April 2006
  
   

FROM ZINC TO LEAN HOGS

There is no doubt that, as a community, independent financial advisers (IFAs) are increasingly outsourcing the day to day investment management of client portfolios to multi manager funds. In so doing we are learning from many of the multi managers that there is more to an investment portfolio than the correct balance of equities, bonds and cash.

Over the last few years we have become used to including an element of commercial property in many clients’ portfolios and now it would seem to be the turn of commodities. For example, at the time of writing, one of our preferred multi managers, Seven Investment Management (7IM) held between 3.1% and 4.6% of each of its portfolios in commodities with the single exception of its Income Portfolio.

Published research into the nature of commodity returns has been produced by Robert J Greer, Senior Vice President and Real Return product manager at PIMCO, previously having been associated with JPMorgan Chase and Daiwa Securities as a developer and product manager of commodity indices.

Robert Greer is recognised as the first researcher to define an index of commodities and to advocate commodities as a separate asset class. Based on data from 1970 to 2005, he lists the following advantages of investing in an index (ie a diverse range) of commodities:

The total return from a commodity index is positive, on average, and comparable in magnitude and volatility to equity returns.
   

Commodity index returns are negatively correlated with stocks and bonds. That is, they react to economic changes in the opposite way to equities and therefore reduce the risks of a portfolio.
   

Commodity index returns are positively correlated with inflation. That is, rising inflation will tend over time to produce increased returns from a commodity index. In particular, commodity index returns are positively correlated with changes in the rate of inflation.
   

Commodity prices are not highly correlated with each other. That is, the more diverse the types of commodities held, the lower the risk from holding them.

The historical performance suggests that a broad portfolio of commodity futures is an attractive asset class to diversify traditional portfolios of stocks and bonds.

You will find background information on commodities as an investment on a new section of our website.

If you would like to receive further information on investing in a multi manager fund or a specialist commodities fund please contact you usual Arch adviser, or email direct@arch-fp.co.uk, or telephone 01483 204600.

 

Unsubscribe:: Click here if you no longer wish to receive issues of MoneyTalk from Arch Financial Planning Limited

Subscribe: If you have a colleague who would like to receive MoneyTalk please ask them to email us at subscribe@arch-fp.co.uk

Feedback: We hope you continue to benefit from this Arch service. Do please let us have your comments or feedback at anytime

Arch Financial Planning Limited, Arch House, Collins Court, 39 High Street, Cranleigh, Surrey GU6 8AS
Tel: 01483 204600, Fax: 01483 204611

AUTHORISED AND REGULATED BY THE FINANCIAL SERVICES AUTHORITY

DISCLAIMER
This message is confidential and for use by the addressee only. If you are not the intended recipient, you must not use, disclose, distribute, copy, print or rely on this message. Please notify the sender by return email and then delete the message from your computer. Arch Financial Planning Limited disclaims all liability of whatever kind (including for negligence) to anyone other than the intended recipient(s). Arch Financial Planning Limited accepts no responsibility for changes made to this message after it was sent nor for any loss or damage from receipt or use. We have endeavoured to ensure that this email is virus free but we advise that in keeping with good computing practice, the recipient should make his or her own checks.