Investing in the commodities asset class
Every day in every way, we use products, substances and materials that are either mined or grown for our benefit and convenience: in this article we explain why the commodities asset class is an important investment portfolio inclusion.
What qualifies an investment to be a recognised asset class?
There are three criteria to satisfy for an investment opportunity to be included as an asset class: they are –
- its must earn a rate of return above the risk-free rate over the long-term;
- it needs to exhibit low to negative correlations with other assets; and
- its returns are unable to be replicated with linear combinations of other asset classes.
How then, the commodities asset class?
An Information Paper (#2, October 2009) published by H3 Global Advisors Pty Ltd, concludes that these criteria have been met with commodities – with the consequence that they say that ‘..the empirical research….suggests that commodities are indeed an asset class in their own right.’
In summary, the commodities asset class has the following features beneficial to their incorporation into an investment portfolio –
- Over the long-term, commodity futures offer attractive returns that are of the same magnitude as global equity returns.
- Commodity futures returns provide portfolio diversification due to their low to negative correlation with stocks and bonds.
- Historical mean-variance portfolio optimisations estimate the optimal portfolio weighting to commodity futures at 5% to 36%.
- Optimal portfolio weightings in commodity futures for investors over the long-term are estimated at approximately 0% to 26%.
Is an investment in commodities right for you?
During each annual review process in considering asset allocation for our client portfolios, we consider whether the strategic aims might be better met by reallocation of a portion of the portfolio to the commodities asset class. Part of the consideration for this is the investor risk profile to which the individual client has been assessed; and a second, but important consideration is the degree of correlation between the commodities asset class with other assets within the portfolio.
ContinuumFP can help you with your portfolio construction
The experienced advisers at Continuum Financial Planners Pty Ltd can help you select an investment portfolio that is suited to your personal goals and financial objectives – to arrange a meeting with one of our team, use the website Contact Us page; or call (07) 34213456 – and be assured of prompt and courteous attention. An initial meeting will be facilitated on a no-obligation, no-cost to you basis. Our advisers listen to your investment and financial goals, they understand your strategic financial needs – and they have wealth management solutions available to you.
Originally posted in February 2010; this article has been refreshed from time to time, most recently in January 2021.
