What about commodity futures and commodity funds?
What about commodity futures and commodity funds?
I have been looking at investing in commodity futures as an asset class and also commodity funds as a "tilt" to total stocks. The driving force for my interest is to achieve additional diversification in my PF and, hopefully, getting a little more of the "free lunch" that is allowed by having a standard PF of uncoordinated fund assets like equities, bonds, and perhaps a tilt to REITs.
However, I am loath to invest in that which I do not understand, but truthfully, I don't understand total equities or bond funds either, at least to the extent of having any idea of what will happen tomorrow. However, the VG energy index ETF VDE does NOT correlate closely to total equities (3 year R^2 = 24%) nor does the commodity futures fund PCRIX (3 year R^2=3%). Now the bond funds VFITX and VIPSX do not correlate either, each being about -50% correlated to US and Int'l equities. Granted VDE and PCRIX are not negatively correlated, but they still offer some of the most diversity I can locate within the realm of broad investments.
So, the question is "Why not put them into a PF"? Other than, of course, that this violates the purity of the Bogle plan to buy the total market of equities and bonds to thus achieve the average market return, which certainly isn't a bad thing.
Chas
However, I am loath to invest in that which I do not understand, but truthfully, I don't understand total equities or bond funds either, at least to the extent of having any idea of what will happen tomorrow. However, the VG energy index ETF VDE does NOT correlate closely to total equities (3 year R^2 = 24%) nor does the commodity futures fund PCRIX (3 year R^2=3%). Now the bond funds VFITX and VIPSX do not correlate either, each being about -50% correlated to US and Int'l equities. Granted VDE and PCRIX are not negatively correlated, but they still offer some of the most diversity I can locate within the realm of broad investments.
So, the question is "Why not put them into a PF"? Other than, of course, that this violates the purity of the Bogle plan to buy the total market of equities and bonds to thus achieve the average market return, which certainly isn't a bad thing.
Chas
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- Rick Ferri
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Investors who believe they are missing out on the commodities boom because they do not own a commodities fund are mistaken. Clearly, you did not need a direct investment in commodities to have benefited GREATLY from the commodities boom. All you needed was a low-cost portfolio of global index funds.
Here are the 5 year COMPOUNDED returns of two funds and one index:
Vanguard Energy Fund Investor = 34.5%
Vanguard Precious Metals & Mining = 40.2%
MSCI US IMI/Materials index = 21.2%
Together, energy, precious metals and mining, and basic materials make up over 17% of the Vanguard Total Stock Market Fund. Energy and materials stock make up 27% of the FTSE All-World ex-US Index.
A globally diversified portfolio of stock has approximately 20% in commodity and mining companies. That is more than adequate exposure to this industry group.
Rick Ferri
Here are the 5 year COMPOUNDED returns of two funds and one index:
Vanguard Energy Fund Investor = 34.5%
Vanguard Precious Metals & Mining = 40.2%
MSCI US IMI/Materials index = 21.2%
Together, energy, precious metals and mining, and basic materials make up over 17% of the Vanguard Total Stock Market Fund. Energy and materials stock make up 27% of the FTSE All-World ex-US Index.
A globally diversified portfolio of stock has approximately 20% in commodity and mining companies. That is more than adequate exposure to this industry group.
Rick Ferri
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I don't agree with often stated view that you get exposure to commodities by owning stocks in broad index. Let me explain why I believe that view is incorrect.
Thinking you have exposure to the commodity's boom because you own a globally diversified portfolio of stocks is IMO simply wrong.That is the same type mistake that people have been making about thinking EM is way to get exposure to CCF. The fact is there is almost no correlation. EM and GSCI annual correlation is close to zero (0.07 since 1988)
The reason is that there are just as many importers of commodities as exporters. So countries say like Russia and Indonesia benefit from commodities boom but Israel and Taiwan and China and India and many others suffer. The same is true of stocks.
While you do have exposure to say oil companies that benefit if oil prices rising you also have exposure to chemical stocks, airlines, hotels, and many other industries that suffer from commodity prices rising. And also commodity prices rising can act like a tax on consumers if it leads to overall inflation, dampening demand and hurting profits overall.
If the proposition that you had exposure to commodities by owning broad stocks was correct then you would have positive correlation with CCF, yet we find significant negative correlation. In fact that is the main reason one should consider owning commodities --that negative correlation.
I hope that helps.
Thinking you have exposure to the commodity's boom because you own a globally diversified portfolio of stocks is IMO simply wrong.That is the same type mistake that people have been making about thinking EM is way to get exposure to CCF. The fact is there is almost no correlation. EM and GSCI annual correlation is close to zero (0.07 since 1988)
The reason is that there are just as many importers of commodities as exporters. So countries say like Russia and Indonesia benefit from commodities boom but Israel and Taiwan and China and India and many others suffer. The same is true of stocks.
While you do have exposure to say oil companies that benefit if oil prices rising you also have exposure to chemical stocks, airlines, hotels, and many other industries that suffer from commodity prices rising. And also commodity prices rising can act like a tax on consumers if it leads to overall inflation, dampening demand and hurting profits overall.
If the proposition that you had exposure to commodities by owning broad stocks was correct then you would have positive correlation with CCF, yet we find significant negative correlation. In fact that is the main reason one should consider owning commodities --that negative correlation.
I hope that helps.
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Larry Said:
Vanguard Energy Fund Investor = 34.5% compounded over 5 years
Vanguard Precious Metals & Mining = 40.2% compounded over 5 years
MSCI US IMI/Materials index = 21.2% (Vanguard Materials ETF - VAW)
Currently, the global stock market is over 20% natural resource related companies that have ALL increased in price substantially in the past 5 years. If a person were to substitute 10% of their stock portfolio with a commodities futures fund, they would have 30% of their portfolio exposed to commodity prices. That is excessive.
Investors DO NOT needs high cost commodities futures funds in their portfolios because they already have very low-cost exposure to those businesses through stocks.
Rick Ferri
Do you think I am making these number up? Let me repeat the above numbers, and then you try to make a legitimate case that stock investors have not benefited from a rise in commodity prices:Thinking you have exposure to the commodity's boom because you own a globally diversified portfolio of stocks is IMO simply wrong.
Vanguard Energy Fund Investor = 34.5% compounded over 5 years
Vanguard Precious Metals & Mining = 40.2% compounded over 5 years
MSCI US IMI/Materials index = 21.2% (Vanguard Materials ETF - VAW)
Currently, the global stock market is over 20% natural resource related companies that have ALL increased in price substantially in the past 5 years. If a person were to substitute 10% of their stock portfolio with a commodities futures fund, they would have 30% of their portfolio exposed to commodity prices. That is excessive.
Investors DO NOT needs high cost commodities futures funds in their portfolios because they already have very low-cost exposure to those businesses through stocks.
