Historical analysis of commodity futures returns shows they have generated a total return very close to that of equities. Research by the Yale International Centre For Finance* focusing on the period from December 1959 to March 2004 showed that the return on an equally weighted basket of commodity futures was similar to the return on equities and in excess that on bonds, with a risk premium just over 5% p.a. in real terms. Returns analysis between commodity, equity and bond indices over the last 20 years produces similar results (see table below). As with equities, the bulk of the return from investing in Commodities comes from a risk premium.
We expect Commodity returns to continue to match those on equities over the long term. However even if returns were half of the historical rate, we believe that an allocation to the asset class still benefits the typical large pension scheme. This is because the real added value from Commodities comes from their negative correlation to other asset classes, i.e. they react completely differently to equities and bonds in certain macroeconomic circumstances.
| Historical Returns (Annualised) | Correlation to Commodities | |
| GSCI | 10.62% | 1 |
| S&P 500 | 10.37% | -0.069 |
| Citi Global Gov Bond Index | 6.46% | -0.181 |
(Source: Bloomberg)
*Yale International Centre for Finance 'Facts and Fantasies about Commodity Futures' by Gorton & Rouwenhorst (2005)
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.
