Resource market attracting increasing allocation interest from pension funds
Pension funds, whose conservative investment strategies lend asset classes an air of respectability, are allocating increasingly to commodities as the market for resources continues to heat up.
California Public Employees' Retirement System (CalPERS) is mulling over allocations to oil and metals, while Hermes (for BT's pension fund) is expecting to start allocating by mid-2006.
The Swiss Post Pension fund, as well as the English county councils of West Midlands and Bedford are also either considering or planning allocations.
Meanwhile, Dutch pension giants Stichting Pensioenfonds ABP and PGGM are already exposed to commodities, as are the Missouri State Employees Retirement System and Massachusetts Pension Reserve Management Board.
Of these, Swiss Post and Bedford County Council have been reported to prefer funds tracking the Dow Jones-AIG Commodity index (DJ-AIGCI) on account of its lower exposure to energy products - 33% compared to 46% in the Rogers International Commodities index (RICI) and 75.68% in the Goldman Sachs Commodity Index (GSCI), which has $50bn (£28bn) tracking it.
By contrast, the Reuters CRB Commodity index is weighted only 17.6% to energy.
The DJ-AIGCI is rebalanced each January, although the 2006 target weights for the index are broadly similar to those of 2005, according to Matthew Schwab, managing director of AIG Financial Products Corporation.
Weights are determined using both trading volume and US dollar-weighted production data, with liquidity carrying twice the importance of production in calculating a commodity's relative weight within the index.
No single commodity may comprise more than 15% or less than 2% of the index and no group of commodities can represent more than 33%.
In comparison, the GSCI is solely world-production weighted with the quantity of each commodity in the index determined by the average global production in the last five years of available data.
Although not yet exchange-tradable, the DJ-AIGCI is tracked by $24bn through vehicles including US mutual funds and structured notes.
Schwab said there are also around 35 licensees to the index offering various derivatives including swaps and options. Stephan Wrobel, partner at Diapason Commodities Management, runs funds worth $2.4bn based on the exchange-traded RICI.
He has noticed a broader range of instruments available, which include swaps and structured products, and a distinct upturn in attention from pension funds as they seek to diversify their portfolios.
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