Rick Ferri
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Just for Rick
In case you have not noticed I will not respond to anything you write. Period.That is for obvious reasons, or should be. You have made persistently false statements about me, making them without any basis for having the knowledge to make them. Then when pointed out that they were wrong you don't even admit it nor have the courtesy to retract the statement and apologize. Having said that when you attack someone with false statements apologizing is like killing one's parents and throwing yourself on the mercy of the court because you are an orphan.
Now to address the issue raised for the group.
First if Rick had cared to read my post he would have noted that I was not responding to his posts (which I will not do) but instead I was commenting on a general issue. Again see my exact statement:
Broad index of course means total market or similar. To get any NET POSITIVE exposure to CCF one would have to own a sector fund, not a broad index fund or portfolio of broad index funds (asset class funds).
Second, as I have posted many times, and stated in my book, the data is very clear from academic papers that stocks of commodity producers have significant positive correlation to equities and are more correlated to stocks than to CCF (which is negatively correlated). Though they are positively correlated to CCF. So you do get some exposure but not the same or as effective. CCF has negative correlation while commodity producers as I said have significant positive correlation. AT any rate if one wanted ANY net exposure to commodities one would have to add some type of sector fund to do that. You cannot get it by simply using a broad based fund. And one might then ask if advisors are not recommending CCF are they recommending one add a commodity producer equity fund as substitute? If not the argument is irrelevant.
Third, there are good reasons for this difference in correlations. There is more risk to equities of commodity producers than just the price of the underlying commodity. A good recent example is the threat of an "excess profits" tax. There are many other issues one could cite--like threat of expropriation of foreign sources or foreign governments changing the terms of agreements (i.e., Venezuela). Or of course overall costs could be rising more quickly so that profit margins get squeezed. I could create an almost endless list of possible negatives.
Fourth, I thought it would that I had previously only looked at the correlations of CCF to the market factor. I decided to take a look at the correlations to other risk factors, for those that have large tilts. And all three are negative.
70-07 with correlation of GSCI and risk factors, annual
Market -0.27
Size -0.27
Price -0.08
My guess why less negative for value stocks is that they tend to be more leveraged and thus benefit somewhat from rising inflation that might accompany rising commodity prices.
I hope the above is helpful
In case you have not noticed I will not respond to anything you write. Period.That is for obvious reasons, or should be. You have made persistently false statements about me, making them without any basis for having the knowledge to make them. Then when pointed out that they were wrong you don't even admit it nor have the courtesy to retract the statement and apologize. Having said that when you attack someone with false statements apologizing is like killing one's parents and throwing yourself on the mercy of the court because you are an orphan.
Now to address the issue raised for the group.
First if Rick had cared to read my post he would have noted that I was not responding to his posts (which I will not do) but instead I was commenting on a general issue. Again see my exact statement:
.I don't agree with often stated view that you get exposure to commodities by owning stocks in broad index. Let me explain why I believe that view is incorrect
Broad index of course means total market or similar. To get any NET POSITIVE exposure to CCF one would have to own a sector fund, not a broad index fund or portfolio of broad index funds (asset class funds).
Second, as I have posted many times, and stated in my book, the data is very clear from academic papers that stocks of commodity producers have significant positive correlation to equities and are more correlated to stocks than to CCF (which is negatively correlated). Though they are positively correlated to CCF. So you do get some exposure but not the same or as effective. CCF has negative correlation while commodity producers as I said have significant positive correlation. AT any rate if one wanted ANY net exposure to commodities one would have to add some type of sector fund to do that. You cannot get it by simply using a broad based fund. And one might then ask if advisors are not recommending CCF are they recommending one add a commodity producer equity fund as substitute? If not the argument is irrelevant.
Third, there are good reasons for this difference in correlations. There is more risk to equities of commodity producers than just the price of the underlying commodity. A good recent example is the threat of an "excess profits" tax. There are many other issues one could cite--like threat of expropriation of foreign sources or foreign governments changing the terms of agreements (i.e., Venezuela). Or of course overall costs could be rising more quickly so that profit margins get squeezed. I could create an almost endless list of possible negatives.
Fourth, I thought it would that I had previously only looked at the correlations of CCF to the market factor. I decided to take a look at the correlations to other risk factors, for those that have large tilts. And all three are negative.
70-07 with correlation of GSCI and risk factors, annual
Market -0.27
Size -0.27
Price -0.08
My guess why less negative for value stocks is that they tend to be more leveraged and thus benefit somewhat from rising inflation that might accompany rising commodity prices.
I hope the above is helpful
Re: What about commodity futures and commodity funds?
You also need to share how much of your tax-deferred portfolio is already filled. CCF funds like PCRIX are very tax inefficient.Chas wrote:I have been looking at investing in commodity futures as an asset class and also commodity funds as a "tilt" to total stocks.
So, the question is "Why not put them into a PF"?
Commodities
.
I agree with Rick...
In general I agree with Rick that higher commodity prices should benefit the earning of commodities producers (and hence both stock prices of commodity producing companies and EM stocks in general) – under normal circumstances. However there will likely often be a lag in the transmission effect IMO.
From 1985 to 2006 (last time I looked at it) the correlation coefficient of the Vanguard energy fund with GSCI was 0.56 which was higher than its correlation with TSM (0.25 correlation coefficient).
For the same time period, adding a separate 5% Vanguard energy fund allocation to a 75:25 globally diversified small cap and value tilted portfolio would have marginally increased returns and lowered their volatility while adding a 5% GSCI allocation would have both lowered returns and their volatility (with a lower Sharpe ratio). [as shown in an earlier thread].
…and I agree with Larry:
However I agree with Larry that CCF can provide a hedge against (non-finanical) event risk – i.e. in abnormal circumstance
Lets take the oil embargo of the early 1970s.
PRNEX = T.Rowe Price New Era fund (the only fund of natural resource stocks back to 1974 that I could find). The investment objective of the fund is to provide long-term capital appreciation by investing primarily in the common stocks of companies that own or develop natural resources and other basic commodities and in the stocks of selected nonresource growth companies
What’s the reason for the difference? My understanding is that the 1973-74 oil price shock was caused by a restriction in supply and an embargo on oil shipments from the Middle East to the US, and other developed countries.
So while international oil prices were high many ‘oil’ companies (particularly service companies which are a larger share of the T.Rowe Price fund) had nothing (or relatively little) to sell so revenues dropped dramatically.
If we look at portfolio data for the full 1972-2006 period then the 5% GSCI contributes more to mean variance-efficiency than the 5% of PRNEX. i.e one event can dominated the relative impact over 34 years.
If these types of events happen in the future – CCFs will likely outperform a fund of commodity companies i.e. CCFs are a better hedge against event risk.
