Rethinking Commodity Indexes. Live Webinar May 6, :00 3:00 pm EDT

Transcription

1 Rethinking Commodity Indexes Live Webinar May 6, :00 3:00 pm EDT

2 Welcome Background on Commodities Indexing Dave Nadig Director of Research IndexUniverse.com Fundamental Problems Solutions & Alternatives IndexUniverse.com Exchange-Traded Funds Report Journal of Indexes

3 Panel Discussion Prof. Geert Rouwenhorst Professor of Finance Yale University Dave Nadig Director of Research IndexUniverse.com Satch Chada Managing Director Jefferies Asset Management

4 In The Beginning The Yale Study Gary Gorton & K. Geert Rouwenhorst June 2004 In addition to offering high returns, the historical risk of an investment in commodity futures has been relatively low especially if evaluated in terms of its contribution to a portfolio of stocks and bonds.

5 Explosive Growth Source: Standard and Poors

6 The Core Problems What s the Market Cap of Wheat? Which Oil Do You Buy? Source: Standard and Poors

7 The CRB Precious Metals 7% Base Metals 13% Energy 39% 23% Oil Agriculture 41% 7% Livestock

8 The GSCI (GSG, GSP) Precious Metals 4% Base Metals 8% 5% Livestock Agriculture 17% Energy 71% 7 Smallest Components = 4.55%

9 Dow Jones-UBS (DJCI,DJP) Base Metals 26% Energy 33% Precious Metals 11% Agriculture 30% 5% Livestock

10 Rogers Int. Commodity Index (RJI) Precious Metals 7% Base Metals 14% Energy 44% 21% WTI 14% Brent Agriculture 35% 37 Commodities on 13 Exchanges

11 Flaws: Overweighting

12 Flaws: Structure Spot Natural Gas Front Month Index (UNG) 0 M-09 J-09 J-09 A-09 S-09 O-09 N-09 D-09 J-10 F-10 M-10 A-10

13 Flaws: Assumptions Natural Gas Grains Copper Crude Oil Gold Natural Gas Grains Copper Crude Oil Gold Year Monthly Correlation, Total Return

14 Patching the Holes (Better Natural Gas?) Month Strip (UNL) Front Month Index (UNG) D-09 J-10 F-10 M-10 A-10

15 Alternatives: The CMCI (UBS Bloomberg Constant Maturity Benchmark Index, UCI) 26 Commodities 5 Years of Contracts Base Metals 27% Energy 34% Precious Metals 5% Ags 34%

16 Alternatives: The CCI (Thompson Reuters/Jefferies Equal Weight Continuous Commodity Index, GCC) 17 contracts (equal) 2-6 month horizon Precious Metals 18% Energy 17% Base Metals 6% Ags 59%

17 Alternatives: The DB-LCI (Deutsche Bank Liquid Commodity Index, DBC) 14 contracts Base Metals 13% Chases roll yield: Precious Metals 10% Ags 22% Energy 55%

18 Other Problems, Other Alternatives What About Spot? What About Active? What About Stocks?

19 A Note On Performance DB-LCI Total Return GSCI Total Return 0 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10

20 Solutions: Alternative Indexes Prof. Geert Rouwenhorst Professor of Finance Yale University

21 First commodities Index bond Excerpt from the Bond: Both Principal and Interest to be paid in the then current money ( ) as Five Bushels of CORN, sixty-eight Pounds and four-seventh parts of a pound of BEEF, Ten pounds of SHEEPSWOOL, and sixteen pounds of SOLE LEATHER shall then cost.

22 Fundamentals of inventories and risk Commodity futures are insurance contracts to obtain protection against commodity price risk insurance premiums are expected to be high when the amount of risk (volatility) to be insured is high Inventories act as a buffer to mitigate the price impact of shocks to demand and supply when inventories are low, this buffer function is diminished which increases volatility risk Risk premium of commodity futures should be high when inventories are low. State of inventories is reflected in futures prices (basis or backwardation and price levels)

23 Inventories and risk premiums Cumulative Returns Inventory Sorted Portfolios Performance of Equally-weighted Portfolios 12/ /2006 EW Index High Inventories Low Inventories Annualized Return 8.98% 4.62% 13.34% Volatility 8.93% 11.27% 10.80% Sharpe Ratio EW Index High Inventories Low Inventories 23

24 The basis and inventory fundamentals Moving Average Oil Futures Basis versus Oil Inventories 13-month centalized Moving Averages 50% 400,000 25% 375, ,000 Basis 0% Jun Jun Jun Jun Jun Jun Jun Jun Jun ,000 Jun ,000 Inventories -25% 275,000-50% 250,000 Basis Inventories 2010 K. Geert Rouwenhorst

