Bogleheads

[pkcrafter]

Commodity Futures Returns for those interested..

U.S. Commodity Futures
Returns* (1948-2007)
.............1 Year.......5 Years.......10 Years.........20 Years

Best.......58.25%......15.37%........10.32%...........5.57%

Worst....-19.02..........-6.94............-4.49............-1.80

Average..2.73............1.87..............1.77.............2.29


source: Vanguard Prospectus on Managed Payout Funds (of all places).

Paul
_________________

[AshKK]

Hi Paul,

I remember reading somewhere that the behavior of commodities changed after the US dropped out of the Gold standard in the 70s. Does this source breakdown the returns to periods before and after this event? Sorry, I am unable to do the research myself.
_________________
Ash

The 82nd Boglehead.

[am]

Then can someone remind why is it that CCF funds are sometimes recommended? I am a long term investor and if a 2.29% return is average for 20 yrs, then why not take that money and put it in MM? Money market is also poorly correlated and probably will return more over the next 20 yrs with almost no downside?

[backofbeyond]

I"d like to know what falls under this commodity index. Oil, timber, gold, grains, pork bellies? One of my friends father is a wheat farmer and it seemed every year he complained about how low the wheat prices were. This year is the first one in the 30 years I've know him that he has been excited about the prices he is getting.

I keep 5% of my portfolio in I-share commodity ETFs...I've been pleasantly surprised over the last 3 years...but again, it may just be the commodity bubble I'm enjoying.

[dmcmahon]

Things changed:

http://www.crbtrader.com/crbin....crb-ci.gif

Over 40 years, the return of this index (one of many) has been 4.42%. You might have done better in CDs over that time period, then again, look at the performance during inflationary bear markets, you'll see most of the gains are packed into short periods of time. This sort of negative correlation would not be obtained from CDs. The parabolic spike at the end of the chart does look scary.

[heyyou]

Larry Swedroe has been coaching us on the concepts of (1) consider how a fund affects the performance of the portfolio, not just the stand-alone characteristics of the fund and (2) when does the fund's returns/correlation occur. For CCFs, they tend to do well when equities are slumping, thus they are good to own in spite of their low long term performance. For my investing years, oil price shocks have triggered most down markets.

[am]

So what if CCF does well when stocks slump? The bottom line is that in 20-30 years, when I need my money for retirement, CCFs will contribute little to the overall performance. And I know I can stick with my plan through thick and thin. Now since PIMCOs fund has TIPS as collateral, then would its return be more closely correlated with TIPS?

[BillRogers]

Paul,

As Larry Swedroe tries to remind investors that it is the portfolio and not the individual moving parts taken in isolation that is important to investors. For investors interested in exploring the role of commodities futures with respect to diversification, downside protection (I think Larry like to call this insurance), and overall portfolio returns I would recommend the article “The Benefits of Low Correlation” in the November/December issue of IndexUniverse written by Craig Isrealson, Professor at Brigham University and a frequent panelists at many industry conferences on indexing:

http://www.indexuniverse.com/c....;Itemid=11

The article illustrates that using a naive portfolio of equally weighting the following seven asset classes (taken from two through seven in six steps to show the impact of each asset class as it is added to the portfolio):

• Large US Equity (S&P 500)
• Small US Equity (Russell 2000)
• Non-US Equity (MSCI EAFE)
• US Intermediate-Term Bonds (Lehman Aggregate)
• Cash
• REIT
• Commodities (S&P GSCI)

For the period 1970-2006, this naive equally weighted portfolio generated
The following returns compared with a Conservative 40/60 Portfolio (40% US Large Cap/60% US Intermediate-Term Bond) and a Moderate 60/40 Portfolio (60% US Large Cap/40% US Intermediate-Term Bond)
Seven Assets Conservative Moderate
Annualized Return 11.25 9.35 9.70
Standard Deviation 8.67 8.11 10.78

More important is the downside protection (during the distribution phase which is a higher stress test than during the accumulation phase) of the simple seven asset class portfolio compared with the Conservative and Moderate Portfolios using the following metrics:
• Aggregate Portfolio Correlation
• Probability of Recovery from a 10% Loss Within Three Years
• Worse Case Single Portfolio Draw-Down
• Frequency of One Year Loss of 10% or Worse
• Frequency of Two Year Cumulative Loss of 10% or Worse
• Frequency of Three Year Cumulative Loss of 10% or Worse

For additional information on CCFs in a portfolio (including a description of the various products) you can go to http://www.altruistfa.com/commodityfunds.htm.