Robert
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PS: Don’t currently own CCFs but appreciate what Rick and Larry are saying…(hope I have not misinterpreted).
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I agree with Rick...
In general I agree with Rick that higher commodity prices should benefit the earning of commodities producers (and hence both stock prices of commodity producing companies and EM stocks in general) – under normal circumstances. However there will likely often be a lag in the transmission effect IMO.
From 1985 to 2006 (last time I looked at it) the correlation coefficient of the Vanguard energy fund with GSCI was 0.56 which was higher than its correlation with TSM (0.25 correlation coefficient).
For the same time period, adding a separate 5% Vanguard energy fund allocation to a 75:25 globally diversified small cap and value tilted portfolio would have marginally increased returns and lowered their volatility while adding a 5% GSCI allocation would have both lowered returns and their volatility (with a lower Sharpe ratio). [as shown in an earlier thread].
…and I agree with Larry:
However I agree with Larry that CCF can provide a hedge against (non-finanical) event risk – i.e. in abnormal circumstance
Lets take the oil embargo of the early 1970s.
Code: Select all
Annual return, %
GSCI PRNEX 5 yr T-notes Inflation
1974 +74% -2% 4.6 8.7
1975 +40% -26% 5.7 12.3
What’s the reason for the difference? My understanding is that the 1973-74 oil price shock was caused by a restriction in supply and an embargo on oil shipments from the Middle East to the US, and other developed countries.
So while international oil prices were high many ‘oil’ companies (particularly service companies which are a larger share of the T.Rowe Price fund) had nothing (or relatively little) to sell so revenues dropped dramatically.
If we look at portfolio data for the full 1972-2006 period then the 5% GSCI contributes more to mean variance-efficiency than the 5% of PRNEX. i.e one event can dominated the relative impact over 34 years.
If these types of events happen in the future – CCFs will likely outperform a fund of commodity companies i.e. CCFs are a better hedge against event risk.
Robert
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PS: Don’t currently own CCFs but appreciate what Rick and Larry are saying…(hope I have not misinterpreted).
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Robert
As I stated owning equities does get you SOME exposure to commodities but the correlation is still significantly HIGH. And there is a reason for that--there are equity risks there--and you noted one specific example of why that is.
And of course it would only help if you actually did own them. There are obviously some advisors who for whatever reasons decide against recommending including CCF but also don't then recommend including equity exposure to producers. So it only helps if you actually added them. And as we both note, it is not as an effective hedge. We can only wonder for example what would happen if an excess profits taxed was imposed in US or foreign governments effectively expropriated by raising taxes or outright takeovers. Or if there was supply disruptions as you note they may not have anything or much to sell
As I stated owning equities does get you SOME exposure to commodities but the correlation is still significantly HIGH. And there is a reason for that--there are equity risks there--and you noted one specific example of why that is.
And of course it would only help if you actually did own them. There are obviously some advisors who for whatever reasons decide against recommending including CCF but also don't then recommend including equity exposure to producers. So it only helps if you actually added them. And as we both note, it is not as an effective hedge. We can only wonder for example what would happen if an excess profits taxed was imposed in US or foreign governments effectively expropriated by raising taxes or outright takeovers. Or if there was supply disruptions as you note they may not have anything or much to sell
I think at the moment, about 80% of crude oil production is from state owned companies. One of my concerns about owning energy funds (mostly oil companies) is that these companies will have decreasing access to remaining reserves.larryswedroe wrote: We can only wonder for example what would happen if an excess profits taxed was imposed in US or foreign governments effectively expropriated by raising taxes or outright takeovers. Or if there was supply disruptions as you note they may not have anything or much to sell
yes, but now?
I don't want to be a market timer, but I also don't want to be a performance chaser. The idea of wide diversification appeals to me, and I do believe that commodities seem to have different behavior that may make them a reasonable addition. Way back, after my first reading of Mr Bogle's Common Sense on Mutual Funds, I decided to place 5% each into the Vanguard "precious metals" and "energy" funds to take advantage of their decreased correlations to total stock market. My impetus was from his recommendation to consider overweight to healthcare for a similar reason. Fund availability in my 401k required me to change that plan to plain vanilla, but soon I will have CCFs available in a new plan.
Here's where the market timing/performance chasing comes in. With the OUTRAGEOUS returns of CCFs and commodities in general in the past years, is adding CCFs, even if you believe in the negative correlation/increased-total-portfolio-performance concept, a good idea whose time has not come around yet? Dr Bernstein warns that the time to alter a portfolio's composition is not into an over performing segment but into that segment, that you believe is desirable, while it is mean reverting. That said, for now I've got CCFs on the buy list of my "living document" IPS with an asterisk, and will wait to buy when it looks like they're not such a good idea after all (unless you guys convince me otherwise ).
Here's where the market timing/performance chasing comes in. With the OUTRAGEOUS returns of CCFs and commodities in general in the past years, is adding CCFs, even if you believe in the negative correlation/increased-total-portfolio-performance concept, a good idea whose time has not come around yet? Dr Bernstein warns that the time to alter a portfolio's composition is not into an over performing segment but into that segment, that you believe is desirable, while it is mean reverting. That said, for now I've got CCFs on the buy list of my "living document" IPS with an asterisk, and will wait to buy when it looks like they're not such a good idea after all (unless you guys convince me otherwise ).
It's true that the example funds VDE and PCRIX have a history of high risk and high returns. A person can't increase returns without taking on risk. But the primary driving factor was the correlation factors, not the returns or risks. The overall PF risk is what matters. If the PF is assembled from assets that are diversified (by diversified I mean low correlation factors to the total PF, not just a random assembly of funds) then the risk can be reduced while the return increases. That is, if you accept MPT (Modern Portfolio Theory).soaring wrote:Sure sounds like chasing returns.
Gene
I am proud of the fact that I never pay attention to past returns when I am looking for a PF candidate. It's not easy to lose the mindset of looking at past performance, but it is not included in any screening I do. It is a given in those of the Boglehead persuasion that past returns are useless.
Thanks for the reply Gene,
Chas
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Rick, is an additional $300 in annual cost for a 50k investment in PCRIX materially relevant to the issues being discussed?
Larry, how much additional exposure to CCFs is desirable, and more importantly, how do you arrive at your percentage? If CCFs are beneficial because negatively correlated, why stop at 5%; why not 10% or 20%?
Larry, how much additional exposure to CCFs is desirable, and more importantly, how do you arrive at your percentage? If CCFs are beneficial because negatively correlated, why stop at 5%; why not 10% or 20%?
