Oil prices have driven a commodities rally this spring as crude rose from its low of early 2009. How is this backdrop affecting investors' attitudes towards commodities?
This month's Off The Record survey sampled pension funds' attitude towards commodities.

Just under half of the respondents - 47% - invest in commodities. A variety of reasons were identified for not investing by the other 53% such as legal and regulatory investment restrictions, a lack of analysis, unsustainability, the size of the assets, a different risk appetite and timing.

"The investment case has never convinced us," said one Dutch pension fund. "It has been perceived as a bet on oil that could also be implemented in other ways."

"We have not yet completely analysed the subject but commodities do not yield something, therefore it is not possible to assess their long-term returns," said a Swiss scheme. "Commodities can be directly accessed through futures only, which are subject to significant roll risk. [But in any case] commodities are [part] of our scheme investments through the commodity-based companies we own in our equity portfolio."
In general, commodities appear to be quite a new asset class, as all investors started their exposure between 2003 and 2009.

Of the 16 respondents that invest in commodities the majority (31%) allocate between 4.1-5% of their portfolio to commodities. A quarter of respondents have an allocation of 1.1-2%, while 12.5% each invest 2.1-3% and 3.1-4% of their portfolio in commodities. One UK pension fund invests more than 5% of its portfolio, while another from the UK stated its target as 9.2% of the portfolio.

Half of the respondents raised their commodities exposure over the past 18 months; one quarter reduced it and another quarter left it unchanged.

Over 81% of the respondents invest in energy, soft commodities and industrial metals, while three quarters of them also had an exposure to precious metals. Four of the investors have an exposure to infrastructure, while one UK fund invests in timberland. Another UK fund has allocations to timberland, water and alternative energies in addition to its more traditional commodities exposure.

The main drivers for investing in commodities are their non-correlation with equities and bonds, and their ability to work as an inflation hedge (75% for each). Half of the respondents invest because of the prospect of long-term returns. Three respondents attributed their exposure to short-term trading opportunities, while two of them do it for scheme-specific liability or risk hedging purposes. A Swiss scheme said it invested in commodities for alpha generation.

Commodities exposure is gained via commodity indices for half of the investors, followed by separate, dedicated commodity and natural resource hedge funds, managed futures funds or CTA funds that are not part of a diversified hedge funds allocation, for which 37.5% of the respondents opted. A quarter of them invest via individual commodity futures. Only two of the respondents have separate, dedicated commodity and natural resource sector equities mandates that are not part of a broader mandate. Timber was another way for a UK pension fund to gain exposure, while a Swiss fund allocated via non-index oriented funds.

Only three investors invest with commodity alpha managers such as hedge funds, managed futures or CTAs.

The most popular index used as a reference for commodity futures exposure is the Dow Jones-AIG Index. Over 53% opt for this one, followed by the S&P Goldman Sachs Commodity Index (S&P GSCI) (40%) and the Rogers International Index (6.5%). Other reference indices are bespoke, such as the S&P GSCI with a limit for energy or an economic sector equally weighted GSCI.

The commodity futures index exposure is enhanced for 62.5% of the respondents and active for half of them. Just under 19% have a passive exposure via commodity futures index.