Sunday, October 22, 2006


CalPERS To Jump Into Commodities

The Sacramento Bee has this report. "It's more than pork bellies, copper and oil futures. To the nation's largest public pension fund, investing in commodities is far different from a decade ago and extends to cutting-edge ethanol plants, gas pipelines, cement plants, entrepreneurs designing the latest technology to improve oil exploration and startups developing the next generation of raw materials."

"'You'll see a greater percentage of investing in natural resources. This is a big change to our portfolio,' said Russell Read, chief investment officer of the $213 billion California Public Employees' Retirement System. 'This will be important to our investment success.'"

"Just five months into the job, Read is mapping out a new investment paradigm for the giant fund. His strategy will integrate the highly volatile world of commodities and natural resources with the fund's current bets on mainstream stock, bonds, real estate and private equity."

"In the long run, Read said, CalPERS would develop a new investment mind-set and possibly create a new class of assets."

"Read wants to unveil a pilot commodities investment program this fall. A former money manager who oversaw billions in commodities-related investments for private firms, Read is counting on his track record to sell the idea to trustees and 1.4 million state and local government beneficiaries of the nation's largest public pension system."

"Nine years ago, Read was the chief architect of the first commodities mutual fund, the Oppenheimer Real Asset Fund. It's generated a five-year annual return of 13.46 percent, bettering a 6.84 percent gain over the same period for the Standard & Poor's 500 Index, according to Morningstar."

"The commodities move, some experts predict, could put CalPERS on the cusp of the next wave of high-flying investment opportunities, perhaps rivaling the golden age of the high-tech boom. 'We are at the beginning stages of a very important transformation,' said George Manahilov of Barclays Capital. 'Investors are trying to find the niche that can be exploited.'"

"From 1959 to 2004, commodity futures have delivered average annual returns of 11.5 percent, mirroring the performance of stocks. In the past four years, commodities produced a 135 percent gain."

"Yet commodities are considered risky investments influenced heavily by world events. In 2001, the closely watched Goldman Sachs Commodity Index lost 32 percent because of a global economic slump that put a damper on industrial demand and farm prices."

"Some experts say the commodities rally has run its course. They point to a recent drop in oil prices to about $60 a barrel, about 25 percent below the record highs reached in mid-July. The Goldman Sachs index has dropped 15 percent in the past 12 months."

"U.S. public funds have taken a longer view and consider commodities as strategy to diversify the portfolio. Pension plans have invested about $30 billion to $40 billion in commodities during the first half of 2006. Today, public funds are estimated to have invested more than $100 billion, or about 3.7 percent, of their assets in commodities, experts say. Morgan Stanley predicts public funds investments will double within five years."

"CalPERS is likely to follow a cautious strategy, board President Rob Feckner said following a workshop introducing trustees to commodities investing earlier this month. 'It's certainly food for thought. I don't think the board is entirely there,' Feckner said. 'We need to test the market before we jump in.'"

"In a report issued in March, CalPERS officials said that commodities futures, considered as a hedge against inflation and stock market downturns, could generate an annual return of 6.5 percent, compared with 8 percent for stocks and 5.5 percent for bonds. CalPERS could invest up to $3 billion into this area."

"Through investments in companies such as Chevron Corp. and Alcoa Inc., CalPERS is already exposed to the commodities markets. Officials say roughly 20 percent of its portfolio is linked to raw materials. For the most part, public funds invest in commodities through passive investments linked to indexes such as the Goldman Sachs Commodities Index."

"But Read said the futures markets don't include materials such as cement. To take advantage of that commodity, CalPERS would invest in a cement producer or distributor. In Europe, major institutional investors have been quicker to embrace commodities. More than 100 funds have poured money into raw materials."

"Read and other experts say prices and demand will continue to be fueled by high-growth emerging markets such as China and India. 'The scarcity and increasing prices have a silver lining in that it will lead to more innovation,' said Brad Barber, a finance professor at the University of California, Davis."

"The big payoffs could emerge from companies and entrepreneurs that profit by designing technology to develop and distribute raw materials, especially in the energy sector. 'New technology development will increasingly focus on natural resources, whether in stocks, private equity, bonds or real estate,' Read said. 'We're looking at a shift in every asset class.'"

"Steven Strongin, a strategist for Goldman Sachs, said the challenge is finding these startup companies. 'This is really a massive change,' Strongin said. 'Every part of the commodities market needs capital. You really don't know who the winners are. You have to spread the capital.'"

this is good.
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