Hi Rick, I stand in awe of you and the other professionals here. Part of the reason I opened this thread was to have the opportunity for a little conversation with you and the others here who have made this board into the great opportunity it is for people to learn about investing.Rick Ferri wrote:Investors who believe they are missing out on the commodities boom because they do not own a commodities fund are mistaken. Clearly, you did not need a direct investment in commodities to have benefited GREATLY from the commodities boom. All you needed was a low-cost portfolio of global index funds.
Here are the 5 year COMPOUNDED returns of two funds and one index:
Vanguard Energy Fund Investor = 34.5%
Vanguard Precious Metals & Mining = 40.2%
MSCI US IMI/Materials index = 21.2%
Together, energy, precious metals and mining, and basic materials make up over 17% of the Vanguard Total Stock Market Fund. Energy and materials stock make up 27% of the FTSE All-World ex-US Index.
A globally diversified portfolio of stock has approximately 20% in commodity and mining companies. That is more than adequate exposure to this industry group.
Rick Ferri
Yes, of course total world equities contain a hefty proportion of commodities and they account for much of the diversity that the total market funds automatically achieve. To say that this is enough, is to accept the Boglehead theory that the market is efficient, so buy the market, sit back, and relax. I certainly don't say that is a bad thing, but perhaps there could be made room for a little spice in a person's investment life. I'm not talking about betting the farm here. But don't many of us, seek ways to diversify our PFs? First, because MPT (Modern Portfolio Theory) indicates possibilities of increasing returns while also lowering risk by diversity, but a second reason (for me at least) is the joy of not being locked into a PF that goes up and down in lock step with the DJ every day. VG's ETF VDE, despite being a significant part of total equities as you pointed out, is still only 24% correlated. There should be room for a little fun in life wouldn't you think?
Thanks for your reply Rick,
Chas
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From a Vanguard research white paper on the role of commodities in a portfolio:
However, for those that like to juice their portfolios beyond basic equities and fixed income, commodities makes sense as an additional asset class in a portfolio invested for the long term.
As with all investments, costs matter so you have to make the decision whether the commodities vehicles available are worth their costs.
So yes, most investors have the potential to reach their retirement goals without using the oft-recommended 5 - 10% of an entire portfolio devoted to commodities.Conclusion
Commodity futures investments have attractive
historical return characteristics: high average returns,
high correlation with inflation, and low correlation with
traditional asset classes. As a result, over the last 23
years through 2006, investors would have benefited
from an allocation to a broad-market commodity
futures investment.
A large contributor to differences in commodity
futures returns is the return derived from rolling
futures contracts before they expire. This roll return
is positive when futures markets are backwardated
and negative when markets are in contango. Many
markets (such as those for energy contracts) have
been consistently backwardated in the past. However,
probably in part because of large long-only investor
inflows, these markets were in contango beginning
in 2004. Consequently, over the next few years,
we do not expect average returns from a long-only
passive commodity investment to be as high as
they have been in the past.
While recognizing the historical portfolio diversification
benefit of an allocation to commodities, we caution
against making such an allocation on the basis of an
extrapolation of historical commodity returns.
However, for those that like to juice their portfolios beyond basic equities and fixed income, commodities makes sense as an additional asset class in a portfolio invested for the long term.
As with all investments, costs matter so you have to make the decision whether the commodities vehicles available are worth their costs.
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If it is your intent to have a low-cost index fund portfolio, do not get involved with CCF funds. In the long-term (over your lifetime), there is absolutely no reason to complicate your portfolio or increase the cost by adding commodity products.
In the long-term, commodities return about the inflation rate, and the equity sectors already in a well diversified portfolio pass through all those gains PLUS some. That INCLUDES total stock market index funds. In the short-term, there is some wash out of commodity gains as airlines and truckers do poorly while energy producers do well. But in the long-term, the higher cost of energy is passed on to consumers, and that leads to outperformance by airlines and truckers. It all comes out in the wash.
Rick Ferri
PS. For a civil discussion on this topic, see The Great Debateparts I and II.
In the long-term, commodities return about the inflation rate, and the equity sectors already in a well diversified portfolio pass through all those gains PLUS some. That INCLUDES total stock market index funds. In the short-term, there is some wash out of commodity gains as airlines and truckers do poorly while energy producers do well. But in the long-term, the higher cost of energy is passed on to consumers, and that leads to outperformance by airlines and truckers. It all comes out in the wash.
Rick Ferri
PS. For a civil discussion on this topic, see The Great Debateparts I and II.
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Chase wrote:
Rick Ferri
Ahh, well that is a difference story. Of course you can trade commodities using ETFs for entertainment if you wish. There is actually a couple of chapters in my latest book, The ETF Book, about different ways you can do that. See chapters 19 and 20. I don't recommend trading commodity ETFs, but whatever blows your hair back. However, no need to waste your resources on CCFs with your Serious Money.perhaps there could be made room for a little spice in a person's investment life.
Rick Ferri
Re: What about commodity futures and commodity funds?
Yes, Bob, sorry I didn't include that. My concern is entirely with IRA funds.bob90245 wrote:You also need to share how much of your tax-deferred portfolio is already filled. CCF funds like PCRIX are very tax inefficient.Chas wrote:I have been looking at investing in commodity futures as an asset class and also commodity funds as a "tilt" to total stocks.
So, the question is "Why not put them into a PF"?
Chas
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Re: yes, but now?
Interesting. Can you provide the location of this statement by Dr Bernstein?Rob't wrote:Dr Bernstein warns that the time to alter a portfolio's composition is not into an over performing segment but into that segment, that you believe is desirable, while it is mean reverting. That said, for now I've got CCFs on the buy list of my "living document" IPS with an asterisk, and will wait to buy when it looks like they're not such a good idea after all (unless you guys convince me otherwise ).
The problem is, of course, how do you know? I have planned to get 5% CCF exposure for almost a year. Because of their strong run, I avoided adding them to my portfolio LAST SUMMER. Now look at them. Definitely going to hold off now!
Heath, if I may comment. The higher you take your percentage of CCFs the lower the internal diversification of your portfolio. As for myself, I'm thinking 10%. Does that help?Heath wrote:Rick, is an additional $300 in annual cost for a 50k investment in PCRIX materially relevant to the issues being discussed?
Larry, how much additional exposure to CCFs is desirable, and more importantly, how do you arrive at your percentage? If CCFs are beneficial because negatively correlated, why stop at 5%; why not 10% or 20%?
Chas
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Re: yes, but now?
Sorry guys, market timing doesn't work. I know it is anti-intuitive, but in the real world, forget about it. That's only my opinion of course, and I do believe there is some revert to mean effects, but you just can't get a handle on it well enough to matter.diasurfer wrote:Interesting. Can you provide the location of this statement by Dr Bernstein?Rob't wrote:Dr Bernstein warns that the time to alter a portfolio's composition is not into an over performing segment but into that segment, that you believe is desirable, while it is mean reverting. That said, for now I've got CCFs on the buy list of my "living document" IPS with an asterisk, and will wait to buy when it looks like they're not such a good idea after all (unless you guys convince me otherwise ).
