s&p commodities · world's most widely tracked commodity index with numerous sub and...

PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 0

PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.

S&P CommoditiesCommodity Investing 2011: Trends and Challenges Webinar

Mike McGlone, Senior Director - Commodities

April, 2011

For Financial Professionals/Not for Distribution


Agenda

• Introduction – why commodities?

• Types of commodity investment exposure: Futures vs. Equities

• Relationship between commodity investing and commodity prices

• Drivers of commodity investment returns: Contango and Backwardation

• Marketplace developments: Sector leadership migration & correlations

• Different types of commodity indices

• Commodity investment performance data


Why Commodities?

• Accelerating global expansion and lifestyle advancement

• Portfolio Diversification – The S&P GSCI� has had a history of equity like returns but with low

correlations to most other asset classes

• Inflation Hedge

• Insurance/Event Risk

• “Money for nothing…” Extremely low base interest rates – Underlying force of converting paper to hard assets


Investing in Commodities – The Choices

• Futures based indices (like the S&P GSCI)

• Equity based indices (like the S&P Natural Resources Indices)

• Physical (ETF’s with exposure to Gold and Silver)

** In the long-term, there must be a direct impact on supply and/or demand to influence spot commodity prices **

Significance Positive NegativeSupply/Demand

Impact

Futures Based Indices

Broad based, simple accessible and

investable

Portfolio augmentaion due to low correlation

historyContango reduces

total returns Never directly

Equity Based Indices

Indirect exposure thru commodity based

stocksLower volatility and

accessible

Higher correlation to equities than commodities

No - but can help supply

PhysicalDirect exposure thru ETP's make it easier

Actual commodity investment

Not broad based. Storage costs reduce

total returnsYes - Takes supply

off the market


Investing in Commodities – Returns & Correlations

Portfolio Augmentation – The S&P 500 with a 20% allocation to the S&P GSCI has demonstrated a history of lower volatility and superior returns

S&P Indices: Performance and correlations December 1999 – December 2010

• S&P Natural Resource Indices – Diversified natural resource based equity indices• Portfolio – Hypothetical index of 80% S&P 500, 20% S&P GSCI (rebalanced annually)

CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 4

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Source: Standard & Poor’s. Data as of December 31, 2010. Charts are provided for illustrative purposes. Past performance is not a guarantee of futureresults.


Real Asset Indices - Performance Chart

-

100

200

300

400

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

S&P GSCI

S&P 500

S&P North American Natural Resources

Combined: 80% S&P 500, 20% S&P GSCI

S&P BG/Cantor 7-10Yr US Treasury

Source: Standard & Poor’s. Data as of December 31, 2010. Graphs are provided for illustrative purposes. Past performance is not a guarantee of futureresults.


The futures curve: Contango and Backwardation

Futures based index returns are based on rolling futures positions before they expire

The curve is determined by the futures math (mostly storage costs) and is cyclical, related to supply/demand conditions

• Contango (bad) - further out futures contracts trade at higher prices – Generally a function of ample supplies– Decreases total returns due to rolling into higher futures prices

• Backwardation (good)- further out futures trade at lower prices– Increases total returns due to rolling into lower futures prices– Generally a function of tight supplies.

Commodity investing rule of thumb in terms of the storage costs, “can I store it in my basement?”

• Natural gas is the most expensive to store S&P GSCI commodity. It has a history of high roll costs. • Gold is the least expensive to store S&P GSCI commodity, It’s roll expense is historically very flat.


Crude Oil Futures Showing: Contango Backwardation

Source: Bloomberg. For illustrative purposes only.


S&P GSCI�� Sector Spot and Total returns Past Decade

-50%

50%

150%

250%

Precious Metals Industrial Metals Energy S&P GSCI Agriculture Livestock

Decade Spot ReturnDecade Total Return

Sources: Standard and Poor’s. The index charts and/or other economic statistics are included solely for the purpose of presenting information on historic correlation between\among the indices and other economic statistics. Past correlation is no guarantee of future correlation. It is not possible to invest directly in an index. Returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not indicative of future returns.

