A recent move by the $255 billion California Public Employees’ Retirement System to further diversify out of stocks, mainly those of U.S. companies, and into commodities and emerging markets equities is just one example of a shift in investor sentiment towards the historically volitile asset classes. According to the Canadian Globe and Mail:
“There’s no doubt that the macro guys are pulling money out of some of the underperforming assets from last year like stocks, allocating a bit more to bonds and definitely allocating a larger percentage to commodities,” said Lars Steffensen, managing director of commodity trading at Ebullio Capital Management. “Even a 1 or 2 per cent shift into commodities is massive in pure dollar terms,” he added. March robusta coffee futures in London rose to a peak of $2,039 a tonne, up $25 and the highest level for the second month since May 1998. The contract has risen around $300 since early December. “Funds hold 25 per cent of world production and currently appear to have an insatiable appetite for softs in general,” brokers Sucden UK said in a daily coffee market report.
Looking backward at the huge runup in prices that commodities have experienced over the last few years it is possible to forget about the historical volatility of the asset class. The increased liquidity brought about by noncommercial speculation has tended to exacerbate price swings. In early 2007, when oil was in the low $50s, down about 35% from its July 2006 high of $78, noncommercial speculators were net short, according to businessweek. This was a far cry from investor sentiment in mid 2006. One has to wonder about the implications that increased commodity exposure in traditionally conservative mutual funds and pension programs may have if commodities fall out of favor.
