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Surging Commodities Attract Pension Fund Cash

by Carla Johnson, Investors Offshore.com

30 December 2004


Attracted by strong returns in the energy and metals markets, pension funds and mutual funds have increasingly been turning to the commodity markets in recent months as they seek to diversify portfolios and beat stock market returns, the Financial Times reports.

A glance at some statistics and it is easy to appreciate why. The Goldman Sachs Commodity Index has risen 25% this year (although it is 12% off its October peak), which compares a return from the S&P 500 of about 10%.

Moreover, it is estimated by Goldman Sachs that the GSCI has returned an average of about 12% since 1970 while the major equity benchmarks have averaged between 8.5% and 11%.

As investors have cottoned on to this trend, the amount of cash that has been tracking commodity indices has risen from around $15 billion in 2003 to a current figure of $40 billion – 90% of which has come from pension funds.

According to Heather Shemilt, managing director of commodity marketing at Goldman Sachs, the GSCI has attracted some $30 billion in funds tracking the index.

"That is an incredible increase in funds flowing into commodity indices, considering it took eight years for the GSCI to get its first $3bn," she noted.

The price of base metals such as aluminum, copper and tin is currently at historic highs, driven mainly by demand from the Chinese industrial sector. Surging oil prices earlier this year have also helped to push the commodities indexes higher while the gold price has surged in tandem with the US dollar’s decline.

However, at the moment, pension fund cash represents only a small fraction of trading in commodities and their derivatives, which continue to be dominated by hedge funds and industry players.

Nonetheless, hedge fund managers believe that the bull market in commodities is set to continue into 2005.

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, and hedge funds is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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