Jim Rogers has written several books, a couple of which document his 'round the world' trips where comments on what he sees and how it relates to investments. In one of his latest books, Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market, Jim writes:
"A new bull market is under way, and it is in commodities-the 'raw materials,' 'natural resources,' 'hard assets,' and 'real things' that are the essentials of not just your life, but in the lives of everyone in the world."
In the book, Jim advocates moving a significant amount of your financial investments out of equities and into commodities (hell, he might have said 'all of it', it's been a few months since I read the book). I'm not batty enough to do anything so capricious, but I did like the way commodities move 'out of sync' with the equity markets and it really looked like a way to enhance diversification.
Intrigued, I Googled 'Rogers Raw Materials' and came up with http://www.rogersrawmaterials.com/ which in turn led me to Uhlmann Price Securities, which administers the fund that Jim is touting. After chatting with them on the phone, they sent me out the material on the 'Rogers Raw Materials Index Funds'. Two problems became immediately apparent:
If the first one wasn't enough to put me off, the second one is a deal killer for me. Sales loads are a huge hurdle for an investment to 'make back', and frankly they call into question the motivations of the whole enterprise.
Still thinking that exposure to a 'pure' commodities play (as opposed to simply owning stock in 'commodity heavy' companies like Exxon Mobil), I continued my search.
That's how I settled on PIMCO Commodity Real Return Strategy D (PCRDX). An unorthodox vehicle, it trades in commodity futures contracts while parking excess cash in Treasury inflation-protected securities.
Did it work? Hell yes. As I was ponying up more than double my usual price per gallon for heating oil this year, I listened to my oil supplier bemoaning that 'the speculators' had driven the price up. Realizing that 'I are one' took much of the sting out of the fuel oil bill, as I more than made up for it with gains in PCRDX.
Unfortunately, the IRS thinks PCRDX is a little *too* unorthodox, and has given them until June 30, 2006 to change their investment strategy. Chuck Jaffe summarized it this way:
Specifically, Uncle Sam ruled that the total return swaps are not 'qualifying income.' That definition is critical because 90% of a fund's income must 'qualify' in order for a fund to be a registered investment company. Having that status as a registered investment company, in turn, gives a mutual fund favorable tax treatment; if a fund loses that status, it is subject to having its income taxed at both the fund level and again when the income flows to individual investors.'
So for now, I'll stand pat with PCRDX, with 5% of my IRA funds parked in it. As they re-tool to align with IRS requirements, I'll keep an eye on it to see if it still meets my needs. I also hear tell that some ETFs are being created to deal with commodities derivatives, and that may be the best of both worlds for me.
DB Commodity Index Tracking Fund (DBC) is the 'new' ETF for commodities, and I'll probably start transitioning to it. I have been a little frustrated with PCRDX this year due to their rules against frequent trades. The whole reason I work a diversified portfolio as carefully as I do is so that I can rebalance when my positions get about 10% out of whack.
I like this language from the DBC prospectus describing 'backwardation' and 'contango':
Conversely, Aluminum, Gold, Corn and Wheat historically exhibit 'contango' markets rather than backwardation. Contango markets are those in which the prices of contracts are higher in the distant delivery months than in the nearer delivery months due to the costs of long-term storage of a physical commodity prior to delivery or other factors. Although Aluminum, Gold, Corn and Wheat have historically exhibited consistent periods of contango, contango will likely not exist in these markets at all times. The absence of contango in Aluminum, Gold, Corn and Wheat could adversely affect the value of the Index and, accordingly, decrease the value of your Shares.
Interesting (lengthy, in depth) article about the outlook for commodities in the coming years.
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