Ben Carlson wrote a piece recently on 200 years of returns by asset class, which showed that commodities had indeed delivered a negative real return over the long run, failing to beat inflation. But surely, over short runs, commodities can be a hedge against inflation? Turns out that isn’t the case either. In this piece, Christine Benz at the MorningStar shows why you need to time it to perfection for that to work. But investors’ behavior as seen by historical fund flows in and out of commodity funds shows that we actually get the timing horribly wrong.
“Assets in commodities funds jumped from $260 million in 2002 to $17.5 billion in 2007. Performance helped fuel investor interest, especially among investors who were scarred by the dot-com bust. The prices of most major commodity types surged in the mid-2000s, driven by demand from emerging markets. The Pimco fund, for example, gained 27% on an annualized basis in the three-year period between 2003 and 2005. Commodities prices flatlined in 2006 before soaring again in 2007.
As is so often the case, investors crowded into the group at an inopportune time. As the global financial crisis came into view in late 2007, commodities prices held steady for a bit, soaring that year even as stocks began to struggle and delivering on their diversification promise. But commodities prices fell sharply in 2008, leading most commodities funds to losses of 30% to 50% during that year. In the subsequent economic recovery that kicked off in 2009, commodities recovered but never fully regained their former glory. From the stock market’s nadir in 2009 through mid-June 2021, commodities tracking funds underperformed bonds and lagged stocks by a mile.
Commodities’ much-ballyhooed ability to diversify stocks and bonds has also declined.
Their long-running slump prompted many investors in the funds to capitulate. Asset inflows into funds in the commodities broad basket Morningstar Category peaked in 2010 at $15 billion, but a series of outflows followed between 2013 and 2015. The group saw one of its largest single-year outflows in 2020, shedding an estimated $3.7 billion in assets. That means those investors weren’t around to benefit from the group’s stunning recovery so far in 2021.”


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