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Commodities and Natural Resources
Commodities can be an efficient contributor to portfolio performance over a wide range of risk levels, as the asset class provides potent diversification at the total portfolio level. Although risk premia on commodity futures and equity markets are comparable, commodity futures’ returns display different behavior over the business cycle than traditional asset classes; resulting in negatively correlated returns with equity and fixed income. In addition, commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation. Those attributes make the asset class attractive from a total portfolio standpoint. Additionally, clients investing in hard and soft commodities can potentially profit from the increasing demand for these resources across the developed and developing world, and earn a risk premium for providing liquidity to the markets.
Still, commodity markets are volatile and only managers with acute expertise in the field may offer attractive returns as each market has its own characteristics and dynamics. Commodity investment programs must therefore be carefully designed, as there are opportunities to invest actively or passively, tactically or strategically, with leverage or without leverage. In this context, QMS Advisors can help guide investors allocate to the asset class efficiently and explore the many alternatives.
Similarly, designing a timber investment program is a custom solution driven by an investor's particular needs and investment objectives. Sophisticated investors have long profited from investments in timber as an adjunct to their real estate investments. Timber is unique among natural resources as timberland continually produces a commodity over time and offers embedded real options (mainly the option to postpone the harvesting time), while investments in natural resources like oil and gas are depleted over time. Like real estate, timber can be an income generating investment or a source of long term capital appreciation.
Investments in real estate, natural resources and commodities all present the advantage of having very low to insignificant correlation in returns when compared to traditional equity and fixed income investments. This allows for greater return diversification in addition to the possibility of higher overall returns.
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