Best wishes,
Bill

[Rick Ferri]

Paul,

Thank you for pointing out these new statistics on commodity futures returns. I have been making that same point on this site for a long time.

In the long-term, commodities futures are expected to return the inflation rate, before fees. Larry's arguments that adding commodities future funds (CCFs) for diversification benefits is ill advised. Yes, your portfolio volatility will be lower by substituting commodities for stock. However, your RETURN will be lower also. Larry is wishing out loud if he believes that adding CCFs to a portfolio will lower risk AND increase returns. It just isn't so.

Rick Ferri

[Rick Ferri]

Deleted dupe post.

[zhiwiller]

[am]

bonds have a return that is higher than the riskless rate. Bonds have had periods of outperforming stocks over long periods > 10 yrs (Look at Vanguard TSM versus total bond over last 10 yrs). Doesnt seem the case for CCF?

[pkcrafter]

My intention on making this post was to provide information on commodities since this asset has been so popular lately. Commodity futures preform well in down markets, but won't provide much upside potential. That's why there are recommended in small amounts. It would be a mistake to look at recent past performance and conclude this is something to hold in sizable amounts to increase portfolio returns.
Commodities might be a smart holding for some investors who are worried about asset protection, but may not be so good for others with long term portfolios.

Ashkk asked: I remember reading somewhere that the behavior of commodities changed after the US dropped out of the Gold standard in the 70s. Does this source breakdown the returns to periods before and after this event?

No, there was no breakdown of returns. But here is a lot more information. This link was originally provided by chinwisker on the Diehards forum.

http://raddr-pages.com/researc....utures.htm


Paul
_________________

[Rick Ferri]

Paul,

I think commodities are a great trade for people who have superior insight into the future and can successfully time markets. For mortals, I recommend sticking with stocks, bonds, and rebalancing.

Rick Ferri

[larryswedroe]

First
There is only one way to look at things rightly and that is in the whole
It simply amazes me that any professional would suggest otherwise.

In fact the reason Harry Markowitz won the Nobel Prize in Economics is for demonstrating that very fact--the only right way is to look at the how the addition of an asset class impacts the risk and return of the portfolio

Any other way is simply incorrect. As I have shown the addition of commodities in terms of its impact on the portfolio has been about 5% more than if you looked individually. And that was true even during the period beginning in 1991, As I have shown that period is one when commodities returned about what Ferri expects relative to stocks and yet their addition made significant impact on portfolio efficiency. And if you choose the longer data it was significantly better.


Also let me add that for portfolios in withdrawal phase the reduction in volatility is a major consideration as volatility matters much more in that situation--

Finally the use of TIPS makes the data look better as TIPS should produce returns significantly better than 3 month bills --assuming we use a TIPS index--as TIPS average maturity is about ten years and that should give you, based on historical data, about another 1%+ in returns.

[ken250]

The only reason I can think of for not holding commodities is costs, it doesn't seem they're available for a reasonable cost. The ETFs have ERs up around 75 and then you have brokerage costs. As far as their technicals, I don't think there's any dispute over their benefit to a portfolio.

[dmcmahon]

I keep costs down by buying long-dated futures contracts, and by holding bullion. Even someone with a small amount to allocate could hold bullion.

[mas]

[ken250]

The odds are just as likely that commodities will become an even better diversifier as they are that commodities will become less of a diversifier.

We just don't know.

We use multiple classes to defend against one or several classes behaving in an unanticipated fashion.

[mas]

[ken250]

mas,

With all due respect, I think as a younger investor just going with stocks and bonds is a mistake. With such a long time frame diversification will really pay off for you, multi class diversification is just as important for accumulators as it is for retirees. However, some classes are tough to access or too expensive so one has to weigh the pros and cons.

[Rick Ferri]

[dbs119]

I have always thought that in order to purchase commodities, you need a margin account. With most futures requiring something like a 10% down payment, that means you earn money market rates on the remaining 90%. Am i wrong on that?
_________________
http://www.dividendgrowthinvestor.com

[larryswedroe]

Rick
The issue I raise has nothing to do with what Fama and French believe about commodities. And I am 100% certain they would support my view that the only right way to look at an asset is to look at how its addition impacts the entire portfolio, not in isolation.

And I suggest you read my statement again.

[larryswedroe]

DBS
These are FULLY collateralized commodities futures. So you put up the full value as collateral.

