Any commodities investors?

[GTM]

Some believe we will see a bull market in commodities now. I do not know much about this market.

Has anyone any experience with commodities investing and if so how did you allocate your investment dollars?

 

[gratefuled]

The company I work for hedges commodity risk for a merchant power generator. Electricity, natural gas, etc.

IMHO there's no such thing as a general bull market for commodities; many are uncorrelated.

Commodity trading is extremely risky; there's a lot of leverage available and the water is thick with sharks. Remember when Homer Simpson got stuck long pumpkin futures and had to go to physical delivery? Obviously that's a silly example but it's instructive.

I allocate about 2.5% to managed futures for the diversification but I don't dabble in individual commodities myself. Google "managed futures" and you'll get a godzillion sources of info, if you're interested.

Ed

 

[gratefuled]

Oh, one more thing. The exchanges all have good primers on their websites. Check out the education pick on NYMEX.com.

Ed

 

[MetryOp]

Jim Rogers was on Wall Street Week with Forturne last night talking about commodities. Of course he was also plugging his new book on that topic.

They haven't posted a transcript of his interview, but they have posted a Yale study on commodity investing.

http://www.pbs.org/wsw/tvprogram/commoditystudy.html

 

[Helen]

Thanks for the link, MetryOp. I found this to be quite interesting:

Over all horizons -- except monthly -- the equally-weighted commodity futures total return is negatively correlated with the return on the S&P 500 and long-term bonds. This suggests that commodity futures are effective in diversifying equity and bond portfolios.

 

[gratefuled]

Which is why I want to ER from it.

Ed

 

[Helen]

http://www.businessweek.com/1997/15/b3522107.htm#Main Story

"Oppenheimer's innovative vehicle relies on a futures index

The fear of inflation has pounded stocks and bonds mercilessly over the past few weeks. That's why OppenheimerFunds Inc. hopes to hit a gusher. On Mar. 31, it launched Oppenheimer Real Asset Fund, a new breed of mutual fund that resembles a bond fund but behaves as though it's a basket of commodities--and thus should be a stellar performer if inflation really does show up.

The fund's aim is to deliver a return that reflects the change in the Goldman Sachs Commodities Index (GSCI). That's an index composed of the futures prices of 22 different commodities from hogs to oil in rough proportion to the value of their production in the world economy. Energy futures make up 55% of the index, agricultural, 25%.

...

Class A shares carry a 5.75% sales charge and 1.75% in expected annual expenses. Other classes forego the load but charge 2.5% in expenses.
"

 

[Helen]

Pimco Commodity RealReturn Strategy Fund

http://www.pimco.com/LeftNav/Product+Focus/2004/Commodities_Approach_03_04.htm

 

[Helen]

OK, one more. This is a pretty interesting article:

http://moneycentral.msn.com/content/Investing/Simplestrategies/P38651.asp

"A dollar invested in the S&P 500 at the beginning of 1972 would have grown to $36.22 by the end of 2000. The same dollar invested in the international stocks that make up the Morgan Stanley Capital International EAFE index would have grown to $30.24. A dollar invested in real estate, as measured by the National Association of Real Estate Investment Trusts index, would be worth $30.04. In the Goldman Sachs Commodity Index, the dollar would have grown to $29.76.

But if the investor split the dollar four ways and put a quarter into each of those equity asset classes, rebalancing each year to keep those percentages constant, his dollar would be worth $44.64 at the end of last year. The lesson is clear: Diversification works. The tortoise wins. "

 

[cute fuzzy bunny]

Raddrs board talks a lot about commodities, their favorite is PCRIX, which is a low cost commodity index. He's done a lot of good analysis that shows that commodities are an even better inflation hedge than TIPS and a better portfolio stabilizer than bonds. In fact, if my memory service Raddr did a portfolio of about half PCRIX and half small cap value and that provided the best returns coupled with pretty low volatility compared to other combos of stocks, bonds, tips and so forth. My stomach hurt just thinking about it though.

These funds usually use TIPS as collateral against purchasing a broad index of commodities. Commodities tend to reflect "unexpected inflation" inasmuch as when prices of commodities go up, its usually reflecting an image of real inflation at the commodity level.

