NEWLY MINTED investors in commodities took a round trip already this year.
Commodity prices spiked in February and March and then retreated just as sharply.
Volatility is an essential element of commodity investing - it's the principal attribute to most professional traders.
But ordinary investors who got caught up in the China growth story need to rethink their commodity fascination. Results from the first quarter don't tell the whole story. But they do tell an important story.
The Goldman Sachs U.S. Commodity Index jumped 23.6 percent in the period; the Euronext Rogers International Commodity Index climbed 14.4 percent; the Dow Jones-AIG Commodity Index gained 13.1 percent.
But the Barclay Group index of commodity trading adviser performance fell by 3.1 percent. Standard & Poor's Managed Futures Index of commodity fund managers fell 6.2 percent.
Investor Jim Rogers, who compiled the Rogers index, says basic commodities have entered a long-term bull market.
Christopher Deveny, a managing director at JPMorgan Private Bank, tells the other side: "We are not proponents of making strategic, long-term allocations to commodities. Even with the recent pickup, they are still in a decline."
Yet both use commodities in their portfolios. The difference between strategic and tactical investing is the key decision.
Justin Dew, senior hedge fund specialist at Standard & Poor's, says most commodity trading advisers don't focus on traditional commodities. "The preponderance of instruments traded by these guys are fixed income and currencies," he said.
There's a simple reason: Most commodity markets are too small to absorb all the capital chasing commodity trends.
"Managed futures [funds] are running about $110 billion to $120 billion," Dew said. "It's difficult to have a position in some commodity markets without swamping your position."
As a result, commodity fund managers often end up betting for or against interest rates, currencies or even stock prices. In the first quarter, for example, commodity trading advisers struggled as long-term interest rates and the dollar rose.
What's more, commodity futures professionals typically take "short" positions (selling borrowed futures contracts) as well as "long" positions (buying futures contracts).
Such opportunistic trading may work, but it's not a commitment to commodities.
"It demonstrates once again that index investing is far superior to managed investing in nearly any asset class over any period of time," Rogers said.
Michael Killian, senior vice president for managed funds at Peregrine Financial Group, says, however, that the comparison is like that between apples and oranges. "Many commodity trading advisers don't
take a long-term view," he said. "They are more opportunistic. A manager may see a good trend in Malaysian rubber or the dollar versus the euro or energy prices."
There are limited investment opportunities for investors who just want to own commodities.
The Pimco Commodity Real Return Strategy Fund and the Oppenheimer Real Asset Fund are two mutual funds that track commodity indexes. Rogers, through Uhlmann Price Securities, offers limited partnerships tracking the Rogers index.
Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Co. newspaper. E-mail him at yourmoney@tribune.com.
Copyright © 2005, The Baltimore Sun