve the results of a portfolio. That is the case being made by the proponents of commodities.
I don't buy this argument over the long term. Low returning assets reduce absolute returns over the long run, although they might improve risk-adjusted returns (as do bonds combined with stocks). But you can only eat absolute returns, not risk-adjusted returns. There might be some behavioral benefit to adding such an asset to your portfolio, but that's an idiosyncratic risk and it's only relevant in a short time perspective. For most investors with a long-term investing horizon, absolute returns are far more important. For these investors, CCFs and gold are not useful assets.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by midareff »

dbr wrote:DBC at an ER of 0.85% would be an example of the difficulty of beating the expenses to own a CCF.
Not to mention the 3% of portfolio having a potential overall impact of about zilch after fees and rebalancing costs.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by dbr »

Browser wrote:
Zero expected real return doesn't mean anything. What matters is how an asset mixes with the rest of the portfolio. Depending on the timing of the high degree of fluctuation, it can improve the results of a portfolio. That is the case being made by the proponents of commodities.
I don't buy this argument over the long term. Low returning assets reduce absolute returns over the long run, although they might improve risk-adjusted returns (as do bonds combined with stocks). But you can only eat absolute returns, not risk-adjusted returns. There might be some behavioral benefit to adding such an asset to your portfolio, but that's an idiosyncratic risk and it's only relevant in a short time perspective. For most investors with a long-term investing horizon, absolute returns are far more important. For these investors, CCFs and gold are not useful assets.
We could, of course, resurrect the great Ferri-Swedroe debate :twisted:
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by heyyou »

heyyou
If the CCF were in fact overwhelmed by institutional money please explain to us how the oil futures have been in large and persistent backwardation for well over a year--though it has been shrinking lately again.
Larry
It has been exactly like buying insurance, the premium has stayed gone. For early retirement in the spring of 2006, I wanted partial inflation insurance and there was the product, PCRIX.

These days, I can see that equities will out grow inflation in the long run, and that SS offers inflation protection for its portion of retirement income. Bye, bye to PCRIX, my only portfolio holding from 2006 with a negative value, less than half of the purchase price.

Larry, consider how much backwardation is necessary for PCRIX to recover to its March 2006 selling price. I caught a falling knife in March of 2006 that some other buyers won't, so PCRIX may work well for them.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

heyyou wrote:
heyyou
If the CCF were in fact overwhelmed by institutional money please explain to us how the oil futures have been in large and persistent backwardation for well over a year--though it has been shrinking lately again.
Larry
It has been exactly like buying insurance, the premium has stayed gone. For early retirement in the spring of 2006, I wanted partial inflation insurance and there was the product, PCRIX.

These days, I can see that equities will out grow inflation in the long run, and that SS offers inflation protection for its portion of retirement income. Bye, bye to PCRIX, my only portfolio holding from 2006 with a negative value, less than half of the purchase price.

Larry, consider how much backwardation is necessary for PCRIX to recover to its March 2006 selling price. I caught a falling knife in March of 2006 that some other buyers won't, so PCRIX may work well for them.
Not that I'm an advocate for commodities, but you didn't add them to your portfolio because you expected an immediate payoff for doing so, did you? That would be very un-Bogle of you. :oops:
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Kenkat »

heyyou wrote:
heyyou
If the CCF were in fact overwhelmed by institutional money please explain to us how the oil futures have been in large and persistent backwardation for well over a year--though it has been shrinking lately again.
Larry
It has been exactly like buying insurance, the premium has stayed gone. For early retirement in the spring of 2006, I wanted partial inflation insurance and there was the product, PCRIX.

These days, I can see that equities will out grow inflation in the long run, and that SS offers inflation protection for its portion of retirement income. Bye, bye to PCRIX, my only portfolio holding from 2006 with a negative value, less than half of the purchase price.

Larry, consider how much backwardation is necessary for PCRIX to recover to its March 2006 selling price. I caught a falling knife in March of 2006 that some other buyers won't, so PCRIX may work well for them.
Don't forget to include the substantial dividends that PCRIX pays out in your return calculations.

