Investment Strategies

The Case for Broad Basket Commodities

9/16/2024

Greg Sharenow, Andrew DeWitt

Discover why a diversified, broad basket commodities strategy may offer a more comprehensive solution compared to single commodity allocations like gold. As one of the largest U.S. broad basket commodities managers, according to Morningstar, PIMCO provides expertise in seeking to maximize potential returns, hedge against inflation, and diversify investment portfolios.

Text on screen: PIMCO

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Images on screen: Natural gas plant

Sharenow: Pimco's been investing in commodity markets since 2000, one of the longest tenured asset managers in the commodity space.

Text on screen: Greg Sharenow, PORTFOLIO MANAGER, COMMODITIES AND REAL ASSETS

We manage over 20 billion in assets ranging from mutual funds to ETFs to private strategies. We have expertise in broad baskets of commodities. Our investment strategies are not only confined to traditional index-based commodities, but we look at assets across the globe and across every type.

Text on screen: Andrew DeWitt, PORTFOLIO MANAGER, REAL RETURN

DeWitt: Single real asset allocations typically start for investors with gold as it's been a store of value for a millennia. And we don't see that to change in the future.

Text on screen: Single commodity allocations lack diversification and may limit inflation hedging

Images on screen: Gold mining

However, two of the pitfalls with allocating to a single commodity or single real asset instrument is the lack of diversification. And second, the inflation hedging potential.

Gold prices are typically linked to the level of prevailing yields in the market and during an inflation spike, central banks are typically hiking interest rates, thus bringing down the return potential for gold and hindering its inflation hedging properties.

Text on screen: Natural resource equities have high equity beta, limiting their inflation-hedging properties

Images on screen: Corn harvesting, mining

Another single instrument real asset allocation choice that investors look at are natural resource equities. Those allocations typically inherit a high equity beta, which is linked to growth rather inflation.

Thus bringing down inflation hedging properties similar to gold.

Text on screen: Commodity-specific expectations maximize return potential, hedge against inflation, and diversify portfolios

Images on screen: PIMCO Trade floor

We marry fundamental research with quantitative techniques to come up with commodity specific return expectations and then allocate proportionally such that we maximize our return expectations per unit of volatility for our client while maintaining the two most important aspects of a commodity allocation: inflation hedging and diversification.

Sharenow: If you look at the last five years, not only has commodities been one of the better performing asset classes, most importantly, they were a liquid real asset that provided genuine diversification. Many of the themes that drove the returns over the last few years, we think are consistently going to present a positive tailwind to returns over the next three to five years, such as capital investment in traditional hydrocarbon is underperforming what we believe is needed to meet future demand growth.

Two, we have new sources of demand that we have not had in the past,

FULL PAGE GRAPHIC: TITLE – Metal demand from green transition for the Sustainable Development Scenario

Description: This bar chart compares three bars per year for 2020, 2030, and 2040, representing the projected consumption increase of platinum, copper, and nickel. Each of the three metals are assigned a bar, and each bar is a different color. In 2020, copper (green) shows the highest consumption increase, followed by nickel (purple) and platinum (blue). In 2030, the consumption of nickel is projected to rise significantly, outpacing the other metals with a near-100% increase, with copper and platinum showing more moderate increases of around 40% and 20%, respectively. By 2040, the consumption of all three metals is expected to increase even more dramatically, with nickel seeing the highest surge, reaching a 160% increase with respect to 2020 consumption levels, with platinum and copper each increasing by around 60%, respectively, in the year. The data for this graphic is stated to be sourced from Bloomberg, SG Cross Asset Research, IEA, International Lead and Zinc Study Group, Statistica, and BNP Research, as of December 31st, 2022.

Specifically, investing in the energy transition is very carbon intensive. Second, AI and data center demand is a new source of commodity demand, both for metals and energy which is likely to transform the power sector demand. These are tailwinds that we think present real opportunities for investors to look to capture.

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Disclosure

Past performance is not a guarantee or reliable indicator of future results.

All investments contain risk and may lose value. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against loss.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Sustainable Strategies are strategies with client-driven sustainability requirements. For these strategies, PIMCO actively incorporates sustainability principles (i.e. excluding issuers fundamentally misaligned with sustainability factors, evaluating issuers using proprietary and independent ESG scoring) consistent with those strategies and guidelines. Further information is available in PIMCO’s Sustainable Investment Policy Statement. For information about funds that follow sustainability strategies and guidelines, please refer to the fund’s prospectus for more detailed information related to its investment objectives, investment strategies, and approach to sustainable investment.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by PIMCO or any judgment exercised by PIMCO will reflect the opinions of any particular investor, and the factors utilized by PIMCO may differ from the factors that any particular investor considers relevant in evaluating an issuer’s ESG practices. In evaluating an issuer, PIMCO is dependent upon information and data obtained through voluntary or third-party reporting that may be incomplete, inaccurate or unavailable, or present conflicting information and data with respect to an issuer, which in each case could cause PIMCO to incorrectly assess an issuer’s business practices with respect to its ESG practices. Socially responsible norms differ by region, and an issuer’s ESG practices or PIMCO’s assessment of an issuer’s ESG practices may change over time. There is no standardized industry definition or certification for certain ESG categories, for example “green bonds”; as such, the inclusion of securities in these statistics involves PIMCO’s subjectivity and discretion. There is no assurance that the ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.

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