New Commodity-Linked Funds Act As Hedges

by Alan Lavine and Gail Liberman

Investors now have a couple of options if they want to hedge their portfolios with commodities.

The Refco Group, a New York-based risk-management firm, announced that is developing a fund that tracks the S&P Managed Futures index, which is designed to measure the performance of managed futures funds. Managed futures funds use a variety of strategies to invest in bonds, stocks and commodities.

The PIMCO Group of Funds recently launched the PIMCO Commodity Real Return Strategy Fund, which invests in derivatives that track the Dow Jones-AIG Commodity Index.  The fund is up 4 percent this year. And since its inception about a year ago, it is up 29 percent.

“We manage the fund by combining a position in commodity–linked derivative instruments backed primarily by a portfolio of inflation-indexed securities,” says John Brynjolfsson, manager of the PIMCO’s new fund. “The commodity-linked derivatives capture the price return of the commodity futures market. Our active management of the fixed income assets seeks to add incremental return above those markets along with the additional inflation hedging.”

PIMCO’s launch of a fund that tracks commodity prices follows in the footsteps of the Oppenheimer Real Asset Fund, which started in 1997. This fund tracks the Goldman Sachs Commodity Index. This year-to-date, the fund is up 5 percent. While the S&P 500 index declined at a 33 percent annual rate over the past three years, the Oppenheimer Real Asset Fund has grown at a 23.7 percent annual rate. 

Be advised that commodity funds are a high-risk gambit. Prices can plunge or soar at a moment’s notices. For that reason, financial advisers recommend that you keep no more than 5 percent of your assets in commodities.

Historically, commodities have done well in almost every stock bear market since 1973. Commodities, as measured by the Goldman Sachs Commodity index, were up while stocks were down in the bear market over the past three years. In October 1987, when stocks lost –22 percent, commodities were up 1 percent. But it's not a sure thing. In 1981, when stocks lost 5 percent, commodities lost 23 percent.

“Commodity prices change rapidly,” says Morningstar analyst Jason Stipp. “We don’t have much of a track record for the PIMCO fund, but these offerings are clearly volatile. This year, Oppenheimer Real Assets has been on a wild ride. It gained 9 percent in January and 12 percent in February only to lose 14 percent March.”

More conservative investors can hedge their stocks by investing in a mix of stocks, bonds, cash, gold and real estate.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.