I have held PCRIX since early 2004; I calculated my return from 8/23/2004 to 8/23/2014 for PCRIX and it was 2.84% annualized. That is in spite of the fact that the current share price is substantially less than I paid.

By comparison, my avg. annual return for Vanguard Total Bond Index over the same period was 3.83%.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by n00b_to_investing »

How about commodity producers like BHP, Agrium, Energy XLE vs Futures etc ?
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

few things
First Browser is simply wrong on low returning assets necessarily reducing returns. I've even seen cases of negative returning assets in efficient frontier outcomes due to very high volatility and negative correlation. And the data I have shown on portfolio returns has basically been little to no impact on returns while dampening SD and cutting tails. And fwiw most investors being risk averse, especially those in retirement would be willing to give up some amount of returns to cut tail risks, as that improves odds of success of not running out of money and also allowing one to sleep well.

Second re PCRIX as pointed out seems you are making the very bad mistake of looking at PRICE ONLY returns, not total returns. Same thing can happen say with REITS which are required to pay out almost all earnings..

Larry
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

larryswedroe wrote:few things
First Browser is simply wrong on low returning assets necessarily reducing returns. I've even seen cases of negative returning assets in efficient frontier outcomes due to very high volatility and negative correlation. And the data I have shown on portfolio returns has basically been little to no impact on returns while dampening SD and cutting tails. And fwiw most investors being risk averse, especially those in retirement would be willing to give up some amount of returns to cut tail risks, as that improves odds of success of not running out of money and also allowing one to sleep well.

Second re PCRIX as pointed out seems you are making the very bad mistake of looking at PRICE ONLY returns, not total returns. Same thing can happen say with REITS which are required to pay out almost all earnings..

Larry
Don't agree. My point was that over longer time periods, CCF won't help absolute returns because the low long-term returns from commodities are a drag on performance and this becomes more evident with time. Might help over shorter time horizons, but that wasn't what the OP was asking about as I understood his question. As an illustration, the annual commodity returns in the Simba spreadsheet are from PCRIX over the 2003-2013 time period. It is evident that adding PCRIX to TSM over the period 2003-2013 produces lower absolute cumulative returns while not improving risk-adjusted returns, as an increasing function of the percentage of commodities held. If you go back 23 years using Simba (commodity return data are "synthetic" collateralized DJ-AIG returns from 1991-2003) you also find that absolute cumulative returns are lower as a function of the allocation to commodities, while risk-adjusted returns are not improved. The OP was interested in commodities as a long-term holding. To address that question we must look at long-term returns, which I'd define as 10 years or longer.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

Browser you can disagree but doesn't change fact that you are incorrect. If correlations are low/negative enough and volatility high enough you can see outcomes with low volatility without negative impact on returns. In fact have shown that very thing here many times

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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

larryswedroe wrote:Browser you can disagree but doesn't change fact that you are incorrect. If correlations are low/negative enough and volatility high enough you can see outcomes with low volatility without negative impact on returns. In fact have shown that very thing here many times

Larry
I'm not disagreeing with you -- the data I quoted disagrees with you. What else can be said?
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by pop77 »

larryswedroe wrote:few things
Second re PCRIX as pointed out seems you are making the very bad mistake of looking at PRICE ONLY returns, not total returns. Same thing can happen say with REITS which are required to pay out almost all earnings..

Larry
May be I have to wait longer but my experience with CCF (PCRDX and then HACMX) is not good. I invested in them in August 2010 and I have four years of data in Quicken and including all distributions I have an XIRR of -3.97%. It might look a small loss but when compared with all the asset classes I see that it is a significant under performance.

I am now wondering how long I might have to wait. Most probably I will sell when XIRR enters positive territory.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by dbr »

pop77 wrote:
larryswedroe wrote:few things
Second re PCRIX as pointed out seems you are making the very bad mistake of looking at PRICE ONLY returns, not total returns. Same thing can happen say with REITS which are required to pay out almost all earnings..

