As we have seen, commodities encompass a wide range of products including basic and precious metals, agricultural and food products, and energy related products such as crude oil and natural gas. We view an asset class as a group of securities with similar characteristics and properties that tend to react in similar way to economic factors.
For example, equities, fixed income and real estate are examples of pure asset classes because their returns are driven by similar factors. Additionally, securities in these different assets classes are mutually exclusive of one another indicating that an equity security is distinct from a fixed income security and vice versa. Given this framework, do commodities represent a distinct asset class?
We believe that commodities are most accurately viewed individually or on a sector basis, rather than collectively as one asset class. The reason for this is that the returns of one type of commodity may have little correlation with the returns of another type of commodity. An example would be an agricultural commodity such as wheat or corn and crude oil. Weather patterns in certain areas of the world will
impact corn or wheat prices, whereas these same weather patterns will have little or no impact on the change in oil prices, which may be driven by geopolitical events or other factors. Our analysis of the correlation between the prices of several commodities confirms this.
For example, the long-term correlation between the price of crude oil and gold is -0.03. Similarly, the long-term correlation between the price of sugar and crude oil is -0.37%. Therefore, when analyzing investments in commodities, we believe it is important to evaluate commodities individually or on a sector basis and determine which commodities make sense as tactical or strategic investments.
For example, equities, fixed income and real estate are examples of pure asset classes because their returns are driven by similar factors. Additionally, securities in these different assets classes are mutually exclusive of one another indicating that an equity security is distinct from a fixed income security and vice versa. Given this framework, do commodities represent a distinct asset class?
We believe that commodities are most accurately viewed individually or on a sector basis, rather than collectively as one asset class. The reason for this is that the returns of one type of commodity may have little correlation with the returns of another type of commodity. An example would be an agricultural commodity such as wheat or corn and crude oil. Weather patterns in certain areas of the world will
impact corn or wheat prices, whereas these same weather patterns will have little or no impact on the change in oil prices, which may be driven by geopolitical events or other factors. Our analysis of the correlation between the prices of several commodities confirms this.
For example, the long-term correlation between the price of crude oil and gold is -0.03. Similarly, the long-term correlation between the price of sugar and crude oil is -0.37%. Therefore, when analyzing investments in commodities, we believe it is important to evaluate commodities individually or on a sector basis and determine which commodities make sense as tactical or strategic investments.
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