Pensions rethink commods plans in bearish world
Pension funds and other big investors in commodities are reassessing strategies for 2009 after their huge buildup in commodity index exposure this year backfired as underlying raw material prices imploded.
Institutional investors in commodities have thus far stuck to “long-only” futures indexes, which principally make them buyers of commodities, not sellers. This worked wonders when oil, copper and corn prices rallied in recent years but proved disastrous during the sell-off of the last four months.
Now, pressure for better returns are pushing pensions and endowments to rethink their conservative stance amid suggestions they look at strategies where they can profit from “shorting”, or selling, commodities in market downturns.
The California Public Employees’ Retirement System, the largest U.S. pension fund, said this week it was open to revamping its long-only commodities portfolio to enhance performance.
“I think it’s fair to say that we will look at other potential opportunities,” Calpers spokesman Brad Pacheco said after the fund announced it had appointed consultants to boost its inflation-linked asset class, which included commodities.
Investment bank Barclays Capital, a big cheerleader of commodities in recent years and an advisor to pension plans, also said a long-only strategy was not prudent now.
“For the next six months at least, markets are likely to be very choppy, and we believe dynamic long-short/market neutral strategies will provide the best returns,” BarCap said.
Institutional funds pumped an estimated $40 billion into commodity futures at the start of 2008, helping crude oil hit $100 a barrel on the first trading day of the year.
Oil went on to hit nearly $150 a barrel in July but has fallen to below $40 now pay day loan centers. It is forecast to drop more amid the global economic gloom, complicating the job of investment managers in deciding how much to allocate to commodities at a time when there was less money to play with but more buying opportunities from the slump.
Calpers — a $182 billion fund — has more than $1 billion tracking the S&P GSCI commodity index, from a total of $3.7 billion devoted to its inflation-linked asset class, which includes holdings in infrastructure, forestland and bonds.
The exposure in the S&P GSCI delivered strong returns for Calpers earlier this year, before the plunge in oil prices led to a net loss of nearly 3 percent on the year.
Passive investors like Calpers use long-only indexes for investment returns, not to take delivery of physical commodities. To maintain an exposure, they must replace contracts going into delivery with farther-dated contracts. This year, index investors also lost money when oil contracts in farther months became costlier than the expiring month.
All these have added to the financial strains of pensions and endowments that rely on such indexes to diversify investment portfolios ravaged by tumbling stock prices. Harvard, the world’s richest university, saw its endowment fall 22 percent in the last four months from losses across markets.
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Analysts said in the hunt for alternatives to long-only commodity indexes, trend-followers like Commodity Trading Advisors (CTAs) could gain.
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