Robert Hyman. Erika Long
Lately, commodities have performed so poorly investors would be forgiven for thinking people no longer need anything to eat, drink, or fuel their cars—just iPhones and subscriptions to Amazon Prime. In the past five years, the average commodity mutual fund has lost 8% a year, while the S&P 500 has gained 10%.
Worse, even when commodity prices have gone up, most commodity funds have failed to fully capture those gains. A phenomenon known as “contango” has been a drag on fund performance. Investors rarely buy commodities directly, instead favoring futures contracts, which are derivatives with expiration dates. Contango occurs when a commodity future’s price is above the current or spot price, so that every time a contract expires, investors must pay more for a new one.
Exacerbating the problem is the fact that index commodity funds buy futures on a published schedule. Astute traders can purchase the funds’ contracts ahead of schedule, forcing funds to pay even more and profiting as the funds’ buying boosts the market.
That’s why active management makes sense with commodity funds. One of the best, despite its absurdly long name, is ALPS/CoreCommodity Management CompleteCommodities Strategy (ticker: JCRAX). “What we’re trying to do within our portfolio generally is to mitigate the contango that has cost approximately [six percentage points] per annum for the last 10 years to the Bloomberg Commodity Index,” says Robert Hyman, the fund’s manager.
Hyman should understand his benchmark’s contango issue better than almost anyone. The founders of his firm, CoreCommodity Management—Bradford Klein and Adam De Chiara—helped design and launch the Bloomberg index, which, when they built it in 1998, was called the Dow Jones-AIG Commodity Index. Hyman worked with Klein and Chiara investing in commodities at Drexel Burnham Lambert and