40% In Commodities? Are You Nuts?

Let's start with a quote posted by Meb Faber attributed to Cliff Asness.

No one is perfect, but I do think I've been pretty good at this for a long time. This is a skill, or maybe mindset is a better word, to cultivate and maintain.

Here's a good article on catastrophe bonds from Bloomberg. The article seemed to focus on a rough spring for the category according to Fermat Capital Management, who is a big player in the space. Let's go to the chart.

Well, um ok I guess. That's about a 1% pullback in May. Note that this is total return, Yahoo Finance is price only. They mentioned that the benchmark Swiss Re Index was only up about half as much this year so far through the same period the year before. As we mentioned though, the scare in 2022 (look at the chart for SHRIX from back then) caused a snapback that distorted prices favorably in 2023 so drawing any conclusions from 2023 might not be ideal. 

Also if you dig into that Swiss Re Index, it is heavily weighted to a couple of specific perils including wildfires I believe, it's not very well diversified when you compare it to how most of the funds are put together. I believe the Brookmont Cat Bond ETF that is in the works will be actively managed and while I am very optimistic on this space, I would avoid any indexed products if there ever are any. I am test driving EMPIX in one of my accounts for possible client use. 

The Economist took a turn crapping on Buffer ETFs. My simple answer on these is just don't with the Buffer funds. Whatever you're trying to do, there is a simpler way to do the same thing. The Economist was going after complexity a little more broadly but spent a lot of time bashing on the Buffers.

I am not against complex funds. The way I frame the portfolio is to describe it as a lot of simplicity hedged with a little bit of complexity. We all have our own definitions of what is complex or simple so it is relative. 

Bank of America, via Bloomberg, put out an interesting note that both confirmed one bias and pushed back on another bias. Believing bonds are not the place to be, confirming my bias, they argue for putting that 40% into commodities, the opposite of confirming my bias, as they apparently expect higher price inflation to persist. 

So it hasn't been crazy as far back as this backtest can go. COMT, COM and DBC are each broad based commodity funds. The various commodity blends didn't really differentiate early on, lagged a little in 2020, outperformed by a lot in 2021 and 2022, lagged again in 2023 and this year is back to not much differentiation. I've never had 40% in bonds with duration and I'm not likely to put 40% in commodities but this is interesting. 

With DBC as a proxy, going back further, there was a prolonged lag in the middle of the back test. To the Cliff Asness quote, that might have been a tough one to ride out. 

Another very new fund, a couple of weeks ago the AQR Sustainable Long/Short Carbon Aware Fund  "repurposed" into the AQR Trend Total Return Fund (QNZIX). It appears it will leverage up to have 50% in the S&P 500 and 100% in managed futures. 

I backtested the following.

And this is how I built Diversify Your Diversifiers.

BTAL and MERIX are client and personal holdings. If someone were to put it all into the strategy underlying QNZIX, the result might very well work out over the long term but there would be periods where it would struggle.

The CAGR above for AQMIX was 0.39%. QNZIX is similar to other funds. I am on board with the effect that this sort of blending can add to a portfolio but while a repeat of a 0.39% CAGR is unlikely because of interest rates' importance to managed futures, it is not impossible. Diversify your diversifiers.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.