September 2011: Commodities as an Asset Class

Commodities as an Asset Class: Appropriate for Responsible Investors?

From their earliest days, the commodities markets have had a strong speculative aspect due to the usefulness of futures contracts. Recent years have seen commodities play an increasingly significant role in the asset allocations of institutional investors. These investments in commodities take a variety of forms, including those in real assets, futures, indexes, equities and hedge funds (although investors may not be aware of the commodities roles involved in these hedge funds). In portfolio management commodities can serve a variety of functions from volatility and/or inflation hedges to purely speculative plays.

Investing in commodities indexes has become particularly controversial due to their implications for commodities prices. These indexes have at times proved disappointing when anticipated diversification protection and returns have failed to materialize. Among the real-assets commodities, timber has one of the longest track records as a sustainable commodity play, with European institutional investors particularly active in this area in the U.S.  More controversial are such real assets as rare earths and minor metals, where institutional investors are less likely to play, though there has been increased interest as new technologies create markets for these products. Investing in the public equities of commodities-related companies is an attractive play for investors, since they have outperformed other strategies by a substantial margin in recent years.

Commodities are thus a broad and diverse asset class with multiple options through which investors can enter these markets with a variety of differing financial, social and environmental implications.

This convening was held on September 23, 2011.

Read a summary of the convening here.

Relevant Articles

Ke Tang and Wei Xiong. Index Investment and the Financialization of Commodities. March 2011. download PDF

Testimony of Michael W. Masters, Managing Member / Portfolio Manager, Masters Capital Management, LLC, before the Committee on Homeland Security and Governmental Affairs, United States Senate. May 20, 2008. download PDF

Carolyn Cui and Tatyana Shumsky. Commodities Beckon Banks. The Wall Street Journal. July 5, 2011. link

Sustainability and Commodities. Quarterly Update for Financial Institutions, World Wildlife Fund Market Transformation. May 2011. link

OnValues. Responsible Investment in Commodities: The issues at stake and a potential role for institutional investors. January 2011. download PDF

John Fullerton. Commodities are Different. June 13, 2011. link