London, 29 June 2006 … A study commissioned by PIMCO, the specialist fixed-income manager, has revealed that strategic allocations to commodities by institutional investors are too low as the asset class may be set to continue to produce equity-like returns. The study conducted by Ibbotson Associates, an expert in asset allocation, is the first piece of independent research into the significant potential of commodities in strategic asset allocation.
To assess how commodities would have contributed to risk-adjusted returns in a strategic asset allocation alongside stocks, bonds and cash, the study analysed the role of commodities as represented by a composite of four commodity indices based on annual data from 1970 to 2004. This reduced any bias occurring in any one index. Commodities were found to have a very low average correlation to the asset classes that made up the opportunity set The opportunity set included 6 other asset classes: US Treasury bills, TIPS, US bonds, international bonds, US stocks and international stocks, produced high returns and provided a hedge against inflation, supporting the claim that commodities provide diversification through superior returns when they are needed most. In examining the fundamental drivers of historical performance, the study showed that commodities offered an inherent or natural, non-skill based return.
The opportunity set included 6 other asset classes: US Treasury bills, TIPS, US bonds, international bonds, US stocks and international stocks
To project the future potential benefits of commodities in strategic asset allocation, the study included commodities in a hypothetical market portfolio to create a set of expected returns based on the Capital Asset Pricing Model (CAPM). Using conservative commodity expected return estimates relative to historical commodity returns, forward-looking efficient frontiers were then created with and without commodities included in the opportunity set. Using CAPM expected returns, the inclusion of commodities significantly improved the efficient frontier.
Components of commodity index returns and estimated forward-looking returns for those components were then identified. Finally, the study combined these two approaches to get a third estimate of returns for commodities as well as the other asset classes. Finally, the study used these three models but significantly reduced the expected commodity return (to just 2% over T-Bills). At 5% or 10% target portfolio volatility, commodities continued to play a significant role in the forward-looking strategic asset allocations in each model.
Commenting on the findings of the study, Bob Greer, Real Return Product Manager at PIMCO said:
“No matter which set of returns was used in the Ibbotson study, including commodities in the opportunity set improved the risk-return characteristics of the portfolio, and usually significantly. Furthermore, commodities played an important and very significant role in the strategic asset allocations. Nevertheless, commodities are still often excluded from the opportunity set of investable asset classes.”
Greer went on to quote one of the conclusions of the study: “Given the inherent return of commodities which is not conditional on skill, there seems to be little risk that commodities will dramatically underperform the other asset classes on a risk-adjusted basis over any reasonably long time period.
“If anything, the risk is that commodities will continue to produce equity-like returns, in which case, current forward-looking strategic allocations to commodities are too low.”
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For more information or a full copy of the report please contact:
Penrose Financial
Sally Todd / Emma Oakman
pimco@penrose.co.uk
+44 (0)20 7786 4820
Notes to Editors:
PIMCO
With more than €230 billion ($273 billion, £157 billion) of assets managed and serviced out of Europe and more than €500 billion worldwide ($600 billion, £340 billion), PIMCO is one of the world's leading fixed-income fund management companies.
Founded in 1971 and headquartered in Newport Beach, California, PIMCO is the fixed-income platform of the Allianz Global Investors group of companies. PIMCO offices are located in London, Munich, Toronto, New York, Newport Beach, Singapore, Sydney, Hong Kong and Tokyo.
Over the last twelve months, PIMCO has won a number of prestigious awards including Bond Manager of the Year, Nordic Asset Manager of the Year and the Institutional Marketing Award at the Financial News Awards for Excellence in Institutional Asset Management 2005; Fixed Income Manager of the Year at the Global Money Management Awards 2006; Fixed Income Manager of the Year at the Global Pensions Awards 2006 and the High Yield Bonds Award at the Pensions Management Provider Awards 2006.
The services and products described in this communication are only available to investors who come within the category of market counterparty or intermediate customer as defined in the Financial Services Authority's Handbook. This communication is not a public offer and individual investors should not rely on this document. Past performance is no guarantee of future results. Diversification does not ensure against losses.
PIMCO Europe LtdNations House103 Wigmore StreetLondon W1U 1QSEngland44-20-78721300
PIMCO Europe Limited is authorised and regulated by the Financial Services Authority.
For further information on PIMCO please visit www.pimco.com
Ibbotson Associates
Ibbotson Associates was founded in 1977 to bridge the gap between modern financial theory and real-world investment practice. Professor Roger G. Ibbotson, founder and Chairman, pioneered collecting the requisite data used in asset allocation and in quantifying the benefits of diversification. The firm continues to provide solutions to investment and finance problems for a diverse set of markets. Ibbotson Associates fills a growing need in the finance industry as a single-source provider of investment knowledge, expertise, and technology.
Ibbotson Associates’ investment management services include asset allocation design, back-testing of portfolio strategies, mutual fund analysis, assessment of investor risk tolerance, employee training, structuring and education for retirement plans, and client-specific research. Ibbotson Associates’ products include client presentation materials, computer-based training, and asset allocation software tools.
