I was thinking the same thing. When I was a little kid, I used to do the same thing after I got into trouble. It only made things worse. Collaterized commodity futures have been getting into trouble.Rick Ferri wrote:There is an awful lot of explaining going on as to why one should add expensive collateralized commodity funds (CCFs) to a portfolio. Usually, when an investment needs that much explaining, it's not a good idea. You start getting in tail end scenarios, the hope of negative correlation, the hope of MPT.
Rick Ferri
Commodities Funds: A Decade of Disaster
Re: Commodities Funds: A Decade of Disaster
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Re: Commodities Funds: A Decade of Disaster
Browser
Simple explanation
CCF reduces tail risks (both good and bad) without negatively impacting returns.
Larry
Simple explanation
CCF reduces tail risks (both good and bad) without negatively impacting returns.
Larry
Re: Commodities Funds: A Decade of Disaster
While lengthening duration was a good move in hindsight from 2003-2013 how many folks would be lined up and eager to do that now?JohnDoh wrote:But as Mr. Swedroe has been saying, when the portfolio is viewed as a whole, the inclusion of CCFs in a portfolio permits a second change in a portfolio: lengthening of duration. Even in 2003-2013 -- and despite the above-mentioned "disaster", the actual CCF-including-and-medium-during portfolio performed better than the CCF-lacking-and-short-duration portfolio. Hence not a "disaster" at all.
Re: Commodities Funds: A Decade of Disaster
Rick Ferri wrote:There is an awful lot of explaining going on as to why one should add expensive collateralized commodity funds (CCFs) to a portfolio. Usually, when an investment needs that much explaining, it's not a good idea. You start getting in tail end scenarios, the hope of negative correlation, the hope of MPT.
My take on investing is much simpler. I buy investments that have positive real return expectation. This may come in from interest, dividends, rents, capital appreciate or a combination thereof. Put these investment in your portfolio and lengthy explanations are not needed.
Rick Ferri
I guess I have to look at it the same way. I want to see a positive real return over time that comes from something I can easily understand; such as " from interest, dividends, rents, capital appreciate or a combination thereof."
In one of his books (and there are 4 on my shelf and I have ordered and sent many to friends, and same with Rick's books so no bias here) Larry recommended 4% CCF in a portfolio, and other discussions here seem to cite 5% or thereabouts. I try to keep my portfolio relatively diversified with slices that are still large enough ( >5%) to make a discernible difference in outcome. Should I decide to add another slice there are many to pick from... it could be; International REIT's, EM, EM Bonds, International Bonds, a Timber ETF, Precious Metals, an Energy ETF or a selection of others that have the expectation of a positive real return. Now, I would forego any of these other choices to add a slice of CCF, for a variety of reasons that seem to require explanations that just don't make sense to me ... huh?
EDIT TO ADD: and Dr. B's books too.
Last edited by midareff on Sun Dec 29, 2013 8:48 am, edited 1 time in total.
Re: Commodities Funds: A Decade of Disaster
"Portfolio engineering is way overrated" ~ John Bogle
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Re: Commodities Funds: A Decade of Disaster
.
FWIW – my take/due diligence on commodities
Exposure to commodity (spot) prices can add portfolio benefits
Personally, staying the course (no separate allocation to CCFs or commodity/industry equity funds). Will be interesting to see how the new iShares fund performs.
Best,
Robert
.
FWIW – my take/due diligence on commodities
Exposure to commodity (spot) prices can add portfolio benefits
- The rationale often provided for including CCFs is to protect against (commodity) price inflation, to provide some protection against event risk, and for a potential rebalancing return. The main evidence for this is 1973-1974 when commodity prices soared while stocks plummeted (event risk), and the longer-term inflation protection from 1973-1981 (the period of highest inflation in the US since 1913 – the earliest data available from the Bureau of Labor Statistics).
- Using available data on the DJ-Commodity Total Returns (reflecting collateralized positions in the underlying commodity futures), collateralized commodity futures (CCF) funds have not closely tracked the magnitude of spot price changes of the underlying commodities - doing better in 1991-2002, but lagging signficantly in 2003-2013 (see figures).
Source: Dow Jones indexes website data
- For the purpose of illustration I use a 50% US Large Value: 50% US Small Value equity holding rather than S&P500. This is a closer reflection my own portfolio than S&P500. The value tilt already provides some inflation protection, and bond duration has already been extended from short-term to intermediate term (5 yr) with inclusion of a value tilt (think Larry also indicated this in one of his earlier books). Given this already extended duration, I don’t include further extension in the analysis.
The main result (2003-2013) is that adding a 5% direct exposure to commodity spot prices lowered the standard deviation of portfolio returns (from 12.2 to 11.6) at a small cost to annualized returns (9.8% vs. 9.9%). The result was an increase in the Sharpe ratio from 0.74 to 0.77. However when adding a 5% direct exposure to CCFs (as opposed to commodity spot prices), returns declined from 9.9% to 9.5%, and the Sharpe ratio was marginally lower (0.73 vs 0.74). These differences increase as the allocation to commodities/CCFs in a portfolio increase.
