Commodities, as investors have been reminded in the last two years, remain one of the few areas investors can find reliable inflation protection and real diversification. In December, Goldman put out one of its biggest calls saying, “Commodities will gain 43% in 2023 as supply shortages bite”.
Auspice Capital (subadvisor to the CI Auspice Broad Commodity ETF (CCOM)) is also very bullish, but notes that it won’t always be straight up, and there will be volatility along the way. Since 1970, the GSCI TR commodity index has actually outperformed most equity indices. The problem is that the volatility and drawdown are too high to just buy and hold.
For this reason, in 2010, Auspice launched the Auspice Broad Commodity Index, the underlying index CCOM tracks. The Auspice Broad Commodity Index is a rules-based index that attempts to capture upward trends while minimizing downside risk during downward trends in 12 diversified commodity futures contracts: soybeans, corn, wheat, cotton, sugar, crude oil, natural gas, gasoline, heating oil, copper, silver, and gold.
Individual commodity sub-sectors tend to perform dissimilarly in different market environments and significant drawdowns can be damaging to achieving long-term return objectives. A rules-based diversified broad commodity strategy like CCOM can alleviate these concerns. When you also consider the macro-environment landscape, the firm has never been so bullish on the commodity sector, and with $100mm in inflows in CCOM since its launch three months ago, investors seem to agree.
2022 data suggests that commodity CapEx and corresponding supply continue to be a problem that won’t be fixed quickly for the following reasons:
- Even though the world consumes 40% more of many major commodities than it did 15 years ago, resource companies have again slashed investment in new production as of late.
- Looking specifically at the energy supermajors, 2022 capital spending remains 30% below the 2019 level and 60% below the 2010-2016 average.
- Despite elevated prices, the supermajors’ production of oil and natural gas continues to fall.