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The Commodity Curve

Quarterly Update

1st Quarter 2018

The commodity asset class, as represented by the Rogers International Commodity Index (“RICI®”), was the stand out performer in the first quarter, rising approximately +2% while most asset classes were negative for the same period.

Asset Class Table

Index

1Q 2018

RICI®

2.08%

Bloomberg Commodity Index

-0.40%

S&P 500

-0.76%

MSCI EAFE

-2.20%

Barclays US Agg Bond Index

-1.46%

Despite the sudden historic rise in volatility in equities, including a near -10% correction from the January highs, US bonds provided little diversification as rates rose resulting in negative returns for the quarter (Diversification is Working). Not only was the RICI® a strong diversifier but it also outperformed the benchmark Bloomberg Commodity Index (“BCOM”) for the third quarter in a row. 

RICI® Sector Performance and Attribution

The Energy sector led the way appreciating +5.04% as oil prices continued to recover. Despite the strong US production led by fracking, global oil supplies continued to contract as demand remained very strong and the massive capital expenditure cuts and the resolve of OPEC have tightened supplies (The Cure for Low Oil Prices)  Natural gas prices, on the other hand, have remained depressed as the record strength of the continued US production has been able to satisfy the growing demand. The RICI®’s relative performance versus the BCOM benefited from the higher weightings in oil-related contracts and lower natural gas.

The Agriculture Sector was also positive as it rose 2.80%. With corn and soybean prices already estimated to be at or below the cost of production, any reversion to the mean in US weather conditions could lead to a strong recovery in prices.  Wheat prices have been stronger as drought conditions in key growing areas (both in the US and Argentina) are already threatening supplies. Cocoa was a leading gainer, recovering strongly from very depressed prices as production issues in West Africa led to tightened supplies. Lumber continued its major run higher as the housing and construction markets remain robust and due to the US addition of tariffs on Canadian lumber imports. The RICI® benefited from its inclusion of both Cocoa and Lumber, neither of which are represented in the BCOM.

The Metal Sector corrected in the quarter (-3.91%) as many industrial metals sold off after two very strong years in 2016 and 2017 (Focus on Metals). Despite the heightened volatility in global markets and the geo-political tensions, precious metals, which the RICI® is underweighted relative to the BCOM, didn’t rally and were flat to down for the quarter as well. 



Value of Commodities in Diversified Portfolios

The non-correlation of commodities to both equities and bonds is a critical benefit to including them in a diversified portfolio. This was particularly evident in the first quarter of 2018. If markets are entering a rising rate environment, then bonds may underperform and including commodities as a diversifier becomes even more important. Despite the fact that commodity prices have been recovering for over two years, since the February 2016 lows, the average prices of the components in the RICI® are still over 40% below their  highs since the Index’s inception in 1998 (View Chart Here). 

Investors have the opportunity to add an important diversifying asset class at a time when prices are still historically low, while the Global Macro environment appears to be significantly improving due to the potential for 1) increasing interest rates, 2) a weakening dollar, 3) rising inflation expectations, 4) growing global event risk, and 5) fiscal stimulus in the form of global infrastructure spending.

A Global Demand-Based Portfolio

The RICI® is a composite, US dollar-based, total return index methodology. It represents the value of a basket of commodities consumed in the global economy, ranging from Agricultural to Energy and Metal products. The Index's weights attempt to balance consumption patterns worldwide (in developed and developing countries) and specific contract liquidity. The value of this basket is tracked via futures contracts on 38 different exchange-traded physical commodities, quoted in four different currencies, listed on nine exchanges in four countries. 

(To access additional management commentaries & reports please visit our web site for Financial Advisors and Institutions by clicking here. For further insights visit our Commodity Curve Blog.)

Rogers International Commodity Index® Performance Comparison
August 1998 - March 2018

Index

Compound Annual Return

Total Return

Annualized Standard Deviation

Sharpe Ratio

RICI®

4.70%

146.61%

18.24%

0.16

BCOM

1.71%

39.46%

16.24%

-0.01

S&P 500

6.45%

242.10%

14.92%

0.31

Barclays US Agg Bond Index

4.78%

150.38%

3.40%

0.87

RICI® - Rogers International Commodity Index®; BCOM - Bloomberg Commodity Index; S&P 500 - S&P 500 Total Return Index.

The index returns shown above do not represent the results of actual trading of investible products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance or provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any index performance provided is for illustrative purposes only. The time period selected represents the inception date of the Rogers International Commodity Index® and is intended to provide a historical long-term average. Data provided by BarclayMAP. Past performance is not indicative of future performance.

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Commodities Mutual Fund

Index Descriptions

RICI® (Rogers International Commodity Index®): Comprised of 38 commodity futures contracts representing the energy, metals, and agriculture sectors. The components of the RICI® have been specifically chosen to give a balanced representation of consumption patterns throughout the world. The RICI® was first published on August 1, 1998. CQG Inc. is the official global calculation agent for the Rogers International Commodity Index® (RICI®).

Bloomberg Commodity Index (BCOM): The BCOM is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Index is comprised of 22 commodities representing the energy, metals, and agricultural sectors. Prior to July 1, 2014, the Index was known as the Dow Jones-UBS Commodity Index which was first published in July 1998.

S&P 500 Total Return Index: The S&P 500 is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/ return characteristics of the large-cap universe.

Disclaimer

The Index returns shown in this presentation do not represent the results of actual trading of investable products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any Index performance provided is for illustrative purposes only.

Exposure to the Rogers International Commodity Index® is typically gained by investing in “alternative” investment products that are linked to the performance of the RICI®.  Alternative investment products may entail leveraging, commodity trading and other speculative investment practices which involve substantial risk of loss.  Alternative investment performance can be volatile.  Not all products are suitable for all investors and some products may only be available to certain qualified and sophisticated investors.

“Jim Rogers”, “James Beeland Rogers, Jr.”, and “Rogers” are trademarks and service marks of, and “Rogers International Commodity Index” and “RICI” are registered service marks of, Beeland Interests, Inc., which is owned and controlled by James Beeland Rogers, Jr., and are used subject to license. The personal names and likeness of Jim Rogers/James Beeland Rogers, Jr. are owned and licensed by James Beeland Rogers, Jr. Products based on or linked to the Rogers International Commodity Index® or any sub-index thereof are not sponsored, endorsed, sold or promoted by Beeland Interests, Inc. (“Beeland Interests”) or James Beeland Rogers, Jr. Neither Beeland Interests nor James Beeland Rogers, Jr. makes any representation or warranty, express or implied, nor accepts any responsibility, regarding the accuracy or completeness of this report, or the advisability of investing in securities or commodities generally, or in products based on or linked to the Rogers International Commodity Index® or any sub-index thereof or in futures particularly.

This report does not constitute an offer to sell, or a solicitation of an offer to buy or sell, any commodities interests, managed futures accounts or securities, and is intended for informational purposes only. Any offer for any investment product will be made solely by the appropriate disclosure document or offering memorandum. Price Asset Management, LLC does not make any representations as to the accuracy or completeness of any data or information contained herein and such information should not be relied upon as such. Some data and information presented on this site may have been obtained from outside sources.

Investments in commodities, managed futures and other alternative investments involve a high degree of risk and performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Investments in commodities, managed futures and other alternative investments are often executed on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Past performance is not indicative of futures results.

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