2003-2013
60:40 stocks:bonds (baseline)
Annualized return = 9.9%
Standard deviation = 12.2
Sharpe ratio = 0.74
55:5:40 stocks:commodities:bonds
Annualized return = 9.8%
Standard deviation = 11.6
Sharpe ratio = 0.77
55:5:40 stocks:CCF:bonds
Annualized return = 9.5%
Standard deviation = 11.6
Sharpe ratio = 0.73
Stocks = 50% FF US Large Value (research):50% FF US Small Value (research); Bonds = 5-year T-notes 1991-2002, Barclays 3-7 yr Treasury 2003-2013 the two series have very similar returns; Commodities = DJ-Commodity Spot; CCF=DJ-Commodity Total Return. Using the PIMCO fund returns instead of the DJ-Commodity Total Returns does not change the overall result.
Over 2003-2013 CCFs (at least the DJ-Commodity Total Returns) have not delivered the returns of the underlying commodity spot prices, which is what matters for their portfolio inclusion. Will this change in the future, with lower tracking error? I don’t know. But if we have an ‘event’ won’t everyone then pile into CCFs yielding the same pattern since 2003 just when you need the reverse to be true? (Will this diminish the effectiveness of CCFs to hedge 'event risk'? The event risk hedge was the main value I viewed for someone including CCFs)
- I repeated the analysis using Vanguard PME and Vanguard Energy instead of CCF.
2003-2013
60:40 stocks:bonds (baseline)
Annualized return = 9.9%
Standard deviation = 12.2
Sharpe ratio = 0.74
55:5:40 stocks:PME:bonds
Annualized return = 9.9%
Standard deviation = 12.3
Sharpe ratio = 0.74
55:5:40 stocks:Energy:bonds
Annualized return = 10.1%
Standard deviation = 11.9
Sharpe ratio = 0.78
The main result is that adding a 5% direct exposure to PME made no difference with the same returns (9.9% each) and sharpe ratio (0.74 each). However when adding a 5% direct exposure to energy, the returns increased to 10.1% and the standard deviation declined 12.2 to 11.9 thereby increasing the shape ratio to 0.78 (from 0.74).
- I earlier did some further analysis on all years from 1926 with inflation above 5% (16 year: 1941-42, 1946-47, 1950-51, 1969, 1973-75, 1977-81, 1990).
The annualized returns over these 16 years were as follows:
CPI = 9.2%
CRSP1-10 = 3.7%
US FF Large Value = 7.8%
US FF Small Value = 8.1%
50% US FF Large Value: 50% US FF Small Value = 8.2%
And from Ken French Industry Data
Oil (industry) = 9.7%
Coal = 14.2%
Agriculture = 8.6%
Mines = 5.0%
Mines = non-metallic and industrial metal mining. The gold ‘industry’ series (precious metals) only begins in 1969. From 1973 (9 years) CPI = 9.3% Gold = 12.9%, Oil = 9.4%, Coal = 11.3%, Mines = 10.6%, Agriculture = 7.8%.
Interestingly Swensen seems to prefer oil reserves to oil futures prices as a hedge against inflation (in Pioneering Portfolio Management), although no easy way to own these. Despite concerns that producers often hedge production thus reducing the strengthen of the link of oil companies with oil prices, the link between CCFs and commodity spot prices can be just as weak (re:2003-2013). For the 16 years analyzed above, crude oil price increases where about twice as large for all periods, as oil (industry) returns (18% vs. 9.7%), while for the last 11 years DJ commodity spot price increased annualized at 9.8%, compared to DJ CCF at 2.9% (the PIMCO fund faired a little, but not much better). So I can understand the view of adding commodity companies (more so for energy), vs CCFs. In this respect, ishares recently launched a fund that tracks the MSCI select energy producers index with the aim to focus on companies in the energy industry that are highly sensitive to underlying prices of energy commodities i.e. companies primarily engaged in exploration and production of oil and gas, or in the production and mining of coal and other consumable fuels. (tikker = FILL).
Beyond industries, the annualized factor premium returns over the 16 years were market (Mkt-rf) = -2.5, SMB = 0.5, HML = 4.7, MOM = 9.7. The ‘quality’ factor does not seem to perform well during inflationary periods (Novy-Marx quality premium had annualized return of -0.3% for year with inflation above 5% from 1969).
Personally, staying the course (no separate allocation to CCFs or commodity/industry equity funds). Will be interesting to see how the new iShares fund performs.
Best,
Robert
.
Last edited by Robert T on Sun Dec 29, 2013 10:59 am, edited 2 times in total.
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Re: Commodities Funds: A Decade of Disaster
Thank you all for these great and insightful comments - I learned a lot from this debate. It seems that very knowledgeable investors can come to different conclusions looking at the data regarding inclusion of CCFs in one's portfolio or not. As Dr. Bernstein, Larry, JohnDoe and Robert seem to agree, the difference is probably relatively small and we should probably focus more on the things they agree on.
But one thing, that I am not sure if it has been mentioned enough, is the cost of a CCF strategy for an individual investor, (if one considers to include this in one's portfolio).
PCRIX has been mentioned a lot, it has an ER of 0.78 but the minimum amount you need to buy this (on the PIMCO website) is 1 million (I wish this would qualify as 5% of my portfolio....).
The individual investor shares costs are much higher, looking at the PCRAX, there is a 5% load and an ER of 1.23%, class B and D have ERs of 1.98%. So even if there might be a marginal benefit for someone who has access to PCRIX, for the regular investor who has no advisor, the (small) benefit of adding CCFs might be absorbed by the high cost. The DFA option that has been mentioned, also requires a financial advisor. Is anyone aware of a less expensive CCF option for individual investors that has a known track record?
Happy New Year to everyone and thanks for these great (and civil) posts!
Michael
But one thing, that I am not sure if it has been mentioned enough, is the cost of a CCF strategy for an individual investor, (if one considers to include this in one's portfolio).