Larry
May be I have to wait longer but my experience with CCF (PCRDX and then HACMX) is not good. I invested in them in August 2010 and I have four years of data in Quicken and including all distributions I have an XIRR of -3.97%. It might look a small loss but when compared with all the asset classes I see that it is a significant under performance.

I am now wondering how long I might have to wait. Most probably I will sell when XIRR enters positive territory.
Lack of correlation with other asset classes is the point, isn't it? That kind of plan is for the long run, aka your entire lifetime, not four years.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

It's interesting that since the peak of oil futures in 1974, due to the OPEC oil embargo, there has not been any period of time from 1 year to the full 40 years until 2013 that adding commodities to TSM would have improved annualized cumulative portfolio returns vs. holding TSM. This is based on the data from Simba for commodity and TSM returns. You can see this clearly by constructing a Telltale Chart. Starting in 1999, an allocation to either commodities or gold has improved annualized cumulative returns, but for the most part the returns were rather meager over that time period whether you were allocated to commodities or not. For the 10 years from 1999-2008 the CAGR for TSM was -0.7%, while it was 0.6% and 0.8% with 10% allocated to commodities and gold respectively. Then, beginning in 2009 your cumulative returns would have been better without a commodity or gold allocation once again.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

Browser
traveling and don't have time but I am virtually certain that is wrong. I've run portfolios for example on DJ index and shown in past not that outcome, and done it many times for different periods
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

larryswedroe wrote:Browser
traveling and don't have time but I am virtually certain that is wrong. I've run portfolios for example on DJ index and shown in past not that outcome, and done it many times for different periods
Larry
To clarify, the starting time for all portfolios was Jan, 1975. At least using the Simba data, none of the annual calendar periods from 1 year (1975-76) to 39 years (1975-2013) had higher cumulative absolute returns for a portfolio that includes TSM + commodities vs. 100% TSM.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by nisiprius »

According to an article in Consumer Reports Money Advisor, Ibbotson Associates published a study in 2006 indicating that commodities were worthwhile. My extremely hazy recollection is that that is just about the time I started reading articles targeted to lay investors that advocated commodities as part of ordinary investors' portfolios. Before then, it had always been an exotic investment used only by sophisticated investors.

Things began to change--Vanguard began to use them in its Managed Payout funds, Fidelity added them to their target retirement funds, etc. I have to wonder if that the 2006 study launched a meme and began a trend. ETFS were launched. I see that the iShares S&P GSCI ETF mentioned by Consumer Reports was launched in late 2006, consistent with that time frame.

Consumer Reports continued:
We created two hypothetical portfolios that were worth $100,000 at the beginning of 2008. We invested one in an traditional mix of 60 percent stocks and 40 percent bonds. The other contains 51 percent stocks, 34 percent bonds, and 15 percent commodities, split evenly among three ETFs: the broad-based iShares S&P GSCI Commodity-Indexed ETF, SPDR Gold Shares, and iShares Global Timber and Forestry. During the past five years there was little discernible difference between the two portfolios; volatility wasn't reduced, nor were returns greater.
So this seems to be an instance of an all-too-familiar pattern: the touted benefit that mysteriously fades just about the time it becomes widely publicized. (This pattern, the "decline effect," is seen in virtually all scientific research, not just investing...)
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

few things
First, Browser that is nothing more than data mining exercise. eliminate the two great years and start at high valuations. Now try running it for various starting points and you find very different answer

Nisiprius
Two things, first popularity does negatively correlate with returns. All popular assets tend to do poorly, they include mostly growth stocks, especially small growth, and other lottery like investments. Also the publication of research can increase popularity and cash flows can lead to higher valuations which in turn reduce returns. Which is why performance chasing not a good idea.
But the idea that commodities are doomed to perpetual contango because of "institutionalization" has already been proven to be nonsense. We've now had well over year of backwardation, sometimes pretty steep, in oil futures as one example. And in easily storable commodities that is never a problem anyway. And that is the biggest issue with CCF, do you pay big insurance premiums or not