Jan 2000 – Dec 2009

Industrial Metals: Total Return exceeds Spot -> Backwardation

Agriculture & Livestock: Spot Increase exceeds Total Return -> Contango


Marketplace Developments – Commodity Sector Leaders

2009 – Recovery from the Crisis: Industrial Metals lead2010 – Agriculture takes over2011 – Energy Risk comes back*

*Significance: Unlike most other commodities, if energy (petroleum) prices increase rapidly, global GDP and equities can suffer accordingly


S&P GSCI Sector Index Returns 2009 2010 2011*

Leading sector index Industrial Metals Agriculure Energy

Total Return 82.42% 34.19% 15.38%* As of March 31, 2011


Petroleum – The World’s most significant commodity


Asset Class Correlations - Post Crisis are Declining

Daily Returns: Jan. 2005 – March 24, 2011

0

50

100

150

200

250

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11-1.0

-0.5

0.0

0.5

1.0

1.5

S&P GSCI (left scale)

S&P 500 (left scale)

20-day Correlation (right scale)

* On March 1st, this correlation measure reached the lowest level since July of 2008 at -.54



WTI Crude Oil and Brent in the S&P GSCI

Brent has been gaining significance in the S&P GSCI relative to WTI Crude oil due partially to the rules based S&P GSCI Methodology – Since 2008 volume (and price) has increased more rapidly in Brent

WTI Crude oil - Land-locked and amply supplied in the U.S.

Brent – Seaborne and currently better reflecting strong global demand and limited supplies

What will it take to change? – A change in the fundamentals


S&P GSCI Index Weight Mar-08 Mar-10 Change

WTI Crude Oil 38.0% 33.5% -4.5%

Brent 13.6% 16.1% 2.5%


The S&P GSCI composition

• The base S&P GSCI index is World production weighted• 24 commodities (2011)

– Must meet eligibility criteria on an annual basis– Futures contracts on physical commodities – Total Dollar Value Traded (TDVT) minimums– Reference Percentage Dollar Weight minimums– Denominated in USD and Trading Facility Organization for Economic Cooperation and Development (OECD)

WeightFeb. 2011

Energy 67.17% Crude oil, brent, gasoil, unleaded gas, heating oil, natural gas Non-Energy 32.83% All commodities not including in Energy sub-index Petroleum 64.49% Crude oil, brent, gasoil, unleaded gas, heating oil Agriculture 17.42% Wheat (Chi. & Kan.), corn, soybeans, coffee, sugar, cotton, cocoa Industrial Metals 8.16% Aluminum, copper, lead, nickel, zinc Livestock 4.22% Live cattle, feeder cattle, lean hogs Precious Metals 3.04% Gold, silver

Included CommoditiesSub-Index

There are numerous S&P GSCI sub-indices, and related indices with modified weight, modified roll and constituent criteria


Different Types of Commodity Futures Indices

Index Name Description Significance Target Investor

Standard - Liquidity focused, world production weightedS&P GSCI World production weighted commodity index. Purchased by

S&P in Feb. of 2007. World's most widely tracked commodity index with numerous sub and derivative indices.

All - has been mostly an institutional tracked index.

S&P WCI S&P World Commodity Index. Multi-currency, commodity index excluding the U.S.

The world's top commodities from non-U.S. exchanges. Numerous sub-indices and regional, WCI Asia and WCI Europe indices.

Investors looking for a global alternative to traditional U.S. dominated commodity indices.

Modified Weight - Generally reduce energy weight

Decreased Energy IndicesEnergy commodity Contract Production Weights (CPW's) are divided by 2-Reduced Energy, 4-Light Energy, 8-UltraLight Energy

Offer decreased energy weights compared to the regular world production weighted S&P GSCI

Investors seeking commodity exposure with less energy sector exposure than the regular S&P GSCI

S&P GSCI Capped Indices Intended to be UCITS III Compliant in Europe. Two capping methodologies: Capped Component & Capped Commodity.

Caps constituents on a quarterly basis. Numerous sub-indices.

Investors desirous of commodity indices that are intended to meet UCITS III regulations.

S&P GSCI Equal Weight Select

Equal weight version of the S&P GSCI that contains only the most liquid commodities: 14 in 2010.

