Investing in commodities is not as risky as stocks, can offer investors diversification of returns and is a better hedge against inflation than equities, according to a study presented at a conference on Monday. The study carried out by The Wharton School at the University of Pennsylvania and the Yale School of Management compared commodity futures data with stocks and bonds between 1959 and 2004.
Over that period monthly annualised returns on commodity futures were around 11 percent, while the volatility of those returns was about 12 percent. Against that stock returns of around 11 percent returns had volatility around 15 percent.
Monthly annualised bond returns were less than 8 percent with a volatility of more than 8 percent.
"Commodities are a neglected asset class," Geert Rouwenhorst, professor of finance at the Yale School of Management said at the Investing in Commodities conference in London organised by Marcus Evans.
"Commodities are slightly less risky then stocks because commodities as an asset class itself is diversified."
Commodity futures include oil, agricultural products and metals. Each category will appeal to different investors at different times depending on whether economic growth is strong or weak and whether inflation is rising or falling.
"Stocks have more downside risk than commodities because commodities usually behave differently in times of crisis," Rouwenhorst said.
During times of uncertainty most investors shun stock markets, while seeking refuge in safe-haven commodities like gold, sovereign debt or currencies like the Swiss franc.
Investors seeking diversification away from stock and bond markets should look at commodity futures because their returns are often negatively correlated with those in traditional markets, Rouwenhorst said.
Correlation refers to the degree to which two variables such as stock and commodity returns move in the same direction.
Over a 5-year period the correlation between returns on commodity futures and stocks ranged from about minus 60 percent to less than 10 percent. The correlation with bonds ranged between nearly minus 50 percent to less than 10 percent.
"Sometimes diversification doesn't work. In times of crisis, markets can become correlated," RouwenHorst said.
That was the case this year between April and August when worries about higher US interest rates, rising global security concerns and fears that China would brake too hard on its economy sidelined investors and kept markets range-bound.
One of the few exceptions were oil prices which rose to record highs on jitters about supply disruptions in the Middle East and accelerating demand.
The 5-year correlation between inflation and commodity future returns ranged between zero and just under 50 percent.
"The longer the period the more positive this correlation," Rouwenhorst said. "Traditional asset classes are negatively correlated with inflation over the long term."
That contradicts a popular belief that equities are an inflation hedge.
"Normally when we have inflation, the economy doesn't do too well, which hits company's cash flows," Rouwenhorst said.
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