Credit Suisse believes that its CS Nova (Lux) Commodity Plus Fund offers institutional investors a low correlation 'alternative' to alternative investments.
The firm's view is that commodities answer the fundamental need of institutional investors for long-term strategic diversification. They demonstrate exceptionally low correlations with financial assets in markets around the world and can help diversify the institutional portfolio more effectively than conventional asset classes and many so called 'alternative' assets over the intermediate and long term.
"We believe the question of whether commodities have had their day in the sun is secondary,' says Terry Mellish, Director, UK Institutional Sales and Relationship Management for Credit Suisse's Asset Management business. 'More important, in our view, is that diversification is always in season and commodities diversify a portfolio more than any other asset class.
'Furthermore, the lack of correlation between the component sectors of a commodities index creates a happy circumstance in that the optimal strategic solution (from a diversification perspective) can also be the most efficient and lowest cost solution in which to invest. As institutional investors become more aware of these benefits, we have seen notable interest from UK pension funds in our recently launched Nova (Lux) Commodity Plus Fund, and expect this interest to continue throughout 2006."
Commodities have lower correlations to traditional asset classes than most other 'alternative' investments, including hedge funds and real estate investment trusts. The unique correlations exhibited derive from their relationship to global markets. Because they are real assets, they realise their return from current demand and supply relationships, unlike other asset classes, such as equities and fixed income, which generate their return largely from future expectations. This explains the difference in performance patterns.
In addition, commodities act as a natural inflation hedge. Commodity prices usually rise with inflation and can even contribute to its onset, setting them apart from traditional inflation hedges that outperform only when inflation expectations are already high and rising.
Furthermore, commodities tend to perform best when conventional assets perform worst. Financial assets tend to advance when economic conditions seem weakest, and the potential for improvement seems greatest. By comparison, commodities usually shine when global industrial production, and the corresponding demand for raw materials, is strong.
For institutional investors looking to invest in commodities, Credit Suisse supports the case for investing in a broad commodities index. The prices of individual commodities can be rather volatile, as they are subject to their unique supply and demand shocks. But the correlations of individual commodities in a broad based index can be rather low.
For example, the factors that may drive the expected future price of livestock (such as the cost of feed, or the popularity of low carbohydrate diets) are different from those driving the expected future price of heating oil (such as current storage levels, or anticipated winter temperatures). Hence the overall volatility of a diversified index that contains both of these raw materials can be substantially lower than that exhibited by the individual components.