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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

larryswedroe wrote:few things
First, Browser that is nothing more than data mining exercise. eliminate the two great years and start at high valuations. Now try running it for various starting points and you find very different answer

Nisiprius
Two things, first popularity does negatively correlate with returns. All popular assets tend to do poorly, they include mostly growth stocks, especially small growth, and other lottery like investments. Also the publication of research can increase popularity and cash flows can lead to higher valuations which in turn reduce returns. Which is why performance chasing not a good idea.
But the idea that commodities are doomed to perpetual contango because of "institutionalization" has already been proven to be nonsense. We've now had well over year of backwardation, sometimes pretty steep, in oil futures as one example. And in easily storable commodities that is never a problem anyway. And that is the biggest issue with CCF, do you pay big insurance premiums or not

Larry
Yes, the problem with rearview mirror investing is that you get a different answer depending on the particular period of time you look at. This applies across the board -- so how do you make a case for investing in commodities that isn't subject to the same criticism? For example, the Ibbotson study in 2006 that touts commodities was based on the 1970-2004 period. That includes the 1970-74 period in which commodity prices ramped up by a couple hundred percent, and it excludes the period since 2008 in which commodities were the dog in the kennel. I note that there are many folks who feel quite confident discounting gold by looking at gold returns starting at the peak gold price in 1980. If that's fair game, then it should also be fair game to discount commodities by looking at what happened after their peak in 1974.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Tigermoose »

I think Larry is also saying that you can improve returns for your overall portfolio by adding CCF because you can then increase the duration of your bond holdings. I think we need to keep this in mind ("the term premium and the risks mix well together"). I think Browser was just doing a comparison with straight VFINX against holding VFINX with commodities. I think that misses the point of how commodities function within a complete portfolio that includes stocks and bonds.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Browser »

Tigermoose wrote:I think Larry is also saying that you can improve returns for your overall portfolio by adding CCF because you can then increase the duration of your bond holdings. I think we need to keep this in mind ("the term premium and the risks mix well together"). I think Browser was just doing a comparison with straight VFINX against holding VFINX with commodities. I think that misses the point of how commodities function within a complete portfolio that includes stocks and bonds.
One problem with backtesting that proposition is that bond returns have been quite high over the last 33 years, due to falling rates. The longer the duration of your bond holdings over that time, the higher your portfolio returns. So, you would have been better off simply extending bond duration and not owning commodities at all over the last 33 years. Before we can know if Larry's strategy would have paid off, we need a period in which bonds aren't doing so well to test the hypothesis. If we can trust Simba's data to look at the 1972-1980 period of rising interest rates, we find that a simple portfolio of 50% TSM / 50% 5 Year Treasuries had a higher return than a portfolio of 45% TSM, 5% Commodities, 50% Long Term Treasuries (CAGR = 7.2% vs. 6.6% respectively), so that's not very reassuring that Larry's strategy will work particularly well when rates are rising; and it sure won't help if rates are falling.
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by larryswedroe »

First, the way you try to look at these issues is test various long period. so you can look at 70-13 which is longest we have for GSCI and you can also look at the longest period for DJ Credit Suisse index, which is early 90s and when I have done that you get the same answers I have found, similar returns with less tail risks and this is period when CCF did not have high returns

Second, you only would extend duration IF you also bought commodities as the hedge against that duration risk you are taking. CCF logically should perform well if rates rise either because of unexpected inflation or strong economy (rising demand for commodities). Not guarantee but that is what should expect

Larry
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Re: Can a Commodities Fund be a Long-Term Investment?

Post by Clive »

Can a Commodities Fund be a Long-Term Investment?

Yes. Most people are familiar with the wealth of Gates and Buffett, but less so with the Koch brothers whose combined $72B wealth compares to Gates'. And that wealth is derived primarily from diversified base/core (Commodity) products such as asphalt, chemicals, commodities trading, energy, fibers, fertilizers, minerals, natural gas, plastics, petroleum, pulp and paper.
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