PCRIX has been mentioned a lot, it has an ER of 0.78 but the minimum amount you need to buy this (on the PIMCO website) is 1 million (I wish this would qualify as 5% of my portfolio....).
The individual investor shares costs are much higher, looking at the PCRAX, there is a 5% load and an ER of 1.23%, class B and D have ERs of 1.98%. So even if there might be a marginal benefit for someone who has access to PCRIX, for the regular investor who has no advisor, the (small) benefit of adding CCFs might be absorbed by the high cost. The DFA option that has been mentioned, also requires a financial advisor. Is anyone aware of a less expensive CCF option for individual investors that has a known track record?
Happy New Year to everyone and thanks for these great (and civil) posts!
Michael
Re: Commodities Funds: A Decade of Disaster
Used to be you could buy PCRIX at Vanguard. I haven't checked for awhile. Last time I did, the minimum initial investment was $25K I believe. Of course you can start with the minimum (If you have it) and then sell some to trim back to the level you want. I'd prefer an ETF (ETN) such as DJP, however. No minimum there. PCRIX is actively managed and not a good passive CCF holding, IMO. Larry doesn't recommend it anymore either.
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Re: Commodities Funds: A Decade of Disaster
I agree.Rick Ferri wrote:There is an awful lot of explaining going on as to why one should add expensive collateralized commodity funds (CCFs) to a portfolio. Usually, when an investment needs that much explaining, it's not a good idea. You start getting in tail end scenarios, the hope of negative correlation, the hope of MPT.
My take on investing is much simpler. I buy investments that have positive real return expectation. This may come in from interest, dividends, rents, capital appreciate or a combination thereof. Put these investment in your portfolio and lengthy explanations are not needed.
Rick Ferri
More to the point, I personally want to understand why some alleged promised return is deserved. I like returns that are obtained by committing my money to something that creates value, and taking my fair share of the value thus created. I do not intentionally commit my money to an enterprise dedicated to getting money by taking it away from somebody else; it seems not only unethical, but unlikely to work, since someone capable of taking money away from other smart players is likely to be capable of taking it away from me.
But, just to be argumentative, I thought there was something about certain kinds of commodity investments having some kind of real return because they are a sort of insurance activity--somebody is performing a valuable service in helping airlines budget future fuel expenses or farmers buy seed based on an assurance of a known future price... and somebody is willing to pay them for doing an honest job of taking on the risk. No?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Commodities Funds: A Decade of Disaster
Robert:
Thanks very much for getting, charting and analyzing the data. Your first chart reproduces the chart I posted from the Gorton and Rouwenhorst paper I believe, and your second chart give actual data in place of my crude extensions based on Dr. Bernstein's initial claims about CCF and spot prices over 2003-2013.
In looking at your 2003-2013, however, I am struck by something: almost all of the disconnect between CCFs and spot seems to take place between late 2008 and early 2011. From mid-2005 to late 2008 there is a mild disconnect, especially in the late 2007/early 2008 spike. But nonetheless by late 2008 the cumulative returns of CCFs and spot are roughly equal. Likewise, from early 2011to end-2013 CCFs and spot appear to track well.
My question to Robert and others:
Leaving aside whether you think one should include / exclude CCFs from a portfolio, is there a technical explanation for disconnect during precisely the late-2008 - early 2011 period? I.e. a technical explanation for both the beginning of the disconnect in late 2008 and for the ending of the disconnect in early 2011?
Thanks in advance.
Thanks very much for getting, charting and analyzing the data. Your first chart reproduces the chart I posted from the Gorton and Rouwenhorst paper I believe, and your second chart give actual data in place of my crude extensions based on Dr. Bernstein's initial claims about CCF and spot prices over 2003-2013.
In looking at your 2003-2013, however, I am struck by something: almost all of the disconnect between CCFs and spot seems to take place between late 2008 and early 2011. From mid-2005 to late 2008 there is a mild disconnect, especially in the late 2007/early 2008 spike. But nonetheless by late 2008 the cumulative returns of CCFs and spot are roughly equal. Likewise, from early 2011to end-2013 CCFs and spot appear to track well.
My question to Robert and others:
Leaving aside whether you think one should include / exclude CCFs from a portfolio, is there a technical explanation for disconnect during precisely the late-2008 - early 2011 period? I.e. a technical explanation for both the beginning of the disconnect in late 2008 and for the ending of the disconnect in early 2011?
Thanks in advance.
Re: Commodities Funds: A Decade of Disaster
What is a sport price
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Re: Commodities Funds: A Decade of Disaster
Thanks Browser, very helpfulUsed to be you could buy PCRIX at Vanguard. I haven't checked for awhile. Last time I did, the minimum initial investment was $25K I believe. Of course you can start with the minimum (If you have it) and then sell some to trim back to the level you want. I'd prefer an ETF (ETN) such as DJP, however. No minimum there. PCRIX is actively managed and not a good passive CCF holding, IMO. Larry doesn't recommend it anymore either.
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Re: Commodities Funds: A Decade of Disaster
I don't know if I'd call 150 and 200 "roughly equal", but I think the explanation for the timing of the disconnect is:JohnDoh wrote:I am struck by something: almost all of the disconnect between CCFs and spot seems to take place between late 2008 and early 2011. From mid-2005 to late 2008 there is a mild disconnect, especially in the late 2007/early 2008 spike. But nonetheless by late 2008 the cumulative returns of CCFs and spot are roughly equal.
nisiprius wrote:It also fits the pattern of what you've called "Rekenthaler's rule: if the bozos know about it, it doesn’t work any more." I'm not quite sure when commodities started to be the flavor-of-the-month--we really need a handy term for a time period on the order of six months, since that actually seems like the rhythm of investing fashion, the time it takes for "everyone" to be talking about something.
