2016 was a vintage year for Commodities, and momentum has continued into 2017.
The above charts the performance of the Friends First Commodities Optimum Yield fund against two indices, the S&P Goldman Sachs Commodity Index and a common reference point for real assets, the MSCI World Index of equities.
Some of the main advantages of investing in a broad Commodities fund are:
Growth: As economic growth picks up you are potentially participating in the increased demand for raw materials. Over the very long term a commodity fund has the potential to produce Equity like returns, and there have been periods such as 2000 to 2004, where the asset class has delivered strong returns when Equity performances were quite stagnant.
Inflation Hedge: Commodities are usually a good inflation hedge with food and energy price changes driving most of the volatility in the Consumer Price Index (CPI). In simple terms if general consumer prices are rising, commodities are likely to more than keep pace with such rises.
Diversification: Commodities are usually a good diversifier with traditionally low correlation to Stocks and Bonds. Commodities as an asset class tends to rise and fall at different times to Equities and Bonds, and this can help stabilise the performance of a multi asset portfolio.
Dispersion: The individual sectors of a commodity index, be it Energy, Agricultural, Precious or Industrial Metals do not all move in tandem thus smoothing out the investor experience versus exposure to one single commodity.
The Commodities Optimum Yield fund provides a balanced exposure to 14 commodities.
Sector Allocation and Composition of the Commodities Optimum Yield Fund
The advantage of taking an Optimum Yield approach is?
A basic issue with commodities is that they require special storage arrangements. Consider Oil and Gas (security, safety and volume), Wheat and soybeans (perishable), Gold and precious metals (security). It is not physically possible to move these around. So instead, commodities are bought and sold via contracts on the futures market. The future price is the market’s collective best guess of what the current price will be at a specific future point, taking interest rates, storage costs and other factors into account. However the prices of futures tend to diverge from underlying commodity prices and different length contracts of the same commodity behave quite differently. The Optimum Yield feature strategy aims to select the most suitable commodity contracts in which to invest.
The Commodities Optimum Yield fund is a component on many of our Magnet and Compass Portfolio Funds. The Commodities Optimum Yield fund and the Magnet and Compass Range are available across the Friends First suite of Pensions, ARF (Approved Retirement Funds), AMRF (Approved Minimum Retirement Funds), Savings and Investment products.
For more information on the Friends First range of funds speak to your Financial Broker or visit our Fund Centre.