The problem is, of course, how do you know? I have planned to get 5% CCF exposure for almost a year. Because of their strong run, I avoided adding them to my portfolio LAST SUMMER. Now look at them. Definitely going to hold off now!
While I'm at it, I don't think it reduces your performance to butterfly around somewhat because if you can't market time opportunely, neither can you market time inopportunely. However, the trading costs will take a toll and time spent in a cash position matters also.
Chas
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Few thoughts re how much.
A) the more risk averse you are the higher should be the allocation, due to the negative correlation.
B) the higher the equity allocation, the higher should be the allocation to CCF, again since the big risks of portfolio are on equities
C) the longer the maturity of your fixed income nominal bonds the more you should consider a higher allocation
D) the more risk averse to unexpected inflation, the higher the allocation should be
E) If we knew the past would look like the future one should probably hold 30% or so CCF. We don't. The data we have and the logic IMO suggest one should include CCF and the first three points should be a guide. One suggestion is say 10% of equities as starting point. Then up or down depending on A-D
There are some other issues--tracking error is huge and that is problem for lots of people. CCF tends to perform poorly for very long time and then great for short bursts. So have to extraordinarily disciplined as a big benefit is from rebalancing--or you don't get that diversification return. Another issue is lack of room in tax advantaged accounts--IMO only place to own the asset class. So many people cannot hold much anyway, especially if want to own TIPS for fixed income
Personally I keep my CCF at around 10% of equities, but I also have very low equity allocation, but little longer bond portfolio because Muni curve is typically steeper and you get paid for taking that risk. The CCF offsets that nicely.
I hope above helpful.
A) the more risk averse you are the higher should be the allocation, due to the negative correlation.
B) the higher the equity allocation, the higher should be the allocation to CCF, again since the big risks of portfolio are on equities
C) the longer the maturity of your fixed income nominal bonds the more you should consider a higher allocation
D) the more risk averse to unexpected inflation, the higher the allocation should be
E) If we knew the past would look like the future one should probably hold 30% or so CCF. We don't. The data we have and the logic IMO suggest one should include CCF and the first three points should be a guide. One suggestion is say 10% of equities as starting point. Then up or down depending on A-D
There are some other issues--tracking error is huge and that is problem for lots of people. CCF tends to perform poorly for very long time and then great for short bursts. So have to extraordinarily disciplined as a big benefit is from rebalancing--or you don't get that diversification return. Another issue is lack of room in tax advantaged accounts--IMO only place to own the asset class. So many people cannot hold much anyway, especially if want to own TIPS for fixed income
Personally I keep my CCF at around 10% of equities, but I also have very low equity allocation, but little longer bond portfolio because Muni curve is typically steeper and you get paid for taking that risk. The CCF offsets that nicely.
I hope above helpful.
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FWIW
I don't believe there is any basis to make that statement. In fact if it were true then CCF would not have negative correlation with equities.
But in the long-term, the higher cost of energy is passed on to consumers, and that leads to outperformance by airlines and truckers. It all comes out in the wash.
I don't believe there is any basis to make that statement. In fact if it were true then CCF would not have negative correlation with equities.
- Rick Ferri
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It takes a while, but that is what happens. Has anyone noticed the price of airline tickets lately? They have gone up, and lots of extra add ons such as charges for second bags. Truckers are charging fuel overrides. These higher commodity costs do get passed on. That eventually does work its way to stock prices.larryswedroe wrote:FWIW
I don't believe there is any basis to make that statement. In fact if it were true then CCF would not have negative correlation with equities.But in the long-term, the higher cost of energy is passed on to consumers, and that leads to outperformance by airlines and truckers. It all comes out in the wash.
Rick Ferri
- Mel Lindauer
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Commodities
While I'm certainly not a commodities guy, I read the following highlights in today's Financial Times from an article about George Soros' recent testimony to Congress earlier this week:
Regards,
Mel
Soros paints bleak picture on commodity price 'bubble'
Warning: George Soros says investing in commodities indices was based on a "misconception' and 'intellectually unsound'.
Pretty scary stuff coming from somone like Soros.Billionaire financier says misplaced investing in indices by institutions is to blame for soaring valuations.
Regards,
Mel
Last edited by Mel Lindauer on Thu Jun 05, 2008 2:42 pm, edited 1 time in total.
Larry, maybe examples would help. Consider two scenarios. In the first I have a 60-40 allocation with the equity piece sliced and diced and the fixed piece all short term. Assume all agree that the portfolio and allocation are fine for me. Assume that at this allocation I am not risk averse and have average risk aversion to inflation. In this case is it fair to say I should not invest in CCF because of lower expected returns, or should I add CCF and balance this with a shift of another part of equities to higher risk/reward?
In the second scenario I decide to reduce my allocation to 40-60 assumed to be for all the right reasons. At this new level I am not risk averse and all fixed is in ST. What if any portion of the reduced equities should be shifted to CCFs and not ST fixed?
In the second scenario I decide to reduce my allocation to 40-60 assumed to be for all the right reasons. At this new level I am not risk averse and all fixed is in ST. What if any portion of the reduced equities should be shifted to CCFs and not ST fixed?
Dr Bernstein
This is not as specific as I think he said it somewhere (still looking for that), but a sense of his attitude toward modifying one's allocation can be seen on page 138 of The Intelligent Asset Allocator (2001) when he is discussing dynamic asset allocation. He speaks of allowing valuations to affect modifications in a counter-intuitive way. Specifically, he spoke of slightly increasing allocations to emerging markets "with the recent carnage in this area." (Does anybody wish they had done that in 2001?). He speaks more about the concept on page 163. The message for me is that I need to make sure a new idea that looks good doesn't just look good because it's made a lot of money lately. If CCF's are a good idea for total portfolio return, they'll be just as good an idea in 4-7 years when they've had their expected period of underperformance.
Re: Commodities
We're discussing this right now on another thread:Mel Lindauer wrote:While I'm certainly not a commodities guy, I read the following highlights in today's Financial Times from an article about George Soros' recent testimony to Congress earlier this week:
Soros paints bleak picture on commodity price 'bubble'Warning: George Soros says investing in commodities indices was based on a "misconception' and 'intellectually unsound'.Pretty scary stuff coming from somone like Soros.Billionaire financier says misplaced investing in indices by institutions is to blame for soaring valuations.