At a rough indicators, when did Fidelity add commodities to its target-date Freedom funds? That would probably be a good marker for the moment at which you could say "the bozos know about it." Aug. 5, 2010: Target-Date Funds Embrace Commodities.
According to March, 2013, Consumer Reports Money Advisor, in 2006 Ibbotson Associates published an influential study apparently showing that commodities improved traditional portfolios.
Re: Commodities Funds: A Decade of Disaster
Fair enough But: 1) from a visual inspection of the chart, it appears that in late 2008 small X-axis changes are tied to substantial Y-axis changes, so it may be there is a particular date there with a smaller discrepancy; and 2) even in the pre-2003 chart/data you find patterns similar to 2003-late-2008, so that period does not look particularly anomalous (to me).jeffyscott wrote:I don't know if I'd call 150 and 200 "roughly equal", [SNIP]JohnDoh wrote:I am struck by something: almost all of the disconnect between CCFs and spot seems to take place between late 2008 and early 2011. From mid-2005 to late 2008 there is a mild disconnect, especially in the late 2007/early 2008 spike. But nonetheless by late 2008 the cumulative returns of CCFs and spot are roughly equal.
Fair enough as to onset. But why the end of the disconnect in early 2011? Did CCFs become massively LESS POPULAR then? Has there been a massive outflow of AUM since 2011? (Serious questions.)jeffyscott wrote: but I think the explanation for the timing of the disconnect is:nisiprius wrote:It also fits the pattern of what you've called "Rekenthaler's rule: if the bozos know about it, it doesn’t work any more." I'm not quite sure when commodities started to be the flavor-of-the-month--we really need a handy term for a time period on the order of six months, since that actually seems like the rhythm of investing fashion, the time it takes for "everyone" to be talking about something.
At a rough indicators, when did Fidelity add commodities to its target-date Freedom funds? That would probably be a good marker for the moment at which you could say "the bozos know about it." Aug. 5, 2010: Target-Date Funds Embrace Commodities.
According to March, 2013, Consumer Reports Money Advisor, in 2006 Ibbotson Associates published an influential study apparently showing that commodities improved traditional portfolios.
I suppose the reasons for the beginning and ending of the disconnect could be related to independent causes, but my first assumption/prejudice is that it might be tied to the beginning and ending of something else (e.g. the crash, the Great Recession, financial policy, etc.).
Re: Commodities Funds: A Decade of Disaster
edge wrote:What is a sport price
- (a) autocorrect when loading the picture, (b) subliminal message to myself to do some sport, (c) a check to see if anyone reads by charts. May be none of these. Thanks for catching it - have made the correction.
Re: Commodities Funds: A Decade of Disaster
I did check Vanguard's Fund Access and the minimum is $25K with a $35 transaction fee. I owned it awhile back and I think there was only a $1K minimum then.michaelsieg wrote:Thanks Browser, very helpfulUsed to be you could buy PCRIX at Vanguard. I haven't checked for awhile. Last time I did, the minimum initial investment was $25K I believe. Of course you can start with the minimum (If you have it) and then sell some to trim back to the level you want. I'd prefer an ETF (ETN) such as DJP, however. No minimum there. PCRIX is actively managed and not a good passive CCF holding, IMO. Larry doesn't recommend it anymore either.
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Re: Commodities Funds: A Decade of Disaster
I don't know, but just speculating that maybe the disconnect was larger during the transition as money flowed into the strategy. Hard to tell for sure from the chart, but it still appears that CCF lags spot, by a smaller amount, post 2011. To my eyes, it appears that spot goes from ~350 to ~275, a loss of about 21%, while CCF goes from ~190 to ~140, a loss of 26%?JohnDoh wrote:Fair enough as to onset. But why the end of the disconnect in early 2011? Did CCFs become massively LESS POPULAR then? Has there been a massive outflow of AUM since 2011? (Serious questions.)
Re: Commodities Funds: A Decade of Disaster
The DJ-USB is dominated by energy. An unexpected (in my opinion at least) event that also occurred in that general timeframe was the rapid expansion of fracking as a way to claim energy reserves that were previously not extractable. Could this have somehow affected futures by putting unexpected downward pressure on energy prices at a time when they were expected to rebound due to an improving economy out of the 08-09 crash? Before fracking, who would have thought we'd be talking about the US as a net exporter of energy?jeffyscott wrote:I don't know, but just speculating that maybe the disconnect was larger during the transition as money flowed into the strategy. Hard to tell for sure from the chart, but it still appears that CCF lags spot, by a smaller amount, post 2011. To my eyes, it appears that spot goes from ~350 to ~275, a loss of about 21%, while CCF goes from ~190 to ~140, a loss of 26%?JohnDoh wrote:Fair enough as to onset. But why the end of the disconnect in early 2011? Did CCFs become massively LESS POPULAR then? Has there been a massive outflow of AUM since 2011? (Serious questions.)
