Rogers International Commodity Index (RICI) Uhlmann Price Alternative Investments November 2006

Transcription

1 Rogers International Commodity Index (RICI) Uhlmann Price Alternative Investments November 2006

2 Uhlmann Price Alternative Investments Services Founded by Fred Uhlmann, former Chairman of the Chicago Board of Trade Specializing in Alternative Investments Structured Notes Commodity Funds Managed Future Funds Specialty Investments Lead Sales Agent for the Rogers International Raw Materials Fund, L.P. Marketing Agent for ABN Amro issued commodity-linked notes 2

3 Overview Commodities offer high returns and real diversification as they exhibit low correlation to stocks and bonds Including commodities in a diversified portfolio has resulted in a superior efficient frontier Investing in commodities through a collateralized, diversified, futures index has resulted in superior returns vs. related equities The Rogers International Commodity Index (RICI) is that kind of index and it is the best performing of its kind Commodity bull markets have historically lasted years driven by supply / demand imbalances; Tremendous demand from China, India and Indonesia are the impetus now Rogers believes we re only 7 years into the current run 3

4 The Rational for Investing in Commodities Yale Study (2004) Diversified portfolio of fully collateralized commodity futures have historically offered the same return and Sharpe ratio as equities Commodity returns are non-correlated to stocks and bonds Commodities are positively correlated with inflation, unexpected inflation, and changes in expected inflation Source: Yale ICF Working Paper No June 14,

5 Std Dev % The Rationale for Investing in Commodities Better Risk Trade-off Yale / Source: Yale ICF Working Paper No June 14, 2004 T-bills Bonds Annual Return % Stocks Commodities 5

6 The Rationale for Investing in Commodities Positive Returns During Worst Sell-offs in Equities 7/59-3/04 1.4% 2.3% Worst 5% Monthly Stock Returns Worst 1% Monthly Stock Returns (9.2)% Stocks Commodities (13.9)% Source: Yale ICF Working Paper No June 14,

7 The Rationale for Investing in Commodities Continued Ibbotsen Study (2006) Including commodities in allocation mix has resulted in a superior historical efficient frontier Commodities should play an important role in strategic asset allocation strategies The greater risk is not that commodities will under perform, but that allocation to commodities is too low Source: Strategic Asset Allocation and Commodities, Ibbotsen 3/7/06 7

8 The Preferred Way to Commodity Investing Continued Diversified basket of commodity futures Fully collateralized Earn t-bill rates on collateral Outperformed commodity related equities by a factor of three* Stocks of commodity producing companies are highly correlated to the stock market Commodity futures are non-correlated to the stock market The Rogers International Commodities Index (RICI) represents this general approach to commodity investing *Yale ICF Working Paper No June 14, 2004 ( ) 8

9 Who s Jim Rogers? Co-founded Quantum Fund with George Soros in 1970s After 10 years, at the age of 37, he retired after amassing a return in excess of 4000% Author of several books: Hot Commodities Adventure Capitalist Investment Biker Frequent contributor to Fox News, Barron s and Worth Magazine Creator of Rogers International Commodity Index (RICI) in August

10 Jim Rogers Thesis Commodity Prices Subject to Long Cycles Long runs occur as supply and demand get out of balance With prices low, little economic reason to increase productive capacity / as demand exceeds supply prices rise It takes years, even decades, to regenerate supply; prices continue to rise as supply-demand dynamic tries to right itself Bull markets in raw materials have lasted years on average shortest boom was 15 years; the longest 23 years Commodities were in a bear market for about 20 years throughout 1980s and 1990s giving rise to current upswing Despite recent run, many commodities still are 80-90% off their highs, adjusted for inflation* We are in early stages of this bull market about 7 years into it* * Can You Spell Commodity, Forbes 10/30/06 10

11 Jim Rogers Thesis Continued Current Market Driven by Developing Countries The industrialization of China, India, Indonesia and Brazil has created and will continue to create extraordinary demand for raw materials Supply, which has been subject to years of neglect, is being strained to an unprecedented extent Prices of most commodities will go up, with some transitionary hiccups, for years to come well into the next decade, and perhaps even the following decade* * Can You Spell Commodity, Forbes 10/30/06 11

12 The Rogers Index (RICI) Passive proxy Broad based, global, diversified Futures contracts on 36 commodities Demand driven Stable / Re-balances monthly Low correlation to traditional assets Strong performance History / established

13 RICI Weightings By Sector Agriculture 21% - Grains / Oilseeds (9%) - Softs (9%) - Livestock (3%) Metals 35% - Precious metals (21%) - Industrial metals (14%) Energy 44% - Crude (35%) - Gasoline (3%) - Natural Gas (3%) 13

14 Correlation of RICI Inception thru 6/06 Dow Jones 30 S&P 500 Nasdaq 1000 Lehman Bond JP Morgan WBI Barclay's CTA Source: Barclay Trading Group Ltd. Data and Beeland Management Company 14

15 $3,500 RICI Performance Total Return Since Inception 8/98-9/06 231% $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 70% 35% RICI S&P 500 LEHMAN BI Source: Barclay Trading Group Ltd. Data and Beeland Management Company 15

16 Key Differences in Commodity Indices Diversification / Broad Representation RICI 36 Commodities Method of Weighting Production Futures trading volume Expected world wide demand Frequency of Balancing RICI Monthly 16

17 INDEX RICI GSCI DJ/AIG NUMBER RICI vs. Other Indices Key Differences* WTG METHOD World Demand / Consumption Production Futures Trading / Production REBALANCING Monthly Yearly Yearly MAJOR SECTORS Energy 44% Metals 35% Agriculture 21% Energy 70% Metals 13% Agriculture 17% Energy 33% Metals 26% Agriculture 41% Source: Barclay Trading Group Ltd. Data and Beeland Management Company *As of 9/30/06 17

18 RICI vs. Alternatives Performance Comparisons* INDEX TOTAL RETURN ANNUAL RETURN STANDARD DEVIATION SHARPE RATIO RICI 230.9% 15.8% 16.7%.75 GSCI 155.8% 12.2% 22.7%.39 DJ/AIG 131.8% 10.8% 14.8%.51 Source: Barclay Trading Group Ltd. Data and Beeland Management Company *As of 9/30/06 18

19 Summary Commodities offer real diversification and should be a fundamental building block of most asset allocation strategies Commodity bull markets run in long cycles, and are now being driven by fundamental economic factors and supply and demand imbalances that could sustain the this run for years to come Jim Rogers believes we are in the relatively early stages of this upward trend in commodity prices The Rogers International Commodity Index (RICI) is the most diversified and best performing commodity futures index of its kind On both an absolute and risk-adjusted basis 19