The threat of inflation is a great concern to investors - particularly pension fund investors. Most traditional asset classes, such as equities and bonds are a poor hedge against inflation, i.e. they perform at their worst during periods of high and rising inflation. This is typically late in the economic cycle. By contrast there is considerable evidence to show that Commodities perform at their best in such periods, i.e. that commodity prices are positively correlated with inflation. Hence an allocation to Commodities can provide a pension scheme with downside protection during periods when equities are at their weakest.
The evidence for this can be clearly seen in the tables below.
Source: Barclays Capital, Data to December 2007.
This shows the performance of equity, bonds, t-bills and commodities during four different economic scenarios:
1. Low gross domestic product (GDP) coupled with a low consumer price index (CPI)
2. High GDP alongside a low CPI
3. High GDP with a high CPI
4. Low GPP with a high CPI
This clearly illustrates that, in periods of rising inflation, commodities are the best performing asset class.
Hermes Commodities Umbrella Fund Limited is authorised by the Guernsey Financial Services Commission and its constituent units are listed on the Channel Islands Stock Exchange.