Re: Commodities Funds: A Decade of Disaster
To me this seems like noise. Moreover, this level of variance is seen in the pre-2003 data I believe -- especially in periods of declining spot prices.jeffyscott wrote:I don't know, but just speculating that maybe the disconnect was larger during the transition as money flowed into the strategy. Hard to tell for sure from the chart, but it still appears that CCF lags spot, by a smaller amount, post 2011. To my eyes, it appears that spot goes from ~350 to ~275, a loss of about 21%, while CCF goes from ~190 to ~140, a loss of 26%?JohnDoh wrote:Fair enough as to onset. But why the end of the disconnect in early 2011? Did CCFs become massively LESS POPULAR then? Has there been a massive outflow of AUM since 2011? (Serious questions.)
Maybe I'm clutching at straws, but the late-2008 - early-2011 period seems SO distinct and suggestive to me. It's got my spidey-sense all tingley . Something about the crash and the rebound ...
Re: Commodities Funds: A Decade of Disaster
One further thought.
Assuming Robert's chart is accurate (which I do) and the isolation of the major disconnect between CCF prices and spot prices to the late-2008-to-early-2011 timeframe (which I'm still sticking with), it appears that at least two things follow:
1) There was NOT a "Decade of Disaster", but rather a "2.5-Year Disaster";
2) The disaster has been over for almost 3 years.
Note that it may well be that roll returns are still negative, thus preventing CCFs from earning more than spot (as was apparently the case pre-2003). But the early-2011 - late-2013 portion of the graph suggests that CCFs have been at least tracking spot prices reasonably well since early-2011 -- and are doing so today.
Assuming Robert's chart is accurate (which I do) and the isolation of the major disconnect between CCF prices and spot prices to the late-2008-to-early-2011 timeframe (which I'm still sticking with), it appears that at least two things follow:
1) There was NOT a "Decade of Disaster", but rather a "2.5-Year Disaster";
2) The disaster has been over for almost 3 years.
Note that it may well be that roll returns are still negative, thus preventing CCFs from earning more than spot (as was apparently the case pre-2003). But the early-2011 - late-2013 portion of the graph suggests that CCFs have been at least tracking spot prices reasonably well since early-2011 -- and are doing so today.
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Re: Commodities Funds: A Decade of Disaster
midareff
First adding duration was not said in hindsight. I have been suggesting that for a long time--if adding CCF add some duration
Second, my books don't really recommend any specific allocation. I simply show model portfolios which should be used as starting points for your decision.
I have suggested people consider 5-10% of EQUITY allocation, with the amount dependent on maturity of bonds and risk of unexpected inflation.
Larry
First adding duration was not said in hindsight. I have been suggesting that for a long time--if adding CCF add some duration
Second, my books don't really recommend any specific allocation. I simply show model portfolios which should be used as starting points for your decision.
I have suggested people consider 5-10% of EQUITY allocation, with the amount dependent on maturity of bonds and risk of unexpected inflation.
Larry
Re: Commodities Funds: A Decade of Disaster
JohnDoh wrote:
1) There was NOT a "Decade of Disaster", but rather a "2.5-Year Disaster";
2) The disaster has been over for almost 3 years.
We have many choices to make when constructing a portfolio. The objective in most cases is to have additions to portfolio add value. If we consider the choice between PCRIX vs VTSAX (TM) it would be a stretch to claim PCRIX has not been a disaster over the past three years. Just over the past three years, PCRIX has undeperformed Vanguard’s total market fund by 20.93% and by a incredible 47.58% over the past year.
Under the most favorable situation where the choice would be between PCRIX and VBTLX (TB) the PCRIX would still have a TR shortfall of 8.14% over the past three years and 11.48% over the past year. If things are getting better for CCFs, it is hard to see it in the actual performance data. Despite the fact that the graph may show CCFs tracking better since early 2011, as an investment, both in isolation and as an allocation to an investment portfolio, the last three years have not been kind to CCFs. Have I misinterpreted your post somehow, I know I have done so with other posts in the past?
You can sum up any active fund manager’s presentation at an investor conference in one sentence: “We’re doing well, all things considered.”
Re: Commodities Funds: A Decade of Disaster
JohnDoh,JohnDoh wrote:My question to Robert and others:
Leaving aside whether you think one should include / exclude CCFs from a portfolio, is there a technical explanation for disconnect during precisely the late-2008 - early 2011 period? I.e. a technical explanation for both the beginning of the disconnect in late 2008 and for the ending of the disconnect in early 2011?
Thanks in advance.
There is no apparent disconnect, as far as I can tell - see chart below. It shows the ratio of the DJ commodity spot price/DJ commodity total return rising throughout the period. It does rise at a faster rate in 2009 and a slower rate towards end of period, but nevertheless rises throughout. Reasons? Some have argued that increasing assets in CCFs is (a large) part of the explaination (e.g. Bill Bernstein and Jeremy Grantham). The chart also plots the total assets of the PIMCO fund (PCRIX). While this fund is not the total market it is a large share, so perhaps is representative of general trends in overall asset (not exact, but proximate). While the turning points are much sharper, there does seem to be rising rates of assets in 2009, and slowing rates of assets towards the end of the period.
I think this only adds to my earlier concerns. CCF assets seems to have signficant market impact. And if rising commodity spot prices (caused by 'events', or other factors) induce large inflows into CCFs, the commodity price hedge could be significanly diminshed just when needed most.
There is a risk we try to read too much into the data - but I think the general trends seem to add up/and seem to make sense. Will be interesting to see how CCFs perform going forward.
Robert
.
Re: Commodities Funds: A Decade of Disaster
Hi Bradley:Bradley wrote:JohnDoh wrote:
1) There was NOT a "Decade of Disaster", but rather a "2.5-Year Disaster";
2) The disaster has been over for almost 3 years.