The good news is that this means you get the returns from TIPS *and* the returns from the commodities.

The bad news is you probably dont want to own this sucker in a taxable account as you will absolutely get pasted by the TIPS inflation adjustment and the thrash commodity trading. Other bad news is owning these funds in a deflationary environment or inflation neutral environment isnt very rewarding either.

Temper any decisions with the knowledge that most of the historic data on commodities and TIPS is helped by the highly inflationary periods during the 70's and 80's...times that supposedly shouldnt recur now that we're supposedly better experienced at handling a non-gold based monetary system. And with the fact that everyones been piling into these investment vehicles over the past year and prices have really run up.

Some analyses show that the run up is justified, and that the prices arent overvalued.

Me, I'm not big on buying something that just ran up 30-40%.

 

[brewer12345]

I bought some PCRDX in October (don't have access to the cheaper PCRIX). It is about 7.5% of my portfolio. I hold it in an IRA for tax efficiency. Why do I have so much? I have a very heavy overweighting in small caps, partcularly small cap value (although some of my picks have done well and are beginning to look more like growth stocks). Commodities are typically negatively correlated with small caps, so I have a heavier aloocation to PCRDX to balance things out. As I sell out of more small cap names and put the cash elsewhere (non-US bonds, large caps, etc.), I will re-evaluate this position.

 

[unclemick]

I too read raddr's forum for good ideas. More a Boglehead than a slice and dicer. In the 70's,80's and early 90's had more international and closet commodities via individual Timber, metals(Al,gold,copper) stocks.

 

[Helen]

Hi Brewer,

Mind if I ask who your IRA is with ? I currently have my IRA with TD Waterhouse and an after tax account with Vanguard.

I haven't made a purchase of PCRIX yet, but it looks as if I select the PIMCO PIMS fund family and PCRIX I can get in for a minimum of $2.5k and a $35 transaction fee in an IRA at Vanguard.

Waterhouse claims I need a $100k initial investment to purchase.

I found this at the moringstar diehard board:

http://socialize.morningstar.com/Ne...015&convId=88403&minReplySeq=21&t1=1105320498

"I bought PCRIX in my Fidelity IRA Brokerage account on 1-18-04, buying $10k, much less than the stated $5 million minimum. There was a $75 dollar transaction fee but considering the fee was well under 1% of the $10k purchase, and the MUCH lower ER compared to PCRDX (no-load, no TF), I thought this transaction fee was worth paying."

So maybe TD Waterhouse would let me in for under the $100k.

PCRIX has no load and an expense ratio of .74 I agree, it really belongs in a tax sheltered account.

-helen

 

[cute fuzzy bunny]

Yeah PCRIX is an institutional fund, but some of the fund families aggregate. Vanguard probably offers the cheapest form of entry to it that I've seen. Not sure if you can buy it into one of their IRA's, I've never looked.

 

[fln]

If you're concern about purchasing cost and minimum initial investment then check out some of the discount brokerage firms' offering of institutional class of funds (PIMCO among others). Most of the times, their offerings are more competitive than the full-service brokerages such as Vanguard or Fidelity. Ameritrade for example has PCRIX at 2500 min investment for 17.99 transaction fee. Maybe lower for IRA ie. 1000(?).
Unless you're going to invest exclusively in an established investment company ie. Vanguard or Fidelity I can't understand why an investor would want to funnel all his/ner funds there instead of an independent discount brokerage with a more diversified and less expensive investment options.

 

[brewer12345]

Hi Brewer,

Mind if I ask who your IRA is with ?  I currently have my IRA with TD Waterhouse and an after tax account with Vanguard.

All my accounts are with Schwab. They don't allow retail clients to buy PCRIX (unless you have a spare $5 million). However, they allow you to buy PCRDX with no transaction fees. I don't hold much in the way of mutual funds (this is my only fund at Schwab), so it isn't worth the trouble to open another account somewhere else just for this position. Yes, I am paying an extra 50 BP over PCRIX, but I would submit that the person who paid $75 on a $10k investment (works out to 75 BP) gave away 18 months of the difference just to buy the fund. If he pays the same amount to sell, he would have to hold for 3 years just to break even.