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Asset classes

Commodities

Commodity investments are increasingly important in many investors’ portfolios as a way of improving risk-adjusted returns at a time when equities and bonds have been extremely volatile.

Aviva Investors offers an actively managed, UCITS-compliant commodity fund, which provides investors with exposure to a long-only actively managed commodity strategy run by Tiberius Asset Management AG (Tiberius), one of Europe’s largest commodity managers.

Why commodities?

Commodity returns tend to be uncorrelated with returns from other asset classes throughout the economic cycle, thus providing diversification benefits. Adding commodities to a portfolio of equities and bonds can therefore enhance returns and reduce volatility:

 

Equities
Diversified Portfolio (DP)

Adding 5% Commodities to DP
Annualised return

-2.22%

0.95%
1.22%
Annualised volatility
25.06%
14.57%
14.10%
Sharpe ratio

-0.20

-0.12

-0.10
Maximum drawdown

66.88%

41.53%
39.85%

Source: Aviva Investors, Bloomberg from 01/01/1999 to 05/02/2012. Diversified Portfolio is 60% Equities (represented by Euro Stoxx 50 index) and 40% Bonds (of which 50% is Sovereign bonds represented by iBoxx € Sovereign Eurozone Index and 50% Corporate bonds represented by iBoxx Liquid Corporates TR Index). Portfolio re-balanced monthly. Commodities are represented by the DJ UBS Commodity index. Data from 03/09/1991 to 29/07/2011 except for Euro Corporate Bonds, US Treasuries, World Corporate Bonds (data starts 04/01/1998) and High Yield Bonds (data starts 04/01/1999). Past performance is not a guide to the future.

Exposure to commodities often provides a good hedge against inflation risk, as commodity returns are generally positively correlated with inflation. This is because commodity-driven prices are an important component of consumer price baskets. This should add to the appeal of the asset class for investors concerned about the prospects for inflation.

Additionally, commodities tend to exhibit high positive returns compared to a normal return distribution (known as positive skewness), due to their sensitivity to supply ‘shocks’.

Why active commodity management?

Commodity assets offer three potential sources of return for investors:

- Spot yield – the change in the spot price of a commodity during the period of investment
- Roll yield – the price difference between an expiring futures contract and a longer maturity contract
- Collateral yield – the interest income earned on cash not used for margin purposes.

Passive commodity products usually aim to replicate the returns generated from spot, roll and collateral yield. While a passive strategy should perform well when the price of commodities rises, active strategies have the scope to improve performance even more.

Active managers, like passive managers, aim to capture commodity returns generated from spot, roll and collateral yield. However, active managers can improve on ‘core’ commodity returns by using their skill and experience to generate additional returns.

In striving to maximise commodity returns, active managers can use their in-depth research and risk management systems to take positions away from benchmark.

To reduce risk, positions may be taken across a range of commodities, maturities and geographies. In this way, active managers can deliver risk-adjusted returns that consistently outperform the benchmark.

Aviva Investors Investment Solutions – Global Commodity Plus Fund

* Source: Aviva Investors, Bloomberg from 01/01/1999 to 05/08/2011. Diversified Portfolio is 60% Equities (represented by Euro Stoxx 50 index) and 40% Bonds (of which 50% is Sovereign bonds represented by iBoxx € Sovereign Eurozone Index and 50% Corporate bonds represented by iBoxx Liquid Corporates TR Index). Portfolio re-balanced monthly. Commodities are represented by the DJ UBS Commodity index. Data from 03/09/1991 to 29/07/2011 except for Euro Corporate Bonds, US Treasuries, World Corporate Bonds (data starts 04/01/1998) and High Yield Bonds (data starts 04/01/1999).