According to a Guardian Newspaper article, The California State Teachers Retirement System, the No. 2 U.S. pension fund, has approved a plan to invest in commodities. Calstrs has not immediately approved a budget for its first investment in commodities but officials at the $138.5 billion fund said they will probably know by early autumn how much they should recommend for an allocation. Calstrs spokesman Ricardo Duran stated in an email to Reuters that the commodities allocation will come out of the fund’s Absolute Return asset class, which targets to make up 5% of the fund’s overall size. At nearly $140 billion, Calstrs is the second largest public pension fund in the United States, after the $200 billion California Public Employees’ Retirement System, or Calpers. Calpers started investing in commodities in 2007 with a $450 million program that tracked the S&P GSCI Commodity Index. The program attained a value of over $1 billion in early 2008 as Calpers’ benefited from record high prices of oil and other raw materials. But the portfolio plunged to about half of its value during the recession although it has since recovered. Where Calpers and Calstrs lead others will follow.
The US funds are not alone mind you. According to the FT, the huge Dutch pension funds PGGM and ABP pioneered investing in commodities in 2003, and other European funds, such as the UK’s BT pension scheme and France’s state-owned Fonds de RÃƒÂ©serve pour les Retraites, as well as US-based schemes, including the Teacher Retirement System of Texas and the Teachers Retirement System of the State of Illinois, have also diversified into commodities since 2005.
Why does it make me nervous when I hear workers pension funds venturing into commodities? Call me old fashioned but I can’t think this is good for the commodity markets the introduction of extremely wealthy but inexperienced players into the market has the hallmarks of increased volatility. Not that a pension fund would be a cut and run kind of day trader but depending on how they make their investments it could boost monthly roll over traffic which arguably already distorts the markets. But also not good for the workers on whose pensions those investments depend. I can almost see the comments section now “what’s the difference between pension funds investing in equities and investing in commodities? you will say. Well I think it’s that word investing. The Concise Oxford Dictionary defines it as to “Employ for profit and one could reasonably say that is exactly what the pension funds are doing they are buying commodities because they see them either as cheap assets that they think will rise in value and be worth more at some stage in the future or they buy them as a hedge against inflation. Arguably there is a risk of inflation in the years ahead and some form of hedge could prove a wise move, but commodities are driven by many other factors than just the threat of inflation supply market dynamics, perceived growth prospects in Asia, appetite for risk in Europe, El Nino, monsoons, you name it, any number of factors can influence commodity prices. Nor are they the counter cyclical hedge against equities they were cracked up to be. Recently equities have been falling heavily and so have commodities right alongside them. Solid equities at least have the benefit of creating a dividend that provides an income in good times and bad. Coca Cola and Pfizer chip in a dividend almost regardless of the rise or fall of their share price. When was the last time copper or wheat paid a dividend? No, to my rather old fashioned way of thinking, “investment in the commodity markets for anyone other than a consumer or producer is a punt and although I have no problem with a few bucks on the gee gees I do not feel entirely comfortable with my pension fund doing the same thing with copper, pork bellies, wheat futures or the price of oil.