Why Commodities?
Diversification
A strategic allocation to commodities has historically helped to diversify risk when added to a broad based portfolio.
While stocks and bonds possess values that are tied to expectations of capital appreciation or of changes in future cash flows, the main drivers of commodity futures prices consist of changes in expectations for the global supply and demand for raw materials. As a result of these differences, the historical risk and return characteristics of commodities have displayed little or no relationship with those of most other financial assets.
Adding Commodities for a More Complete Portfolio (01/01/1970 – 12/31/2018)
Sources: UBS Asset Management (Americas) LLC, Ibbotson, Bloomberg LP. Risk measured by standard deviation, a statistical measurement of dispersion around an average which depicts how widely returns varied over a certain time period. Allocation: Initial allocation: 40% US bonds, 45% US stocks, 15% international stocks. As commodities were added, other asset classes were reduced proportionately. Commodities measured by: S&P Goldman Sachs Commodities Index. US Stocks: S&P 500 TR Index. International Stocks: MSCI Daily TR Net EAFE Index. US Bonds: Represented by the Ibbotson Intermediate-Term Government Bond Index TR from 1/1/1970 to 12/31/2010, and BofA Merrill Lynch US Treasury Current 5 Year Index from 12/31/2010 through the end of the period.
Past performance is not a guarantee or indicator of future results.
Inflation Hedge
Commodities tend to be highly correlated with measures of inflation risk.
The strong link between commodities and inflation exists because raw materials and their associated costs are key inputs in the basket of goods used in compiling many consumer price indices. One of the most compelling values that commodities offer is its differentiated return characteristics during periods of unexpected inflation risk. Unexpected inflation, or the difference between projected and realized inflation, can dramatically impact financial assets.
Average Commodity Performance in Periods of Both Lower and Higher than Expected Inflation Environments (January 1970 – December 2018)
Sources: Ibbotson, Bloomberg LP, UBS Asset Management (Americas) LLC.
Inflation is represented by the Headline Consumer Price Index (CPI). Unexpected inflation is based on the historical relationship between one month Treasury bills and CPI. Commodity returns are lagged one month compared to unexpected inflation figures. Intermediate Term Bond represents the Ibbotson Intermediate-Term Government Bond Index TR from 1/1/1970 to 12/31/2010, and the BofA Merrill Lynch US Treasury Current 5 Year Index from 12/31/2010 through the end of the period.
Past performance is no guarantee or indicator of future results.
Business Cycle Diversification
Commodities have historically helped to diversify business cycle risk as the asset class tends to behave differently compared to equities during various phases, such as expansions and contractions during the early and late periods of the cycle.
As of 12/31/18, the Commodities Portfolio Management Team believes the US Business Cycle is in the Late Stage Expansion.
Sources: NBER, Bloomberg LP, Ibbotson, UBS Asset Management (Americas) LLC, Commodities measured by: S&P GSCI Excess Return Index. US Dollar: US Dollar Index. US Equities: S&P 500 Excess Return Index. International Equities: MSCI Daily TR Net EAFE Index. NBER official periods for contractions and expansions were split in half to represent the four stages of the business cycle. The first half of each expansion and contraction period represents the early stage expansion (Stage 1) and early stage contraction (Stage 3) phases, respectively. The second half of each expansion and contraction period represents the late stage expansion (Stage 2) and late stage contraction (Stage 4) phases, respectively.
Past performance is no guarantee or indicator of future results.
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