We have many choices to make when constructing a portfolio. The objective in most cases is to have additions to portfolio add value. If we consider the choice between PCRIX vs VTSAX (TM) it would be a stretch to claim PCRIX has not been a disaster over the past three years. Just over the past three years, PCRIX has undeperformed Vanguard’s total market fund by 20.93% and by a incredible 47.58% over the past year.
Under the most favorable situation where the choice would be between PCRIX and VBTLX (TB) the PCRIX would still have a TR shortfall of 8.14% over the past three years and 11.48% over the past year. If things are getting better for CCFs, it is hard to see it in the actual performance data. Despite the fact that the graph may show CCFs tracking better since early 2011, as an investment, both in isolation and as an allocation to an investment portfolio, the last three years have not been kind to CCFs. Have I misinterpreted your post somehow, I know I have done so with other posts in the past?
Yes, I do think you are mis-interpreting my post. The point of this thread is not whether CCFs have been the best performing asset class this year or even this decade. But rather whether CCFs captured the returns that some people thought they were "supposed" to capture. If CCFs had tracked spot prices over the decade, I don't think Dr. Bernstein would have called the decade a "disaster" -- EVEN IF CCFs=spot had had negative returns. Likewise, if CCFs had outperformed spot and yet both were still negative.
In a similar spirit, TIPS have returned around -7% this year, but no one says that that is a "disaster". TIPS simply did what they were supposed to do in the face of rising real interest rates. Likewise, precious metals equity (PME) are down something like -50% over the past few years. On the one hand, of course, -50% is a "disaster" (especially when US LV is up something like 40%). But on the other hand, this is what PME does from time-to-time -- and part of the precise reason why some people choose to own it.
This year turns out to have been one of those years in which it hurt to be "diversified", almost no matter what asset class you mean. But no one seriously suggests we should own non-diversified portfolios. This is the way the investing world turns from time-to-time; but not a "disaster".
Re: Commodities Funds: A Decade of Disaster
Thanks, Robert, for the additional data and charts and analysis. I'm going to have to think more on them. (Mebbe I'm treed ... )
On a technical point, I note that the prior series begin in January 2003 and the current series appears to begin in June 2004 (and not January 2004). Is that correct?
P.S. Where do you get your data from? And can anyone access it? Thanks again.
On a technical point, I note that the prior series begin in January 2003 and the current series appears to begin in June 2004 (and not January 2004). Is that correct?
P.S. Where do you get your data from? And can anyone access it? Thanks again.
Re: Commodities Funds: A Decade of Disaster
Collateral yield is a forgotten factor in futures funds - this is cash sitting in t-bills. Over the last few years this has contributed nothing to returns. Historically it was much greater. These funds will perform when inflation and interest rates rise, because the futures will return better and the collateral will return better.
Re: Commodities Funds: A Decade of Disaster
John,JohnDoh wrote: TIPS have returned around -7% this year, but no one says that that is a "disaster". TIPS simply did what they were supposed to do in the face of rising real interest rates.
Even when compared to worst performing asset class many of us hold (TIPS) this year, it has outperformed PCRIX by 8.30% per year over the past 3 years and 4.48% over this past year which some may view as a disaster especially considering it's decade long troubles. The future may become brighter for PCRIX and 10 years is a relatively short time period but I do believe many investors have already jettisoned there CCFs while being told next year will be better with no real evidence that will actually happen. Interesting discussion and in my opinion behavioral thinking and neuroeconomics have played a part in both camps on the issue of commodities.
You can sum up any active fund manager’s presentation at an investor conference in one sentence: “We’re doing well, all things considered.”
Re: Commodities Funds: A Decade of Disaster
FYI - JohnDoh has started a new thread: So, you want to invest in CCFs ...
Interested members should post in that thread.JohnDoh wrote:... In this thread, I'd like to focus on analyzing the relative merits of the various vehicles for investing in CCFs. In other words, for the purpose of this thread please let us ASSUME that (for whatever reasons) one has ALREADY decided on a CCF-including STRATEGY and let's talk TACTICS.
Re: Commodities Funds: A Decade of So What
Recurring threads such as this one on the wisdom of holding a small portion of your portfolio assets in a commodity fund strike me as much ado about next to nothing. Most people hold 40%-70% of their portfolio in equities, so how can Larry Swedroe's advice to hold 5%-10% of equity holdings in CCF's make diddly-squat for difference one way or the other with regard to most people's investment returns and goals? Inquiring minds want to know! Certainly, I can't be the only one that thinks this way - can I ?
Hold um or don't don't hold um - but quit obsessing about it.
BobK
edited once for spelling of diddly
Hold um or don't don't hold um - but quit obsessing about it.
BobK
edited once for spelling of diddly
Last edited by bobcat2 on Sun Dec 29, 2013 4:58 pm, edited 1 time in total.
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Re: Commodities Funds: A Decade of Disaster
Bob,
Re much ado about next to nothing: I kinda thought that was Nisi's point when he quoted John Bogle--e.g.,
"To those who advocate commodities. John C. Bogle has said "Successful investing involves doing just a few things right and avoiding serious mistakes."
I can assure you that my ongoing retirement will not stand or fall on the next "new, new thing."
Lev
Re much ado about next to nothing: I kinda thought that was Nisi's point when he quoted John Bogle--e.g.,
"To those who advocate commodities. John C. Bogle has said "Successful investing involves doing just a few things right and avoiding serious mistakes."
