2nd Quarter Performance Update

Commodities: Mid Year Review and Outlook for 2018

RICI® Beats Stocks, Bonds, & Commodities Benchmark

The Rogers International Commodity Index® (RICI®) outperformed the benchmark Bloomberg Commodities Index (BCOM), the S&P 500, and Barclays U.S. Aggregate Bond index*

The commodity recovery, which began in February 2016, continued to gain momentum in the first half of 2018. The RICI® outperformed the commodity benchmark, the Bloomberg Commodity Index (BCOM), as well as the S&P 500 and the Barclays U.S. Aggregate Bond Index. This was principally due to continued price improvement in the energy sector, following the second leg of the crude oil rally that resumed in the 3rd and 4th quarters of 2017. The metals sector declined, after posting a better than 19% return in 2017, remaining positive year-over-year and the agricultural sector experienced a slight decline. However, each RICI® sub-sector index outperformed its equivalent BCOM sector. A breakout of the relative contribution to total return of each of the three commodity sectors is as follows:

Trade disputes, renewed sanctions, geopolitical standoffs, and domestic political turmoil have added to uncertainty around energy production trends, possible supply disruption, demand patterns (particularly in China), and the general economic health globally. We believe that this noise obscures the important fact that commodities prices, despite the almost continuous rally off of the 2016 bottom, remain significantly depressed and are still historically cheap, especially in the context of the very mature equity and fixed income rallies.

The 2011-2015 bear market in the commodity asset class led to historical capital expenditure cuts across the energy and metals industries, thus paving the way for years of tighter supplies and higher prices. On a global macro basis, the asset class tends to add significant diversification benefits during rising rates, inflation and/or unexpected inflation, and during periods of heightened event risk. Although the energy sector dominated the return profile of commodities so far this year, if historical patterns hold true, investors can expect agricultural and metals prices to begin to rise later in the year as well. Despite the near-term volatility, investors should focus on the long-term opportunity, and look to add to the asset class during the inevitable corrections that will occur along the way.

John Reese