Once largely the preserve of traders, commodities are now part of the investment mainstream and attracting attention even in the conservative world of pension fund trustees.
And the potential of these funds to have a profound market influence cannot be underestimated. According to consulting firm Watson Wyatt (WW), the world's top 300 pension funds ended 2005 with a staggering US$9,4 trillion (R67 trillion) in total assets, or more than five times the value of annual global oil production.
Just how substantial pension fund investment can be is seen in a move by the largest US pension fund, the $220bn California Public Employees' Retirement System (Calpers), to enter the direct commodity market. In what Calpers terms a "pilot programme", it plans to pump $500m into assets directly linked to the prices of energy, metals and agricultural products and into commodity production and distribution companies.
"Commodities can play an important role in improving the risk-and-return characteristics of the portfolio," says Calpers board president Rob Feckner. Calpers believes commodities will reduce the volatility of fund returns and generate gains during severe downturns in bond and equity markets. In many respects Calpers is following the lead of European pension funds, which, says WW, account for 85% of commodity investment by pension funds.
One of the first to grasp commodities as a key alternative asset class was the Netherlands' public employees' pension fund, Stichting Pensioenfonds ABP (ABP). In 2001 it committed 2,5% of its portfolio and cash flows to commodities. The world's second-largest pension fund, ABP has total assets of Euro 201bn (R1,9 trillion) and says it is in commodities "for the long haul."
ABP's move was preceded by another Netherlands pension fund, the health care and social workers' PGGM fund, which entered the commodity market in 2000. PGGM now holds 5% of its Euro 57bn assets in commodities.
A more recent entrant is UK telecom company BT Group's £34bn (R470bn) BT Pension Scheme (BTPS). In January BTPS's investment arm, Hermes Pensions Management, announced that it had invested £1bn in a newly created commodity tracking index fund.
Hermes says that over the past 50 years commodities and equities have provided similar real returns in excess of 5,0%/year. However, it adds that the correlation of the two asset classes' performance over the longer term has been quite different.
But overall the world's pension funds have yet to invest in commodities on a grand scale. According to WW, of the $195bn invested by pension funds in alternative asset classes in 2005, commodities attracted only $10bn (5%) and accounted for 2% of total alternative investments.
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