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Friday, September 15, 2006

On Commodities

By William Trent, CFA of Stock Market Beat

Roger Nusbaum had an interesting post related to the appropriate commodities weighting in a portfolio. Our response (from his comment section):

A good starting place would be the market weighting. For example, if commodities are 5% of the investable universe, the average investor has to be at 5%. If all investors shifted to 10% it would simply bid the price up artificially.

On the other hand, it is reasonable to assert that investors have had too little exposure to commodities historically, and that the weight may still be too low to reflect the fact that the investing world has to play catch-up.

And indeed, that second part is one reason for our bullishness. It also appears to be playing out.

As Minyanville noted:
The California Public Employees’ Retirement System, the largest US public pension fund, could take its first direct stakes in infrastructure projects such as oil depots and orange groves as part of a radical change in its commodity investment strategy unveiled this week, the Financial Times reported.

The shift, aimed at diversifying Calpers’ $208bn portfolio, will take the fund into direct commodity investments previously regarded as too speculative.

Calpers executives this week stressed the fund would not follow hedge funds and other short-term investors that have been active traders of physical commodities and derivatives.

Instead Calpers will spread its investments among commodity futures, direct involvement in infrastructure projects – which could include oil storage facilities and orange groves – and companies affected by commodity prices such as rail and road operators, the FT reported.

Russell Read, Calpers’ recently appointed chief investment officer, told the FT that the new strategy would lead to a sharp increase in the commodity exposure across the entire spectrum of the funds’ investments in both the public and private markets.

Can you show us that CRB Index chart again?

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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