Education
Commodity Investing 101
- Physical commodities are tangible assets such as oil, wheat and gold. In certain instances, particularly in the case of precious metals, investing in physical commodities is generally accessible. However, in most other cases, the costs and complexities of storage, distribution and liquidation make investing in physical commodities accessible only to the most sophisticated firms.
- Commodity futures provide a more efficient and liquid alternative. Commodity futures contracts are exchange-traded instruments that, if held to maturity, obligate the buyer to take delivery and the seller to make delivery of a specified quantity of a commodity at maturity.
- Most commodity futures indices are comprised of futures contracts with maturities typically not much longer than 30 days. To maintain continuous exposure to the commodities markets, investors need to “roll” the futures exposure from the expiring contract to contracts maturing further out in the calendar. If successive-month contracts are trading at prices higher than the current month, the market is said to be in “contango.” Conversely, if the successive-month contracts are trading at prices that are less than the prices at which the current-month contract can be liquidated, the market is said to be “backwardated.” A market in contango results in a drag in performance. Over the past decade, the broad commodities markets have tended to be in contango, harming returns.
- JAM has extensive experience in trading commodities and in identifying and exploiting the nuances of each particular commodity, whether it is trading in backwardation or in contango.
What are some of the advantages of this approach?
- JAM’s approach to managing the Fund builds on our core strengths as a pioneer in commodity investing. The Fund invests in both commodity futures-linked investments and commodity equities, seeking to optimize the allocation between these two components to gain comprehensive exposure to the global commodity markets.
- The commodity equities portion provides exposure to global companies principally engaged in the production and distribution of commodity-related products and helps to reduce some of the costs inherent in investing in commodity futures.
- With the portion allocated to the commodity futures-linked investments, JAM invests in commodity derivatives with a potential to outperform the Thomson Reuters / Jefferies CRB 3 Month Forward Index (“TR/J CRB 3M Forward Index”) without committing substantial amounts of capital.
- The Fund invests the remaining cash in Treasury Inflation-Protected Securities ("TIPS") and other high credit quality instruments. This combination provides comprehensive access to the global commodity markets and offers three layers of inflation hedging potential from commodities, equities and TIPS.