The Wall Street Journal had an article regarding long-term commodity investing in its April 9 digital edition, that argued against a long-only investment in the commodity space. It argues that commodities don’t appreciate over the long-term as equities. The piece, “Why Commodity-Index Investing May Be Futile,” by Simon Constable has one major flaw. It makes an assumption that is not true: That the goal of investing in commodities is the same as equities and that those assets are in competition with each other.
The folks who put together the S&P Goldman Sachs Commodity Index (S&P GSCI) have long advocated that a strategic allocation to commodities is an important part of every portfolio as a hedge against inflation. One may want to argue that premise — some have — but no one is arguing for the type of investment in long only commodity indexes as one would have in equities. The S&P GSCI had, in the past, advocated for a consistent 4% allocation to a long-only investment in a basket of commodities. At times they would recommend underweighting or overweighting this investment. That is not the 60% allocation most commonly suggested for equities by investment professionals.
Studies have shown, as cited by the purveyors of long-only commodity indexes, that an investment in commodities are non-correlated with equities and when made along with typical equity and bond investments, reduces the overall volatility of your portfolio.
The WSJ story includes a source that claims that commodities are more volatile than equities, which is a dubious claim subject to selection bias and something that is at odds with the research of the commodity index providers. But more importantly, the argument for a long-only investment in commodities is based on how it lowers the overall volatility of a portfolio when added to a traditional 60/40 allocation, not whether it is more or less volatile than equities.
More disturbing is how the story compares the two by cherry picking select data. It cites CFRA Research’s chief investment strategist Sam Stovall, who notes “since January 1970, investors who held the S&P 500 for at least 12 years would always have had positive returns including dividends.” The next paragraph states that major broad indexes of commodities have registered negative returns over the past 10 years. This is according to Amanda Agati, an investment strategist at PNC Institutional Asset Management. She is the one that claims commodities are more volatile than stocks.
Why would you cite two different time periods when comparing two asset classes? And to look at the last 10 years in commodities—close to 10 years after an historic peak—is disingenuous at best and downright fraudulent at worst.
The GSCI, and several other new and existing commodity indexes became popular at the turn of the last century. When the second Bush Administration (George W. Bush) abandoned the “pay as you go” budgeting measures initiated in his Father’s Administration and the short period of surplus budgets (1998-2001) ended, many economists expected to see a surge in inflation. It was this anticipation of a spike in inflation that led to billions of dollars being allocated to investments tied to the GSCI and various long-only commodity indexes.