CalPERS Removing Billions From Commodities?
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By Shelley Goldberg, Commodities Analyst
The California Public Employee Retirement System (CalPERS) is the largest U.S. public pension fund. It provides retirement, health, and financial benefits to more than 1.6 million public employees.
With $295 billion in assets under management, CalPERS has long been viewed as a bellwether in the industry.
It tends to be an early adopter of alternative assets, too, setting the trend for the entire investment community. In October 2007, for example, the fund initiated its commodities program as a way of diversifying its portfolio – a move that helped establish commodities as a mainstream investment.
So you can see why an August 10 report from The Wall Street Journal, which mentioned that CalPERS might exit or substantially reduce bets on commodities, caused quite a stir.
The move could trigger a massive $2.4-billion outflow from the commodities market.
What’s in CalPERS’ Crystal Ball?
CalPERS’ potential retreat from riskier investments is evidence that it’s trying to simplify its portfolio and guard against losses during the next market downturn.
After all, CalPERS wants to hold on to its 18.4% gains for the fiscal year that ended June 30, an amount which actually exceeded its goals. Its domestic and international equity holdings were up 25%, real estate was up 14%, and private equity increased by 20%.
In a sense, CalPERS is turning to a bit of a “risk off” mode in this time of uncertainty.
Ultimately, with the realization that we’re in the midst of the Fed’s continued tapering, talk of interest rates hikes, and geopolitical unrest from the Middle East to the Ukraine, it may be time to dial down risk and play it safe.
In fact, this move is reflective of last fall, when CalPERS hinted at a shift away from complex investments, warning that the fund “will take risk only where we have a strong belief we will be rewarded for it.” This decision came after it had approved a new set of investment goals that reduced future exposure to equities and private equity, while increasing allocations to bonds and real estate.
A similar move by CalPERS also took place at the end of 2012, when the fund chopped commodities investments by more than half – prompting reports that it was shifting from commodities to inflation-linked bonds.
And in both incidences, the commodities markets experienced corrections.
How to Profit From a CalPERS Move
Now, the move won’t occur all at once.
CalPERS traders are savvy enough to know that they need to scale in and out of trades. The market just can’t handle the sheer volume otherwise. Furthermore, CalPERS wouldn’t want to be visible in the marketplace, or to move the markets against them.
Still, amid the current wave of banks exiting commodities, “long only” investors could begin heading for the exits, as well.
In other words, if CalPERS does go ahead with its asset allocation decision, we’ll likely start to see a gradual (but sizable) downturn in commodities markets, exacerbated by systematic traders who tend to follow the trend.
Acknowledging that this move will largely be technical in nature, we should very gradually scale into commodities from the long side – rather than attempting to time the bottom of the markets.
Commodities are seen as a safeguard against inflation. And while there are no imminent signs of inflation, any anticipation of even a gradual interest rate hike will be a positive for the commodities markets. Furthermore, ongoing geopolitical risk should put upward pressure on commodities like crude oil and gold.
Should one wish to avoid having to choose individual commodities or trade the futures markets, there are a number of commodity indices available, including the S&P GSCI, the Dow Jones Commodity Index (^DJCI) and the Rogers International Commodity Index.