Commodities – Diversification Is Working!

The DOW Jones Industrial Average tumbled 1,194 points in 3 days from the close on 3/20/18 through 3/23/18 resulting in a -4.83% decline. The S&P 500 declined 4.72% over the same period. Commodities were not only positive during that heightened volatility but outperformed US, International, and Commodity Resource related Equities as well as Bonds! In fact, YTD through 4/02, Commodities, as represented by the Rogers International Commodity Index (“RICI®), was the only asset class positive on the year!

Furthermore, in 2017 commodities went through a correction led by the decline in oil that began in February 2017 and ended in late June 2017. Since the end of that correction approximately 9 months ago, commodities have significantly outperformed both equities and bonds as indicated above. Not only did portfolios with an allocation to commodities benefit from the absolute return over the period but perhaps more important, is the non-correlation of commodities to stocks and bonds during the most recent sharp increase in market volatility.   Most investors may not be aware of how well commodities have begun to work as a diversifier. Granted, 9 months is a short time period however commodities are now 2+ years off of their February 2016 lows. We believe this was the beginning of a multi-year reversion to the mean. With history as a guide, we may be in the very early stages of a prolonged period where an allocation to the commodity asset class will consistently add value and lower volatility to diversified portfolios.

*The RICI® is a composite, US dollar-based, total return index methodology. It represents the value of a basket of commodities consumed in the global economy, ranging from Agricultural to Energy and Metal products. The Index’s weights attempt to balance consumption patterns worldwide (in developed and developing countries) and specific contract liquidity. The value of this basket is tracked via futures contracts on 38 different exchange-traded physical commodities, quoted in four different currencies, listed on nine exchanges in four countries.

 

 

Alan Konn

Partner & Managing Director of Price Asset Management