Regards,
Mel
http://www.bogleheads.org/forum/viewtopic.php?t=18804
And you can read Soros' and others testimony here:
http://commerce.senate.gov/public/index ... 730c4bbbe8
Rick, I have the historical Excel spreadsheet that we all use a lot around here. I went there and ran 100% PCRIX from 1982 to 2007. The historical CAGR (Compounded Annual Growth Returns) returns were 11.99% nominal and 8.67% real. How can it be so if CCFs have no real return component?Rick Ferri wrote:If it is your intent to have a low-cost index fund portfolio, do not get involved with CCF funds. In the long-term (over your lifetime), there is absolutely no reason to complicate your portfolio or increase the cost by adding commodity products.
In the long-term, commodities return about the inflation rate, and the equity sectors already in a well diversified portfolio pass through all those gains PLUS some. That INCLUDES total stock market index funds. In the short-term, there is some wash out of commodity gains as airlines and truckers do poorly while energy producers do well. But in the long-term, the higher cost of energy is passed on to consumers, and that leads to outperformance by airlines and truckers. It all comes out in the wash.
Rick Ferri
PS. For a civil discussion on this topic, see The Great Debateparts I and II.
Chas
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Re: Dr Bernstein
Robert,Rob't wrote:This is not as specific as I think he said it somewhere (still looking for that), but a sense of his attitude toward modifying one's allocation can be seen on page 138 of The Intelligent Asset Allocator (2001) when he is discussing dynamic asset allocation. He speaks of allowing valuations to affect modifications in a counter-intuitive way. Specifically, he spoke of slightly increasing allocations to emerging markets "with the recent carnage in this area." (Does anybody wish they had done that in 2001?). He speaks more about the concept on page 163. The message for me is that I need to make sure a new idea that looks good doesn't just look good because it's made a lot of money lately. If CCF's are a good idea for total portfolio return, they'll be just as good an idea in 4-7 years when they've had their expected period of underperformance.
CCF PCRIX real returns were 8.67% CAGR 1982 - 2007. Is this just a fluke fund? I haven't researched to any extent on this, so it might really BE a fluke for all I know.
Chas
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Heath, first almost everyone is risk averse. And the larger the dollars involved the more risk averse they become. Example would you flip a coin and bet me a $1 on getting it right, or would you require odds? Now make that $1mm. Would you require even higher odds?
The evidence on CCF shows that adding them allows one historically to either increase returns for the same level of risk or lower risk and have the same returns. In other words, improved Sharpe Ratio. The "price" is you give up some opportunity for the good tail to get the benefit of reducing the risk of the bad tail. And almost every person I know would take that "bet." That happens because of the negative correlation and the high volatility. So that while CCF do not have high expected returns, the impact on the overall portfolio is much greater than the individual component--the diversification return. I have given many examples of that
Also in the lower equity allocation and all ST fixed income obviously less need for CCF. First less equity risk to hedge and also less unexpected inflation risk to hedge. But you still have equity risk and still have some unexpected inflation risks. Just not as much. Which is why IMO one should consider the points I raised.
As to Rick's comment:
The evidence on CCF shows that adding them allows one historically to either increase returns for the same level of risk or lower risk and have the same returns. In other words, improved Sharpe Ratio. The "price" is you give up some opportunity for the good tail to get the benefit of reducing the risk of the bad tail. And almost every person I know would take that "bet." That happens because of the negative correlation and the high volatility. So that while CCF do not have high expected returns, the impact on the overall portfolio is much greater than the individual component--the diversification return. I have given many examples of that
Also in the lower equity allocation and all ST fixed income obviously less need for CCF. First less equity risk to hedge and also less unexpected inflation risk to hedge. But you still have equity risk and still have some unexpected inflation risks. Just not as much. Which is why IMO one should consider the points I raised.
As to Rick's comment:
Again there is no logical reason for that outcome to be the only possibility. There are many other outcomes possible. Example, airlines cannot pass on costs because demand falls and their margins shrink. Could even be that because of such costs competition arrives and kills that particular business hurt by high oil prices. There are many possible accounts.It takes a while, but that is what happens. Has anyone noticed the price of airline tickets lately? They have gone up, and lots of extra add ons such as charges for second bags. Truckers are charging fuel overrides. These higher commodity costs do get passed on. That eventually does work its way to stock prices.
Last edited by larryswedroe on Thu Jun 05, 2008 4:21 pm, edited 1 time in total.
Rick, no, I must have given the wrong impression. I am not a day trader, week trader, month trader, but maybe, just maybe, an annual/biannual trader if the sand has really shifted in the correlation of my portfolio. I am far too poor to be able to absorb much in trading costs. However, if someone like George Sorros can get rich, there is hope for anyone. That aside, if one can re-balance to maintain a policy portfolio allocation, then why not re-balance to maintain a diversification portfolio? Is that "trading to blow my hair back"?Rick Ferri wrote:Chase wrote:Ahh, well that is a difference story. Of course you can trade commodities using ETFs for entertainment if you wish. There is actually a couple of chapters in my latest book, The ETF Book, about different ways you can do that. See chapters 19 and 20. I don't recommend trading commodity ETFs, but whatever blows your hair back. However, no need to waste your resources on CCFs with your Serious Money.perhaps there could be made room for a little spice in a person's investment life.
Rick Ferri
Chas
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They may have had one in the past, but that doesn't necessarily mean they will have one in the future.Chas wrote:The historical CAGR (Compounded Annual Growth Returns) returns were 11.99% nominal and 8.67% real. How can it be so if CCFs have no real return component?
Chas
Ignoring interest earnings or costs (from cash on hand or cash received from selling a future), there is no automatic underlying return from a future.
I sell a wheat future, and you buy it from me. When the future settles, one of us will be ahead and one behind - it's zero sum. 0% return, FWIW (ignoring cash).
BUT, although it's zero sum collectively (for the two participants), one participant is certainly ahead. If you can consistently identify the position likely to be ahead at settlement, you can earn a return.
So, is it a sign of great foresight when someone has profited over a long period of time from commodities? Not necessarily.
Ignoring the speculation component, commodities futures are about risk reduction. A farmer knows it may cost him $1.00/(expected) bushel to plant and harvest a crop that is currently selling for $2.00. But, without a futures market, he has no guarantee that he will be able to get a $2.00 price when his crop is harvested. What if he can use a futures contract to lock in that price, and lock in his profit (ignoring uncertainties about his crop yield and such). The farmer lowers his risk, and that's a good thing - it adds value.
In theory, that contract for future wheat delivery might be bought by a baker who wants to lock in the price he'll pay later in the year. But in reality, there is far less need for the baker to lock in his price. If wheat prices double in the next few months, he will likely be able to raise his price on his finished product to make comparable profit margins. Perhaps at that higher price his overall demand (unit sales) will be lower, but he can adjust for that by lowering his production.
So, farmers have a strong desire to lock in future prices (sell futures), but bakers and others like them have only a weak desire to lock in future costs (buy futures). The supply/demand curve is unbalanced.