I can assure you that my ongoing retirement will not stand or fall on the next "new, new thing."
Lev
Re: Commodities Funds: A Decade of Disaster
Good point, but I thought that futures and options prices already incorporate the cost of short-term borrowing. I'm pretty sure that's the case with options, I'm not so clear on futures. So if short term interest rates were higher, would the futures cost more?ladders11 wrote:Collateral yield is a forgotten factor in futures funds - this is cash sitting in t-bills. Over the last few years this has contributed nothing to returns. Historically it was much greater. These funds will perform when inflation and interest rates rise, because the futures will return better and the collateral will return better.
Brad
Most of my posts assume no behavioral errors.
Re: Commodities Funds: A Decade of So What
Hi Lev,Levett wrote:I can assure you that my ongoing retirement will not stand or fall on the next "new, new thing."
Lev
I can't imagine that anyone's retirement is going to stand or fall on any "new, new thing", if that thing is less than 5% of their portfolio. What are people thinking
Happy Holidays Lev,
Bob
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: Commodities Funds: A Decade of Disaster
I see Taylor hasn't yet posted in this thread... one of his own authentic "gems," in my opinion, is:
"When experts disagree, it is often because it does not make much difference."
"When experts disagree, it is often because it does not make much difference."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Commodities Funds: A Decade of So What
That's what I said. I can't understand why, if a little CCF is good, a lot isn't better. If you like backtesting, that will show you that you should probably allocate a lot more than 5% to commodities. The Perm Porters have it right -- go for 25%. Now -- start thinking of all the misgivings you would have about owning a large allocation to commodities. Then explain what would cancel out those misgivings just because you are allocating only diddly-squat to them, other than the fact 5% won't make much difference one way or the other.bobcat2 wrote:Recurring threads such as this one on the wisdom of holding a small portion of your portfolio assets in a commodity fund strike me as much ado about next to nothing. Most people hold 40%-70% of their portfolio in equities, so how can Larry Swedroe's advice to hold 5%-10% of equity holdings in CCF's make diddly-squat for difference one way or the other with regard to most people's investment returns and goals? Inquiring minds want to know! Certainly, I can't be the only one that thinks this way - can I ?
Hold um or don't don't hold um - but quit obsessing about it.
BobK
edited once for spelling of diddly
We don't know where we are, or where we're going -- but we're making good time.
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Re: Commodities Funds: A Decade of Disaster
baw
If rates were higher there would be two exactly offsetting effects. The carry costs are higher and that leads to futures being higher and the return on the collateral would be equally higher.
That is why you never see this issue that Bill has raised about divergence between spot and futures (which happened in OIL, not ALL COMMODITIES) with any EASILY STORABLE commodity like a precious metal (gold).
The only other point I'll make is that why do people (the same people) keep looking at the returns of CCF and showing them relative to a equity return? That's totally irrelevant. All that matters, and it's why Markowitz won a Nobel Prize, is the impact of when you add something what happens to the risk and return of the portfolio. In fact IF we knew that CCF would provide no real return but would be highly volatile and negatively correlated to stocks and/or bonds we should all include them as they would improve the efficiency of a portfolio. But we don't know that will be the case. That's the risk. But comparing the returns in isolation is just showing a lack of knowledge of basic principles of finance.
Larry
If rates were higher there would be two exactly offsetting effects. The carry costs are higher and that leads to futures being higher and the return on the collateral would be equally higher.
That is why you never see this issue that Bill has raised about divergence between spot and futures (which happened in OIL, not ALL COMMODITIES) with any EASILY STORABLE commodity like a precious metal (gold).
The only other point I'll make is that why do people (the same people) keep looking at the returns of CCF and showing them relative to a equity return? That's totally irrelevant. All that matters, and it's why Markowitz won a Nobel Prize, is the impact of when you add something what happens to the risk and return of the portfolio. In fact IF we knew that CCF would provide no real return but would be highly volatile and negatively correlated to stocks and/or bonds we should all include them as they would improve the efficiency of a portfolio. But we don't know that will be the case. That's the risk. But comparing the returns in isolation is just showing a lack of knowledge of basic principles of finance.
Larry
Re: Commodities Funds: A Decade of Disaster
Robert, the graph and your commentary are invaluable. Thanks for the contribution.Robert T wrote:edge wrote:What is a sport price.
- (a) autocorrect when loading the picture, (b) subliminal message to myself to do some sport, (c) a check to see if anyone reads by charts. May be none of these. Thanks for catching it - have made the correction.
Re: Commodities Funds: A Decade of So What
grayfox wrote.
BobK
WAY WAY UPThis is an epic debate. The victor shall be awarded the CCCCF, the Coveted Cup of Collateralized Commodity Futures [or not - if the nots win ].
This cup is made from the most precious of commodities, solid gold, and encrusted with priceless jewels. It is symbolic of the endless search for the ultimate portfolio diversifier. [Note: Not for drinking from.]
Happy Holidays!
BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: Commodities Funds: A Decade of Disaster
Browser, the simple economic theory explains why this is WRONG.That's what I said. I can't understand why, if a little CCF is good, a lot isn't better
An asset with lower returns can improve a portfolio when you add a little bit--depending on correlations and volatility--but adding a lot can make it more inefficient. That's simple math---just think about moving to 100% and you'll see why it's wrong.
