DoubleLine: Rationale For Investing In Commodities

DoubleLine Strategic Commodity Fund webcast titled, “Rationale for Investing In Commodities.”

We believe there should be diversification benefits relative to traditional asset classes:
– Potential low–to-uncorrelated return source to traditional asset classes.
Potential to hedge against unexpected inflation:
– Physical assets have historically tended to move in line with broad inflation measures.
Potential incremental returns from each individual commodity’s market structure.
Commodity supply and demand is generally correlated to the cyclicality of the global economy.

Commodity performance over the long term has tended to rise and fall with unexpected inflation

UBS Bloomberg Constant Maturity Commodity Index (CMCI) adjusted for inflation
- Relative low during financial crisis of 582.4 on February 28, 2009
- Level as of August 31, 2015 was 535.1

DoubleLine Strategic Commodity Fund is a long-biased commodity fund that tactically allocates to a long-short dollar neutral commodity strategy when a 100% long commodity allocation is unattractive

Traditional asset classes define “beta” using market capitalization, or a similar price-based metric, as the basis for determining the weighting scheme.
However, since commodity investments are typically obtained via commodity futures there is a challenge with defining commodity “beta” in a similar vein:
– For each futures contract outstanding there is one entity which is long the exposure and one offsetting entity that is short the exposure;
– Therefore the market capitalization of each futures market is zero.
Index providers have turned to other factors to determine how to allocate capital across various commodities:
– These include, but are not limited to open interest, volume, production and fixed weights.
Since there is no agreeable definition of how to define the market weights of various commodities, all commodity indices are actually rules-based commodity strategies.

From a return and risk standpoint, the UBS Bloomberg Constant Maturity Commodity Index (CMCI) is the best of the commodity betas for the time period shown:*
– Highest Return;
– Lowest Standard Deviation;
– Highest Sharpe Ratio;
– Best Maximum Drawdown.
How the CMCI improves upon other betas:
– Weighting based upon fundamental and liquidity factors;
– Exposure across each individual commodity’s curve;
– Daily rolling of futures contracts.
Where is there still room for improvement?
– Commodity selection to avoid commodities that have tended to show weak technicals;
– Enhance curve positioning for better risk and reward trade offs;
– Less frequent rolling and utilizing more liquid commodities to reduce transaction costs.

See full PDF below.

DoubleLine: Rationale for Investing In Commodities