Speculators step in. They are willing to absorb some of the farmer's risk, in exchange for an expected profit. They can absorb that risk, because they have a wide variety of investments - if they take a beating on wheat, they'll likely make it up elsewhere. Of course, they want to make a profit, so if the expected price for September wheat is $2.00 (the average of the whole probability curve), the speculators will buy futures contracts for $1.95. On average, they will make a $.05 profit, though sometimes they will make more and sometimes less. The farmer will accept the $.05 haircut to reduce his risk. Basically, it's an insurance premium.
It's my understanding that this is the way that the markets have worked for decades - a modestly-sized group of speculators have acted as insurance underwriters for commodities prices.
But consider the insurance market - perhaps it's in balance if 5 large companies are out writing auto insurance policies for a fixed pool of drivers. What if 5 more companies enter the market, with a MANDATE to write policies (their investors demand it). Insurance premiums will be driven down, perhaps to levels below break-even for auto-insurers.
Well, that may very well be happening in commodities now. A flood of CCFs have taken in a lot of cash, and they are expected to put it to use. This will likely drive down the "insurance premiums", reducing future real returns to very low or possibly negative values.
Consider Soros' comments from the FT.COM article:
Notes: I have little personal experience with commodities trading or CCFs - the above is based on a bit of reading from a variety of sources, plus some thinking by me. IMO, one must be very careful about investing in financial assets that are basically zero-sum unless it is clear that one side of the transaction (side A) is paid a consistent premium (at least in *expected* return), perhaps for a risk reduction that the other side (side B) seeks, and that the premium is enough to compensate side A for the risk (perhaps side A is generally in a better position to diversify than side B).“When the idea was first promoted there was a rationale for it . . . but the field got crowded and that profit opportunity disappeared,” he said.
Whether it's a fluke or not, I will leave to the "Great Debater's"; it seems that is one of the points of Rick and Larry's disagreement. I personally think it behaves like a separate asset class with low correlation to equities so I favor it as an addition to a widely diversified portfolio. I believe in MPT so think it will, over time, improve total return. Now, however, I worry that it is misbehaved. The characteristics of the asset class that created its behavior (and historical return record) have changed. At one time major participants in the market were producers trying to insure against critically low prices when they sold their goods; the result was futures prices often lower than spot prices. Now the major participants are institutional investors and speculators with motivations ranging among increasing diversification, chasing the hot dot, and being more like David Swenson. Again, borrowing from an essay by William Bernstein on commodities: It's not Ozzie and Harriet's commodities market anymore.
Re: Dr Bernstein
I think you meant 2002 - 2007. The inception date was June 2002.Chas wrote:CCF PCRIX real returns were 8.67% CAGR 1982 - 2007.
http://finance.yahoo.com/q/pr?s=PCRIX
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Larry, I am actually thinking 10% CCF and also a 10% commodity fund tilt in a portfolio with 35% VBIIX and VIPSX. I consider myself risk adverse, but consider also that I have been a lifetime poker player, even if for less than stellar stakes. If a poker player is careful to not get into games over his head the AAR and SD are not nearly as scary as the market. That's been my experience anyway. Now, tournaments like the World Series of Poker are an entirely different animal than a standard game of poker. They are, indeed, every bit as scary as the market.larryswedroe wrote:Heath, first almost everyone is risk averse. And the larger the dollars involved the more risk averse they become. Example would you flip a coin and bet me a $1 on getting it right, or would you require odds? Now make that $1mm. Would you require even higher odds?
The evidence on CCF shows that adding them allows one historically to either increase returns for the same level of risk or lower risk and have the same returns. In other words, improved Sharpe Ratio. The "price" is you give up some opportunity for the good tail to get the benefit of reducing the risk of the bad tail. And almost every person I know would take that "bet." That happens because of the negative correlation and the high volatility. So that while CCF do not have high expected returns, the impact on the overall portfolio is much greater than the individual component--the diversification return. I have given many examples of that
Also in the lower equity allocation and all ST fixed income obviously less need for CCF. First less equity risk to hedge and also less unexpected inflation risk to hedge. But you still have equity risk and still have some unexpected inflation risks. Just not as much. Which is why IMO one should consider the points I raised.
As to Rick's comment:Again there is no logical reason for that outcome to be the only possibility. There are many other outcomes possible. Example, airlines cannot pass on costs because demand falls and their margins shrink. Could even be that because of such costs competition arrives and kills that particular business hurt by high oil prices. There are many possible accounts.It takes a while, but that is what happens. Has anyone noticed the price of airline tickets lately? They have gone up, and lots of extra add ons such as charges for second bags. Truckers are charging fuel overrides. These higher commodity costs do get passed on. That eventually does work its way to stock prices.
Chas
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Rob't - you're on the right track, but not quite there, IMO.
The reason that you should add a given asset to your portfolio, is that the combination of expected return, SD, and correlation is favorable - i.e. that adding the asset will improve your portfolio by increasing return, decreasing risk, or otherwise improving your position on the risk/return curve.
An asset can be unfavorable on two of the three dimensions, but if the third is good enough, it can be an attractive asset class. Conversely, an asset can be favorable on two of three but fail because of a poor outlook on the third.
Low correlation (or negative correlation) with typical investor portfolios (i.e. broad equity indexes) is a good thing, but BY ITSELF, the low correlation characteristic is not sufficient to make an asset attractive.
In a fair casino, each spin of the roulette wheel is independent of the other spins, and independent of one's stock market returns. While the SD for a single spin is high, I can get that SD down close to zero if I average the results of enough spins. So I can invest in this asset class (roulette wheel spins) in two flavors:
Many spins a day: 0.00 correlation with my equity portfolio, low SD
One spin a day (or year): 0.00 correlation with my equity portfolio, high SD (relatively)
Both flavors are unattractive, because the third variable, expected return, is quite poor for both.
---
Similarly, regardless of their correlation and/or SD, CCFs are only attractive if their expected returns are good enough. I do not think we can reliably use historical returns to estimate future returns for this asset class, as the market has changed (the "insurance premiums" are likely much smaller now, due to so much money invested). I'm not sophisticated enough about this asset class to venture a guess about future expected returns, but I am quite skeptical that they will be high.
The reason that you should add a given asset to your portfolio, is that the combination of expected return, SD, and correlation is favorable - i.e. that adding the asset will improve your portfolio by increasing return, decreasing risk, or otherwise improving your position on the risk/return curve.
An asset can be unfavorable on two of the three dimensions, but if the third is good enough, it can be an attractive asset class. Conversely, an asset can be favorable on two of three but fail because of a poor outlook on the third.
Low correlation (or negative correlation) with typical investor portfolios (i.e. broad equity indexes) is a good thing, but BY ITSELF, the low correlation characteristic is not sufficient to make an asset attractive.
