STRONGEST COMMODITY IS CONFIDENCE: DESPITE FALLING PRICES AND ASIAN DEFLATION, INVESTORS HOLD STEADY

Institutions and wealthy individuals are hanging on to commodities investments even though performance has lagged and some fear deflation may set in.

The Goldman Sachs Commodity Index , the index of choice for institutions taking long-only positions in commodities, returned -14.1% in 1997 and -1.6% through January.

Moreover, investment markets have been rattled by the possibility of deflation, which would push down commodities prices.

But not everyone is convinced deflation has taken hold, and some observers say the prospects for commodities could improve once the situation in Asia stabilizes.

One institution holding steady with its Goldman Sachs Commodity index allocation is a Canadian pension fund, Ontario Teachers’ Pension Plan Board in North York, Ontario. The $36 billion (U.S.) pension plan hasn’t been in commodities long enough to consider withdrawing, says Robert Bertram, senior vice president of investments.

The fund has had an allocation of 0.2% of assets since September, which is “far too short a time” to consider a change, given it was a long-term asset mix decision, Mr. Bertram says.

Commodities are “basically a good diversifier. It’s not going to be up every year,” he says.

But at least one institution, Michigan Bureau of Investments in Lansing, has put off a planned commodities allocation as its staff awaits a more favorable investing environment, says Ray Pentilla, acting director of the bureau, which oversees $40 billion in pension assets.

strategic, not tactical

Market participants say institutions are keeping their allocations intact.

Steven Strongin, director of commodities research for Goldman Sachs & Co. in New York, says institutions that have invested in commodities generally view them as a strategic investment, not a tactical one, and aren’t getting out.

He says current problems with deflation could, ironically, lead to inflation down the road.

While the risk is still on the downside in commodities markets, traditionally central banks
have erred on the side of accommodation, which is what creates inflationary pressure, Mr. Strongin adds.

If central banks increase the supply of money in a battle with possible deflation, the end result could be inflation, months down the road, he says.

Wayne Peterson, president of Morgan Stanley Commodities Management in New York, says the prospects for inflation and deflation alone affect some commodities more than others.

Moreover, he says, commodities prices level off at a certain point that is related to the cost of producing that commodity.

Is the price of crude oil going to fall to zero? Mr. Peterson asked. ” Not any time in the next several decades,” he says.

Not everyone is convinced that commodities make sense long term.

Says Tim Rudderow, director of research for futures manager Mount Lucas Management Corp. in Princeton, N.J.: “We don’t think holding commodities in the long term is a good investment.

“Commodities prices on a lot of fronts have been effectively collapsing. The function of an efficient market is to drive commodities prices down, not up.”

food prices steady

He says the price for wheat recently stood at about $3.30 a bushel, which isn’t much higher than the $2- a-bushel price of 1960.

Mount Lucas offers passive investments tied to its Management index, which uses a simple computer program to simulate the trend-following style of managed futures firms. The Mount Lucas index, which goes long and short, returned 7.4% in 1997.

As for other indexes, part of the reason the GSCI fell in 1997 is because it has a heavy emphasis on energy-related commodities. The Daiwa Physical Commodities index, which has less weighting to energy, returned -3.1%.

Total return from Refco Group Ltd.’s Investable Commodities index, an equal-weighted index, was up 2.1% last year.

Commodity index returns

1997

Goldman Sachs Commodity Index -14.1%

Daiwa Physical Commodity Index -3.1

Investable Commodity Index 2.1

Mount Lucas Management Index*
7.4

*Includes financial futures and goes long and short.

Crain News Service