Pensions put commodities on back burner

Business Times - 02 Jun 2009

Inflation, low prices keep them from raising exposure

(NEW YORK) Pension funds that helped fuel the commodities bull run for years with outsized allocations have done little during this year's rally as subdued inflation made a less compelling case for them to raise their exposure.

Pensions like Calpers, America's largest retirement plan, poured hundreds of millions of dollars into funds tracking commodity index futures and other derivatives in recent years as they diversified their investments from stocks and bonds.

Such money helped oil soar to a record high of nearly US$150 a barrel last year from below US$20 in 2002, sent gold to above US$1,000 an ounce from around US$300, vaulted copper past US$4 a pound from 80 cents and rallied soya beans beyond US$16 a bushel from under US$6.

But since the meltdown of world markets in September, pensions and other institutional investors such as endowments and mutual funds have virtually put commodities on the back burner.

Analysts said these conservative fund managers did not feel the pressure to buy more commodities as a hedge as the global recession had knocked prices of most raw materials down more than 50 per cent from their highs and wiped out any immediate risk of inflation.

Even with energy, metals and grain prices rebounding lately, these investors have not been convinced that they should raise their weightings in commodities before the markets rose any further.

'If you look to see where the activity in commodities is coming from now, my guess is that it's more from the short-term traders and hedge funds and tactical asset allocation strategies than endowments and pension plans that are watching inflation closely,' said Al Pierce, director at SEI Investment Manager Services in Oaks, Pennsylvania.