25 Role for dynamic commodity selection? Benefits from Active Commodity Selection SummerHaven Dynamic Commodity Index versus Equally-weighted Index Dec 1999 = 100, Data through 2010/ Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 SDCI EW Index

26 Solutions: Alternative Indexes Satch Chada Managing Director Jefferies Asset Management

27 Even in a bull market for commodities, Many Investors have fared poorly Year-End 2004 Year-End 2009 % Change Annualized Return Sugar % 21.28% Gold % 20.12% Copper % 17.59% Corn % 15.02% Gasoline NY % 13.52% West Texas Intermediate Crude Oil Spot % 12.79% Dow Jones UBS DJUBS Spot Index % 13.45% Standard & Poors S & P % -1.65% Dow Jones UBS Commodity Index % -0.90% Past performance is not indicative of future results Source: Bloomberg Data Range: Year-End 2004 through Year-End 2009

28 Corrosive effects of Contango on investment returns The following chart displays the rolling 12-Month Roll Yield from (Dec, 1999 Dec, 2009) 10% 5% 0% -5% % -15% -20% -25% -30% Rolling 12-month roll yield for the DJ-UBS Commodity Index Past performance is not indicative of future results Source: Bloomberg Data Range: Year-End 2004 through Year-End 2009 Since 1999, with the exception of two periods, on and around 2001 and 2004, the commodity futures have generally traded in contango or negative roll yield.

29 Rethinking Investing in Commodities 300 Commodities Equities, Spot and Futures Prices Historical Performance Comparison Commodity Equity Commodities Spot Commodities Futures S&P 500 Source: Bloomberg Data Range: Year-end 2004 through Year-end 2009 Past performance is not indicative of futures results Commodity Equities represents S&P Global Natural Resources Index, Commodities Spot represents DJUBS Spot Index and Commodity Futures represents DJUBS Excess Return Index.

30 A Perfect Blend? Commodity Equities AND Commodity Futures Spot Commodities BLEND Source: Bloomberg Data Range: Year-end 2002 through Year-end 2009 Past performance is not indicative of futures results Commodity Equities represents S&P Global Natural Resources Index, Commodities Spot represents DJUBS Spot Index and Commodity Futures represents DJUBS Excess Return Index.

31 Index Design Features and Benefits Features Global Pure-Play Production & Reserves Large Cap/Large Mid-Cap Bias Oil & Gas Producer Bias Primary Agriculture Equities Only Potential Benefits Captures World-Wide Opportunity, Including BRIC Countries and Other Emerging Markets Exposure to the Commodities Space (Each company derives at least 50% of its annual revenues from the production and distribution of commodities.) Own or Control Global Production of Commodities (e.g. ~70% of Global Non-Governmental Petroleum reserves) Most Constituents Are the World Market Leaders in Their Respective Sectors Minimizes Value Added Service Providers, Improving Exposure to Underlying Energy Commodities No Companies Classified as Packaged Food Producers, Emphasis on Producers of Seeds, Chemicals and Fertilizers No regulatory Risk Emanating from Use of Futures Key design features can/may result in key benefits for benchmarking and investing 31

32 CRB-EQ Index Company Inclusion Criteria Pure Play Each company derives at least 50% of its annual revenues from the production and distribution of commodities. Multi-Cap Portfolio Minimum market cap. of U.S. $1 billion and free float of $800 million for the energy sector and $750 million market cap and $600 million free float for all other sectors. Globally Listed Stocks Listed on a regulated exchange providing a last closing price. Liquid Minimum average daily volume of $1 Million. 32

33 TR/J CRB-EQ Provides Global Coverage TR/J CRB Global Commodity Equity Index: Top 10 Countries TR/J CRB Global Commodity Equity Index: Top 10 Currencies US Dollar 51.06% Canadian Dollar 14.41% Netherlands 1.77% Singapore 1.86% South Africa 2.06% France 2.09% Other 18.41% United States 35.52% Pound Sterling 9.54% Euro 7.26% Swiss Franc 3.61% Hong Kong Dollar 2.39% Australian Dollar 2.08% Singapore Dollar 1.86% Brazil 3.76% South African Rand 1.50% Switzerland 5.14% Russia 6.42% Britain 8.57% Canada 14.41% Israeli Shekel 1.19% Other 5.09% As of 01/31/2010 Diversification, however, does not eliminate the risk of experiencing investment losses. With holdings in 30 countries, the TR/J CRB Global Commodity Equity Index offers diversified country and currency exposure 33

34 Panel Discussion Prof. Geert Rouwenhorst Professor of Finance Yale University Dave Nadig Director of Research IndexUniverse.com Satch Chada Managing Director Jefferies Asset Management

35 Thank You! For more information: (or call ) som.yale.edu/~geert/ CFP & CIMA Non-ICMA Credits Forms will follow in in a few days for live webinar attendees. Nov 4 th, rd Annual Inside Commodities Conference, NYSE