TIME TO PARTY LIKE IT’S 1999?

 

As of 12/17/19, the Rogers International Commodity Index® (“RICI”) was up over 10% YTD, over 300 BP ahead of the benchmark Bloomberg Commodity Index (“BCOM”)!

Over 2/3 of the 38 components in the RICI® are positive year to date indicating a relatively broad and healthy market across the commodity complex.

This performance is far better than most advisors appear to realize and few seem to have paid attention to. Perhaps this is not surprising given the combination of the 1) constant barrage of news spreading concerns over tariffs, 2) memories of the surprise drop in oil in the 4th quarter of 2018 and 3) the extraordinary positive performance of the equity and bond markets this year. Overall, in our experience commodities “feel” the most out of favor and under invested than they have been for many years. We believe the current negative sentiment is a strong contrary indicator and a reason to be more bullish on the asset class looking forward into 2020.

Commodity Asset Class Poised to Recover!

The spread in performance between commodities and equities has only been this stretched two other times in almost 50 years (see Who Is Buying Commodities). Both were excellent times to include commodities in diversified portfolios. We realize it has been a long, difficult period for commodities; however, we stand by our assessment that February 2016 was the low point in the cycle. Although the recovery has been muted relative to the recoveries from past major lows, we believe the asset class is indeed setting up for a major reversion to the mean.

PARTY LIKE IT’S 1999!  

 Just over twenty years ago, in mid-1999, was the last time the spread between commodities and equities was stretched to this level. As indicated in the chart below, it was followed by a very important and significant reversion to the mean relative to the equity markets. Even a small allocation to commodities would have improved portfolios a great deal. The similarity between 1999 and today is that prices were similarly severely depressed while supplies across the commodity complex were tightening around the world due to several years of declining capital expenditures. As indicated below, commodities began their powerful reversion to the mean relative to equities from those lows in 1999 despite the weak global macro conditions during the period. Commodities went up despite slowing US GDP, declining inflation, and 2 years of a strong dollar!

We believe the commodities asset class is near a major and historic turning point relative to financial assets. Investors in the asset class may finally be poised to garner the significant benefits that the commodities have traditionally provided for diversified portfolios. We believe the RICI® Index Methodology is sound and with a long history of outperforming the benchmark BCCOM, warrants serious considerations for investors 2020 portfolio allocations.  

 

The Rogers International Commodity Index®: A Global Demand-Based Portfolio

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. The RICI® has significantly outperformed the Bloomberg Commodity Index since inception (8/1/98 through 9/30/19) as shown in the table below.

 

(To access additional management commentaries & reports please visit our web site for Financial Advisors and Institutions by clicking here.

DISCLAIMER: The index returns shown above do not represent the results of actual trading of investible products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance or provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any index performance provided is for illustrative purposes only. The time period selected represents the inception date of the Rogers International Commodity Index® and is intended to provide a historical long-term average. Data provided by Bloomberg LP, BarclayMAP, and RBC Wealth Management. Past performance is not indicative of future performance.
Alan Konn

Partner & Managing Director of Price Asset Management