Commodities Still An Alternative?
Commodities did not deliver in 2012 and they have yet to recover from their 2008 highs. In fact, according to Cerulli Associates, commodity funds attracted meager infows of $698 million in 2012, compared to $9.7 billion for 2011.
In the wake of these realities, it seems your clients may be searching for more efficient ways to extract value from commodity investing.
One of the issues is that most traditional commodity funds rely on long-only exposure to commodities. This limits their potential because investors can only benefit if commodity prices rise. And long-only commodity strategies have shown to be unpredictable over time because:
- Commodity returns are typically cyclical and sporadic;
- Individual commodities tend to perform dissimilarly in different market environments;
- Significant drawdowns1 can be damaging to the long-term performance of a portfolio.
For example, as you can see from this table with two of the major long-only commodity indices (S&P GSCI and Dow Jones UBS) over the past ten years, along with modest performance, they have exhibited high volatility and deep declines.
Performance Metrics of Long-Only Commodity Indices (2003 – 2012)
|S&P GSCI Index||DJ UBS Commodity Index|
|Annualized Standard Deviation2||25.82%||22.51%|
Source: Bloomberg. Date range: 1/1/2003 – 12/31/2012.
If you can’t beat ‘em, join ‘em.
Commodities still offer potential risk-adjusted returns over time in a diversified portfolio, but a long-only approach to this asset class is limiting.
Commodities have always been inherently volatile. So why try to change that? Instead, how about a more tactical approach to commodity investing that has the ability adjust to price trends, and therefore attempt to limit their downside risk?
The Direxion Indexed Commodity Strategy Fund allows investors to take advantage of rising commodity prices, and to preserve capital by going flat (to cash) when individual commodities are experiencing downward trends. Therefore, it seeks to potentially provide commodity investment returns with lower risk characteristics than long-only commodity strategies.
1Drawdown – The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.
2Standard Deviation – A measure of the dispersion of a set of data from its mean. The expected return of an asset, less the rate of return on a risk-free asset. This rate is denominated by the risk of that asset, which is expressed as the standard deviation of returns.
Diversification does not ensure profit or protect against loss.