In a fair casino, each spin of the roulette wheel is independent of the other spins, and independent of one's stock market returns. While the SD for a single spin is high, I can get that SD down close to zero if I average the results of enough spins. So I can invest in this asset class (roulette wheel spins) in two flavors:
Many spins a day: 0.00 correlation with my equity portfolio, low SD
One spin a day (or year): 0.00 correlation with my equity portfolio, high SD (relatively)
Both flavors are unattractive, because the third variable, expected return, is quite poor for both.
---
Similarly, regardless of their correlation and/or SD, CCFs are only attractive if their expected returns are good enough. I do not think we can reliably use historical returns to estimate future returns for this asset class, as the market has changed (the "insurance premiums" are likely much smaller now, due to so much money invested). I'm not sophisticated enough about this asset class to venture a guess about future expected returns, but I am quite skeptical that they will be high.
Psteinx,
You are correct on where we would disagree. I would agree with your analysis if CCF's had no or negligible return, but I would only invest in them within a product like PCRIX. There, the lion's share of your investment (the collateral) is in reserve invested by PIMCO (some pretty smart cookies re bonds) in TIPs (rather than collateral in treasuries, which I am told some other products do). So in fact there is return, albeit at a bond rather than equity rate. I have chosen with my asset allocation to hold bonds, and bet you have too. Even though they have lower yield, they reduce our risk and offer a lower correlating asset. Why does not similar logic favor CCF's; while the return might be a trace lower than bonds, the correlation is even more favorable. I think I can make a case that a small allocation to CCF meets your criteria for addition to a portfolio.
You are correct on where we would disagree. I would agree with your analysis if CCF's had no or negligible return, but I would only invest in them within a product like PCRIX. There, the lion's share of your investment (the collateral) is in reserve invested by PIMCO (some pretty smart cookies re bonds) in TIPs (rather than collateral in treasuries, which I am told some other products do). So in fact there is return, albeit at a bond rather than equity rate. I have chosen with my asset allocation to hold bonds, and bet you have too. Even though they have lower yield, they reduce our risk and offer a lower correlating asset. Why does not similar logic favor CCF's; while the return might be a trace lower than bonds, the correlation is even more favorable. I think I can make a case that a small allocation to CCF meets your criteria for addition to a portfolio.
The CCF investment you describe can essentially be decomposed into two elements:
1) Return on the 'safe' portion (bonds, cash, or whatnot)
and
2) Return on the commodities futures
When I say 'return' above, I am simplifying - combining the 3 main characteristics - real return, SD, and correlation.
Now, it is possible that PCRIX is a hair better than some other alternative which invests the safe portion in an inferior manner. I will say that I am quite satisfied with the current fixed income components of my portfolio and am not aware of any strong reason why a PIMCO offering would be superior to my current holdings. (It's possible that PIMCO's offerings *would* be superior - I haven't researched them, but then, I don't research all X,000 funds out there.)
Anyways, on top of that 'safe' portion is the commodities play. It is not surprising that adding commodities would lower correlation versus a straight investment in, say, bonds. But then again, you could say the same thing of putting money on the roulette wheel.
i.e. Given an investment which uses cash/bonds as an underlying, then something else on top, the investment doesn't have value unless you were unable to obtain a similar cash/bonds investment without the other part (very unlikely, IMO), or unless the other part is attractive in and of itself.
If commodities futures have a correlation of near zero, a real return of near zero, and a non-trivial SD, then they will likely hurt your portfolio's risk/return profile. It would be the equivalent of adding bets on a roulette wheel without any green spaces (i.e. expected return of zero rather than the negative return of a typical roulette wheel). I don't know enough about the current state of commodities to know if a zero expected return is reasonable, or if we should expect something positive or negative. But I will take a wild guess (based on the logic I've outlined in my other posts on this thread), that the return for commodities futures going forward will be, at a minimum, significantly lower than they've been in the past.
1) Return on the 'safe' portion (bonds, cash, or whatnot)
and
2) Return on the commodities futures
When I say 'return' above, I am simplifying - combining the 3 main characteristics - real return, SD, and correlation.
Now, it is possible that PCRIX is a hair better than some other alternative which invests the safe portion in an inferior manner. I will say that I am quite satisfied with the current fixed income components of my portfolio and am not aware of any strong reason why a PIMCO offering would be superior to my current holdings. (It's possible that PIMCO's offerings *would* be superior - I haven't researched them, but then, I don't research all X,000 funds out there.)
Anyways, on top of that 'safe' portion is the commodities play. It is not surprising that adding commodities would lower correlation versus a straight investment in, say, bonds. But then again, you could say the same thing of putting money on the roulette wheel.
i.e. Given an investment which uses cash/bonds as an underlying, then something else on top, the investment doesn't have value unless you were unable to obtain a similar cash/bonds investment without the other part (very unlikely, IMO), or unless the other part is attractive in and of itself.
If commodities futures have a correlation of near zero, a real return of near zero, and a non-trivial SD, then they will likely hurt your portfolio's risk/return profile. It would be the equivalent of adding bets on a roulette wheel without any green spaces (i.e. expected return of zero rather than the negative return of a typical roulette wheel). I don't know enough about the current state of commodities to know if a zero expected return is reasonable, or if we should expect something positive or negative. But I will take a wild guess (based on the logic I've outlined in my other posts on this thread), that the return for commodities futures going forward will be, at a minimum, significantly lower than they've been in the past.
- Rick Ferri
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PCRIX did not exist in 1982. The inception date of the fund was June 28, 2002. That data you are using is hypothetical, back-fit analyse. I am sure that you disclose this important fact to all the clients that you show this 'analysis' too.Chas wrote:Rick, I have the historical Excel spreadsheet that we all use a lot around here. I went there and ran 100% PCRIX from 1982 to 2007. The historical CAGR (Compounded Annual Growth Returns) returns were 11.99% nominal and 8.67% real. How can it be so if CCFs have no real return component?
Since CCF's have great risk of not repeating the past, is there any reward for that risk? Won't CCf's eventually be bid to some level that does match their current risk profile? With one side advocating their use and the other denigrating, I expect the performance to be subdued, but not zero, after the hot money has moved on to the next supposedly hot opportunity. Long term holders may do okay instead of great, after recovery from the drop of this bubble bursting. Small value stocks have existed far longer than small value funds. We are past the beginning of commodity futures funds. Bubbles are tough on specific funds, some may fail, but not all. TSM funds are 20 years old, we're not talking ancient history on fund data. Look at the cycles that high yield funds have been through.
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Vanguard likes ccf's
Interesting that Vanguard puts 10% into ccf's in their managed payout funds. They probably put some thought into this :roll: Tony