Oliver
Hard Assets, Hardly Tame
by Anne Kates Smith
http://www.kiplinger.com/magazine/archi ... ities.html
Zigs and zags
Commodities tend to move in tandem with inflation and not in lockstep with the stock and bond markets. That explains why Lewis Altfest, a financial planner in New York City, has long advocated adding a touch of commodities (about 5% of assets) for the sake of diversification. He worries, though, that investors will buy commodity funds simply because of recent results and will bail out quickly after any setbacks.
If you're still interested in a commodity fund, we suggest you look closely at Pimco's. Its record isn't long, but it is more conservative than Oppenheimer's, and the Pimco D shares, with annual fees of 1.24%, are cheaper than any of Oppenheimer's classes.
http://www.mcapitalmgt.com/html/publishedarticle.html
A Bullet Proof Portfolio 'Lessons from An Insider'
Let me start by saying, I would suggest you do not invest in any single company or fund for the alternative class exposure. Just like individual stocks there are too much event risk and you are better served with pooled holdings. At my firm, Montecito Capital Management, we have between 25%-45% allocation to alternative classes and only use liquid vehicles (easily sold) with broad holdings and have nominal initial investments. Also we steer away from many hedge funds that have long minimum holding periods, short performance histories and avoid hedged strategy funds using over 25% leverage. One must be vigilant with hedge fund vehicles as they often are not regulated by SEC and are known for self-serving fees.
Like real estate, commodities -- oil, lumber and other hard assets -- have a decent record of negative correlation with stocks. Inflation sends the price of these hard assets up and it hurts the stock market. For example, the non-correlation between stocks and commodities was dramatically highlighted during 1973 and 1974 where stocks dropped 41% and commodity prices soared 114%. During the S&P's two worst declines during the past decade, managed futures recorded net profits. Also during September to November 1987, when the S&P 500 fell nearly 30 percent, managed futures rose 10%. And, the three-year return of Goldman Sachs Commodity Index (annualized from June 2002) is 10.91% - we invest in this class through the PIMCO Commodity Real Return, among other funds
Alternative asset classes are hard to understand and unless advisors understand the nuances of modern portfolio management, many advisors continue to steer clear from alternative investments, specifically hard assets. They look and say, 'Gosh, look at the poor returns and volatility. How can that possibly help my client?" Except when you sit down and do the math, a 5% to 15% allocation of hard assets goes a long way in reducing overall portfolio volatility, while improving returns.
...................................................................How to Protect Your Portfolio from Inflation
by Russel Kinnel | 04-03-2003 http://poweredby.morningstar.com/Powere ... ?CN=brf295
There are two mutual fund alternatives that offer better inflation protections, however. One is rather plain-vanilla and can easily be incorporated into your bond portfolio, and the other is more of a Tabasco flavor that's best used sparingly.
TIPS Funds
The Treasury sells inflation-protected bonds whose par value is adjusted to rise and fall based on the Consumer Price Index. Thus, you could significantly reduce your inflation risk by shifting up to a quarter of your high-quality taxable-bond portfolio into TIPS funds.
Commodity-Linked Funds
There are only two members of this club. Mutual funds aren't allowed to buy commodities directly, so commodity-linked funds buy derivatives that track commodity prices. The end result is quite similar to a direct investment in commodities. The strategy throws off a lot of income, though, so these are best left in tax-sheltered accounts such as IRAs and 401(k)s.
Commodity prices change rapidly, so these funds will definitely act like Tabasco in your portfolio. Oppenheimer Real Asset A QRAAX tracks the Goldman Sachs Commodity Index, which is dominated by energy prices. PIMCO Commodity Real Return Strategy PCRIX is a new entrant that tracks the Dow Jones-AIG Commodity Index, which is more evenly spread among different commodities and therefore may produce a somewhat smoother ride.
We don't have much of a record for the PIMCO fund, but these offerings are clearly volatile. This year, Oppenheimer Real Asset has been on a wild ride. It gained 9% in January and 12% in February, only to lose 14% in March.
http://www.pimcofunds.com/cms_files/sal ... /pb690.pdf
Double RealTM: Attempting to Combine the Inflation-Hedging Qualities of Commodities and Inflation-Indexed Bonds
Commodities have historically had a positive correlation with inflation and a negative correlation with stock and bond returns, making them an
attractive vehicle to enhance portfolio diversification and guard against inflation.
Double RealTM Strategy:
Commodity-Index-Linked Derivative
Instruments + Inflation-Indexed Bonds
Buy commodity swap agreements
(using small percentage of assets)
Buy and actively manage a portfolio
of inflation-indexed bonds and other fixedincome
securities (using remaining assets)