DoubleLine: Rationale for Investing In Commodities

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.