EUROPE – European pension funds are showing increased interest in commodities as an alternative asset class, says Catherine Claydon, managing director of European Pensions and Insurance at Goldman Sachs International.
According to Claydon, there has been a “tremendous amount of interest in commodities from European pension funds”.
Indeed, alternative assets as a whole are seeing increased interest from investors as try to reduce risk and boost returns. As investors realise that equities are unlikely to produce the double-digit returns seen in the past, they are becoming more open to lower returns – and can therefore consider a wider range of asset classes, with alternatives at the higher-returning end of the spectrum.
While private equity, hedge funds, and real estate are all attracting investors, commodities are receiving particular attention says Claydon. “Dutch pension funds have already embraced the asset class – ABP and PGGM, the two largest Dutch funds, have allocations to commodities.”
The attraction of commodities lies in its negative correlation with equities and bonds. “They offer diversification when you need it most.” Explains Claydon: “Commodities have produced an average return of about 11.6% and when equities and bonds are producing negative returns, this amount can triple.”
Conversely, when bonds and equities are producing positive returns, returns from commodities will be negative, but, says Claydon “when they account for two percent of your portfolio, this isn’t a concern – the other 98% is leading the way.”
What is important is that by producing such high returns when the rest of the portfolio is doing badly, commodities will provide much more protection in the event of a market downturn than perhaps hedge funds which could produce around five percent regardless of the market direction.
Among the pension funds considering investing in commodities is Sweden’s Sjunde AP-fonden, or AP7. At the PensMart conference in Frankfurt, AP7’s executive president Peter Norman said the scheme would be looking at commodities, currency overlay and tactical asset allocation next year.