We believe an active, long-biased approach based on fundamental research has the potential to generate alpha, while providing the diversification benefits of a commodities allocation within an investor’s broader portfolio.
Commodities are raw materials that go into making a finished good or product for which there is demand. Whether it’s your morning cup of coffee, the gasoline that fuels your car, the corn that’s on your dinner table, the cotton in your clothing, or the oil (or natural gas) that heats your home, commodities are an essential part of everyday life and the building blocks of the global economy. Similarly, commodities can be an important way for investors to diversify beyond traditional stocks and bonds, to serve as a hedge against unexpected inflation and event risk, or to profit from a conviction about price movements. Commodity sectors include energy, industrial and precious metals, agriculture and livestock. Prices are influenced by supply and demand. Conversely, supply and demand are influenced by commodity prices. Higher prices will encourage a greater supply, and a greater supply will tend to lower prices. Lower prices can create a greater demand, which will tend to increase prices. Levels of global economic activity, weather conditions, natural disasters, political events, and even investor sentiment also have the ability to influence commodity prices.
A wide variety of investors include commodities in their allocations. We believe this is because commodities have historically demonstrated two important investment characteristics: the potential to improve portfolio diversification and the ability to hedge a portfolio against unexpected inflation and event risk.
The historical risk and return characteristics of commodities have captured the interest of many types of investors, based on their relatively low correlations with traditional asset classes, attractive long-term return potential and high correlation with increasing economic activity. While some investors have chosen to focus on passive or enhanced index commodity strategies, we believe an actively managed approach based on fundamental research to be the optimal approach for a broad range of commodity investors.
This is not an inducement to buy or sell commodity interests. Strategies and funds that trade in commodity interests involve a risk of loss. Investors should consider whether such services or products are suitable investments.
The views and opinions are subject to change without notice and represents an assessment of the market environment at a specific point in time, should not be relied upon as legal, investment or tax advice and is not intended to predict or depict performance of any investment. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment. Investors should consult their own advisors with respect to their individual circumstances.There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that a market forecast made in this commentary will be realized.
Cohen & Steers U.S. Registered open-end funds are distributed by Cohen & Steers Securities, LLC.
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Risks of Investing in Commodities
An investment in commodity-linked derivative instruments may be subject to greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. The use of derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. Among the risks presented are market risk, credit risk, counterparty risk, leverage risk and liquidity risk. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivatives.
Futures Trading Is Volatile, Highly Leveraged and May Be Illiquid. Investments in commodity futures contracts and options on commodity futures contracts have a high degree of price variability and are subject to rapid and substantial price changes. Such investments could incur significant losses. There can be no assurance that the options strategy will be successful. The use of options on commodity futures contracts is to enhance risk-adjusted total returns. The use of options, however, may not provide any, or only partial, protection for market declines. The return performance of the commodity futures contracts may not parallel the performance of the commodities or indexes that serve as the basis for the options it buys or sells; this basis risk may reduce overall returns.