Although oil and gold have received most of the press this year, many investors are probably unaware that there has been a strong and broad rally across the commodity complex. In fact, commodities are outperforming both equities and fixed income in 2016 YTD, and the Rogers International Commodity Index® (RICI®) is outperforming the benchmark commodities indices. Through October 31, the RICI® is up 8.41% YTD.
We have always maintained that the RICI® methodology benefits from its more rational weighting scheme (consumption-based), broader diversification (37 commodity components), and more frequent rebalancing. While the volatile energy sector has dominated the headlines, the RICI’s enhanced methodology has enabled it to outperform both the higher-energy weighted (S&P GSCI) and lower-energy weighted (BCOM) benchmark indices. With all the focus on energy, most investors may also not realize that the metals sector is by far the strongest sector with positive performance across both industrial and precious metals.
- Rogers International Commodity Index®: 8.4144%
- Bloomberg Commodity Index: 8.3429%
- S&P GSCI: 3.7215%
- S&P 500: 5.8690%
- Barclays US Agg Total Return Value Unhedged: 4.9850%
Source: Bloomberg LP as of 10/31/16 YTD
In January, 2016, we wrote about the possible turn in the asset class when it was still viewed as a “falling knife” by most investors. We indicated that fundamentals were changing and when this asset class turns it tends to do so quickly. In fact the RICI® is now up approximately 18% from the bottom in January of this year.
Commodity Curve – Price Asset Management – January 2016.pdf
In February, 2016 we provided an analysis of the RICI® methodology which at the time was under-performing the benchmark Bloomberg Commodity Index. Since then, the RICI’s attributes have indeed added value. In fact, the RICI® has gone from over 300 BP behind the BCOM to slightly ahead since the end of February 2016. Here is our piece on the attribution of the RICI® methodology.
Price Asset Management Investment Letter February 2016.pdf
On a longer term basis, the potential combination of better fundamentals across much of the commodity complex, inflation showing signs of picking up, rates beginning to inch up, and the ongoing potential of global event risk helps support our belief that a multi-year reversion to the mean has begun for the asset class. If this occurs as we expect, then the diversification benefits will become ever more evident in the months and years ahead.