[pkcrafter]

Did anyone catch Nightly Business Report last night (Monday, 4/08 ). There was clip on how commodity index funds are changing the futures markets. I'm afraid an awful lot of people are simply buying commodity funds because of recent returns. I'll bet most investors who have bought recently have no idea of how they work or what to expect.

http://www.pbs.org/nbr/site/on....s/080408c/

Paul
_________________

[dumbmoney]

[larryswedroe]

Paul I have no doubt that is true
But there are also people investing because of the academic research showing the benefits in terms of diversification

I doubt that most of the institutional investors like say a Calpers is performance chasing. but probably most individuals are.

Rebalancing is important, especially in highly volatile asset classes.

[MIARay]

I have to agree with Rick here. CCF's amount to market timing and the pros do not out-weigh the cons. The PIMCO fund you regularly recommend IS high in fees and a large portion of it is you know what- TIPS- a much better asset class to combat inflation than CCF's!

French argues his point to the contrary pretty strongly and I agree. Coming from someone who did his Phd dissertation on the matter and taught the subject for the first ten years of his academic career, he's no slouch. It's interesting that you mention Gorton and Reuwenhorst, when French sights them in his counter-argument to your position.

To compare Calpers to the average man on the street is a bit on the wild-side. I'd venture to say that the average investor around here has considerably less than 250 billion to invest. While a Calpers can afford to allocate a portion of their investment to a "speculative" asset class, the average investor should not. Should the AVERAGE investor start investing in timber futures, private equity and hedge funds also?

Who knows, maybe your an avid follower and reader of Jim Roberts. If so, you should be jumping into China right about now and teaching your kids to speak chinese.

[zhiwiller]

[ken250]

Some indirect reasoning...

VG will be releasing 3 new income funds soon, and all 3 funds have an allocation to a new Commodities-Linked Securities fund.

That ought to give some indication...

[schwarm]

[tc101]

How do these returns compare to total bond market index? Better, worse, or about the same?

[MIARay]

[am]

[larryswedroe]

MIARay
I really dont understand any of your points

How is a passive position in CCF market timing? It is asset allocation/risk management in same way other allocations are.

Second, French's arguments, having been there when he made them, were filled with holes as I have stated. IMO he was using data in way to support his already held view. Example he stated that because of the high monthly SD of CCF they were not a good inflation hedge. Who cares about the monthly SD. I don't invest monthly, rebalance monthly etc. When you look at the data like at one year horizons the correlations of CCF to inflation are positive and negative for stocks and bonds.
There were other problems IMO with his presentation. But reasonable people can disagree.

Third, yes TIPS do provide inflation hedge and stock hedge and that is why I prefer the PIMCO fund since it includes TIPS. Adding CCF with TIPS is superior to just adding CCF or just adding TIPS IMO. They are not mutually exclusive

Fourth Re Calpers, I don't see how you can conclude that Calpers is speculating or why you would do so. There is no reason I am aware of to draw that conclusion. IF anything it is exactly the reverse, they are using it in way I suggest as portfolio insurance--looking at impact of entire portfolio.

And re the other asset classes that CALPERS invest in--answer is no as Swensen points out because there they have advantages in being able to negotiate much lower fees among other things.

[MIARay]

[Rick Ferri]

Larry Swedroe wrote to Rick Ferri:

[zhiwiller]

Is there a button to tone down the histrionics on the thread?

[Mel Lindauer]

Hi Guys:

Let's calm down and stick to the issues. Please refrain from personal attacks or anything that even resembles personal attacks. If you can't, I'll lock the thread.

Play nice!

Best regards,

Mel

[schwarm]

[Daffy]

[larryswedroe]

Rick
You need to read more carefully. I never said you were unprofessional.
What I said was I was shocked that any professional would make a statement that is clearly incorrect--a basic premise of finance for which Markowitz won a Nobel Prize.

There are reasons why some might not want to include CCF, but the argument that is made based on looking at returns of the asset class in isolation is simply wrong--and not a justification and IMO not a debatable issue (see Markowitz)

[Rick Ferri]

[Rick Ferri]

Delete dupe post

[dbr]

Rick, Larry, I was reading in Scott Burn's website a recommendation for a "proxy" postion to handle commodity diversification which was to position in REITs and energy stocks.

What is your take on this?

Thank you.

[dbr]

Sorry, meant to add the reference: http://assetbuilder.com/forums.....aspx#3999

[Rick Ferri]

[schwarm]

[Rick Ferri]

The 2%-3% historic return is before inflation. Net of inflation, individual CCFs have earned the inflation rate. Logically, that would be expected since in the long-term commodity prices ARE the global inflation rate.

Rick Ferri