DoubleLine: Rationale for Investing In CommoditiesVW Staff
DoubleLine Strategic Commodity Fund webcast titled, “Rationale for Investing In Commodities.”
Rationale for Investing In Commodities
- We believe there should be diversification benefits relative to traditional asset classes:
– Potential low–to-uncorrelated return source to traditional asset classes.
- Potential to hedge against unexpected inflation:
– Physical assets have historically tended to move in line with broad inflation measures.
- Potential incremental returns from each individual commodity’s market structure.
- Commodity supply and demand is generally correlated to the cyclicality of the global economy.
Potential Diversification Benefits of Commodities
- Broad commodities have shown low correlations to other broad asset classes
- The average correlation is 0.20
Commodities as a Possible Inflation Hedge
- Commodity performance over the long term has tended to rise and fall with unexpected inflation
When is it a Good Entry Point to Buy Commodities?
- UBS Bloomberg Constant Maturity Commodity Index (CMCI) adjusted for inflation
- Relative low during financial crisis of 582.4 on February 28, 2009
- Level as of August 31, 2015 was 535.1
Tactically Allocating to a Long-Short Strategy
- DoubleLine Commodity Timing Signal.
DoubleLine Strategic Commodity Fund’s Approach
- DoubleLine Strategic Commodity Fund is a long-biased commodity fund that tactically allocates to a long-short dollar neutral commodity strategy when a 100% long commodity allocation is unattractive
What is Commodity Beta?
- Traditional asset classes define “beta” using market capitalization, or a similar price-based metric, as the basis for determining the weighting scheme.
- However, since commodity investments are typically obtained via commodity futures there is a challenge with defining commodity “beta” in a similar vein:
– For each futures contract outstanding there is one entity which is long the exposure and one offsetting entity that is short the exposure;
– Therefore the market capitalization of each futures market is zero.
- Index providers have turned to other factors to determine how to allocate capital across various commodities:
– These include, but are not limited to open interest, volume, production and fixed weights.
- Since there is no agreeable definition of how to define the market weights of various commodities, all commodity indices are actually rules-based commodity strategies.
What the CMCI Gets Right
- From a return and risk standpoint, the UBS Bloomberg Constant Maturity Commodity Index (CMCI) is the best of the commodity betas for the time period shown:*
– Highest Return;
– Lowest Standard Deviation;
– Highest Sharpe Ratio;
– Best Maximum Drawdown.
- How the CMCI improves upon other betas:
– Weighting based upon fundamental and liquidity factors;
– Exposure across each individual commodity’s curve;
– Daily rolling of futures contracts.
- Where is there still room for improvement?
– Commodity selection to avoid commodities that have tended to show weak technicals;
– Enhance curve positioning for better risk and reward trade offs;
– Less frequent rolling and utilizing more liquid commodities to reduce transaction costs.
See full PDF below.