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Seek higher risk in commodities

By Neville Bennett

Friday 21st February 2003

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Good portfolio design is like a triangle. At the base, there are low risk assets like gold, cash and fixed interest. Further up the triangle there are more risky but higher yielding assets. There is still a place for high-yielding equities (and some excellent ones on the New Zealand market).

Higher up the triangle are assets with more risk and potentially higher returns. Exposure to hedge funds is beneficial and they can produce equity-like returns for bond-like risks. Some exposure to commodities is also worth consideration.

I will leave aside the topic of the investor acting as a trader, as few people have the temperament or the time to devote themselves fulltime to the daunting task of being a day trader. I also leave aside physically stockpiling oil, petrol, cotton and pig's bellies. (See Peter V O'Brien's survey, NBR, Jan 31.)

Commodity funds are opportune as the Kiwi dollar is high relative to the US dollar.

One such fund is the Oppenheimer Real Asset Fund. This combines commodity bonds and futures. It is huge and tracks the Goldmann Sachs commodity total return index. Thus it has exposure to about 30 commodities in agriculture, energy and metals.

The Oppenheimer has delivered a 12% annualised return over the last 30 years. It can be volatile, especially now in the oil and gold sectors. The merit of the fund is decent returns plus the fact it usually performs best when stocks and bonds are down. It helps balance a portfolios return.

The Oppenheimer performed well in the 1973-74 bear market. While equities fell 40% it rose 120%. That was a bit lucky as Opec suddenly increased the price of oil, but other commodities also soared.

Commodities are a good hedge against inflation. Most people feel inflation is licked but the jury is still out for the US economy, which has been distorted by low interest rates and the creation of easy credit.

Another suggestion (in New Zealand currency) is Tower's GAM Multi-Trading Fund, a composite fund with a limited exposure to commodities. It has returned a satisfactory 12.57% annually over the last seven years.

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