An "Agile" Move to Commodities

03/25/2005 12:00 am EST

Focus:

J.D. Steinhilber

President, Agile Investments

J.D. Steinhilber, editor of Agile Investments, has added a position in the Pimco Commodity Real Return to his portfolio. Here, the fund expert explains the reasoning behind using a commodity position to help diversify a portfolio and serve as an inflation hedge.

"The unprecedented credit growth that has played such a central role in this economic recovery shows no signs of abating. For example, in the first month of 2005, the issuance of asset backed securities tied to home equity loans is up 30% vs. 2004. In our view, there remains a strong inflationary and expansionary bias in the economy. Our belief that inflationary forces predominate over deflationary forces is one reason why we are adding a position in a diversified commodities fund to our portfolios. The principal benefits of an allocation to commodities in a diversified portfolio include:

  • History of Positive Returns: The returns from commodities compare favorably to the returns from other key asset classes such as stocks and bonds. The principal factor driving the positive returns of commodities over time is ever-expanding global demand. This demand is particularly strong at present given the rapid economic development occurring in Asia.
  • Diversification Benefits: The case for including commodities in portfolios becomes even more compelling in light of their historic negative correlation with the returns from stocks and bonds. The essence of diversification is combining asset classes that do not move in tandem (i.e. are not highly correlated). Commodities provide the opportunity to enhance risk-adjusted returns over time because of their negative correlation with both stocks and bonds.
  • Inflation Hedge: While commodities are negatively correlated with stocks and bonds, they are positively correlated with inflation. Because of this positive correlation, commodities tend to perform well during periods of rising inflation or unexpected inflation, while stocks and bonds perform poorly.

"Pimco Commodity Real Return Fund (PCRDX) is an open-ended mutual fund. It is an ‘index fund’ in that it tracks the performance of the Dow Jones AIG Commodity Index, which is a broad-based index representing 19 commodities in the following such categories as energy, grains, and industrial and precious metals. An investment in a broad commodity index provides diversified exposure to the asset class with substantially less volatility than an investment in particular commodity sectors, which can be quite volatile."

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