Larry
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Re: Commodities Funds: A Decade of Disaster
Robert T wrote:
I think it was a good idea to plot the AUM on the same plot as the spot price/total return. But I am not sure how large inflows of capital into CCFs in an event such as a "supply shock" would play out for investors, who hold CCFs before the event. - Couldn't it be that we could observe a similar mechanism as a"flight to safety" in bonds when there are stock market crashes? i.e. wouldn't the sudden great demand for CCFs lead to an increase the prices? I have to admit that I don't understand the futures market enough to know, if a simple supply/demand mismatch would (or would not) lead to higher prices. How did this play out in the early 70s?I think this only adds to my earlier concerns. CCF assets seems to have signficant market impact. And if rising commodity spot prices (caused by 'events', or other factors) induce large inflows into CCFs, the commodity price hedge could be significanly diminshed just when needed most.
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Re: Commodities Funds: A Decade of Disaster
one other thing
Note that the ERP has been about 8%, so if you expect CCF to have return of say tbills that's a hurdle of 8% to overcome
Now most financial economists are predicting an ERP more like 4% or so, without even a RTM of valuations which could occur
So I'll point out that in era of 8% ERP adding CCF at worst had little to no impact, and perhaps we no longer are in that world of excessive contango for oil, and the ERP is now half the size perhaps there is clearly less of a hurdle for CCF to overcome.
Best wishes
Larry
Note that the ERP has been about 8%, so if you expect CCF to have return of say tbills that's a hurdle of 8% to overcome
Now most financial economists are predicting an ERP more like 4% or so, without even a RTM of valuations which could occur
So I'll point out that in era of 8% ERP adding CCF at worst had little to no impact, and perhaps we no longer are in that world of excessive contango for oil, and the ERP is now half the size perhaps there is clearly less of a hurdle for CCF to overcome.
Best wishes
Larry
Re: Commodities Funds: A Decade of Disaster
Acronym decoder for the previous 2 posts:
AUM = Assets Under Management
CCF = Collateralized Commodity Futures
ERP = Equity Risk Premium (Investopedia: Equity Risk Premium)
RTM = Reversion To the Mean (wiki: Mean reversion)
AUM = Assets Under Management
CCF = Collateralized Commodity Futures
ERP = Equity Risk Premium (Investopedia: Equity Risk Premium)
RTM = Reversion To the Mean (wiki: Mean reversion)
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Re: Commodities Funds: A Decade of Disaster
Can someone explain what CCF stands for or point me in the right direction to reading some materials?
John C. Bogle: “Simplicity is the master key to financial success."
Re: Commodities Funds: A Decade of Disaster
Here's a thread with a lot of good info: Collateralized Commodity Futures ? - Larry's Article (Jan 03, 2008)
A partial quote: Subject: Collateralized Commodity Futures ? - Larry's Article
A partial quote: Subject: Collateralized Commodity Futures ? - Larry's Article
A referenced paper: Facts And Fantasies About Commodity Futures, June 14, 2004Rick Ferri wrote:...Commodity futures are a way to play the commodities market without actually owning anything. Over the 50 year period commodity futures prices have been tracked, they have had the same return as the underlying commodity. There is no reason to believe that in the long-term investing in CCF will have different return than by investing in the underlying commodity, which is about the inflation rate.
Thus, the only way to possibly achieve better than inflation returns from commodity futures is through a trading strategy. No academic disputes any of these facts...
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Re: Commodities Funds: A Decade of Disaster
We invested in the Vanguard Precious Mining funds years ago and quickly sold it.
We never went back and are happy for the decision we made.
We never went back and are happy for the decision we made.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Commodities Funds: A Decade of Disaster
Thanks LadyGeek.LadyGeek wrote:Here's a good thread with a lot of references: Collateralized Commodity Futures ? - Larry's Article (Jan 03, 2008)
A partial quote: Subject: Collateralized Commodity Futures ? - Larry's Article
A referenced paper: Facts And Fantasies About Commodity Futures, June 14, 2004Rick Ferri wrote:...Commodity futures are a way to play the commodities market without actually owning anything. Over the 50 year period commodity futures prices have been tracked, they have had the same return as the underlying commodity. There is no reason to believe that in the long-term investing in CCF will have different return than by investing in the underlying commodity, which is about the inflation rate.
Thus, the only way to possibly achieve better than inflation returns from commodity futures is through a trading strategy. No academic disputes any of these facts...
I have some reading to do tonight.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Commodities Funds: A Decade of Disaster
When it comes to holding CCFs as "tail risk insurance", first of all it's kinda expensive insurance. Second of all, as Joel Dickson of Vanguard suggest, the best tail insurance is probably good old gummit bonds.
http://www.indexuniverse.com/sections/f ... rance.htmlDickson: Well, there’s always tail risk, and we can talk about insulating portfolios from bad events. The main message here is that you don’t have to be all that complicated in terms of the implementation of this portfolio insurance, because the best way to insulate portfolios from unforeseen risk events that could hurt broad equity and other risky asset returns is with high-grade sovereign debt; it’s that simple.
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Re: Commodities Funds: A Decade of Disaster
Browser
Now why do you think it's expensive? You only can draw that conclusion if you think of the investment in isolation . As I have shown with examples in this thread the insurance basically cost you nothing in terms of portfolio returns or efficiency and it wasn't even needed.
Larry
Now why do you think it's expensive? You only can draw that conclusion if you think of the investment in isolation . As I have shown with examples in this thread the insurance basically cost you nothing in terms of portfolio returns or efficiency and it wasn't even needed.
Larry