DoubleLine: Rationale for Investing In Commodities

DoubleLine: Rationale for Investing In Commodities

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

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.

Potential Diversification Benefits of Commodities

  • Broad commodities have shown low correlations to other broad asset classes
  • The average correlation is 0.20

Commodities as a Possible Inflation Hedge

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

DoubleLine Commodities

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When is it a Good Entry Point to Buy Commodities?

  • 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 Commodities

Tactically Allocating to a Long-Short Strategy

  • DoubleLine Commodity Timing Signal.

DoubleLine Commodities

DoubleLine Strategic Commodity Fund’s Approach

  • 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

DoubleLine Commodities

What is Commodity Beta?

  • 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.

What the CMCI Gets Right

  • 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.

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