Reweights quarterly. Back-dated history of superior, lower volatility returns. All investors

Modified Roll - Help alleviate negative impact of contangoS&P GSCI Forward Indices Basic enhanced indices that move forward on the futures

curve from 1 thru 5 months. Simple but with a history of superior lower volatility returns. More astute investors seeking to limit potential negative roll returns.

S&P GSCI Enhanced Designed to alleviate potentially negative roll returns. Simple to maintain investability; only 8-commodities are enhanced.

Somewhat of a benchmark in the Enhanced commodity index space. History of superior lower volatility returns.

More astute investors seeking to limit potential negative roll returns.

S&P GSCI Covered Call Select Index

Systematically writes out of the money calls on only the S&P GSCI constituents with liquid options markets.

Seeks to generate income, lower volatility and benefit from taking in options premiums on constituent commodities.

More astute investors seeking long commodity exposure, potential income and to limit potential negative roll returns.

S&P GSCI Dynamic Roll Index An enhanced version of the S&P GSCI that seeks the optimal futures roll schedule for all S&P GSCI commodities.

Most sophisticated version of the S&P GSCI that seeks to optimize the futures roll return.

More astute investors seeking to limit potential negative roll returns

Strategic Futures - Long / short futures indices

S&P DFI S&P Dynamic Futures Index. Strategic futures long/short index.

More investable alternative to the S&P DTI that utilizes S&P GSCI weights and methodology guidance. Uses market momentum for index signals.

Astute investors looking for an alternative to long only commodity indices.

S&P DTI S&P Diversified Trend Indicator. Strategic futures long/short index.

Considered somewhat of a benchmark in the Strategic Futures space. Uses market momentum for signals.


S&P Systematic Global Macro Index

IN DEVELOPMENT - S&P Systematic Global Macro Index (SGMI).

A pure, unbiased long/short global macro designed to provide a benchmark for measuring performance.


S&P Commodity Indices

It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P index.


2011 Commodity Indexing Themes

• Reduce exposure to contango – S&P GSCI Enhanced, Forward, and Dynamic Roll Indices

• Reduce volatility – S&P GSCI Covered Call, Capped Family, and Equal Weight Select Indices

• Strategic futures indices – S&P DFI and soon to be launched S&P Systematic Global Macro Index

• Regional commodity exposure – S&P World Commodity Index: S&P WCI Asia and S&P WCI Europe

• Indices complying with regulations and potential regulations– S&P Capped Indices intended for UCITS compliance in Europe

It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P index.


Commodity Indexing/Investing Challenges

• No free lunch Liquidity and cost of less traditional indices– Can any deviation from the basic foundation index avoid reducing liquidity?

• Past performance not indicative of future returns – Risks of basing future products and investments on what happened in 2008 and 2009


Commodity Indices Estimated AUM

Commodity index fund flows remain strong* S&P GSCI estimated AUM increased to about $100B at the end of 2010. Total commodity indexing

assets increased to near $175B.

0

50

100

150

200

250

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Estimated AUM - S&P GSCI

Estimated AUM - Index Universe

S&P GSCI Spot (begin at 6 Dec. 99)



Key Take Away Themes

• Commodities are a real asset class based on a real asset

• Virtually everyone is inherently long equities and short commodities

• Exposure to commodities can be a beneficial addition to most portfolios


Index Support -> Monthly Market Attributes, Practice Essentials

http://www.spindices.com/commodities

Market attributes are partial views for illustrative purposes only


S&P Indices – Performance Statistics

All returns are total return

February 28, 2011S&P 500 S&P GSCI

S&P GSCI Light

Energy

S&P GSCI 3 Month

ForwardS&P GSCI Enhanced*

S&P GSCI Dynamic

Roll*

S&P GSCI Covered

Call Select*

S&P GSCI Equal

Weight Select*

S&P GSCI Capped

Component 35/20* S&P WCI* S&P DFI*

S&P BG/Cantor 7/10 yr*

Cumulative Returns

2010 15.06% 9.03% 17.10% 12.14% 12.14% 9.52% 19.35% 17.08% 12.97% 17.10% -0.26% 9.82%

1999 - Feb 2011 10.74% 90.80% 77.01% 373.27% 355.19% 522.44% na 139.84% 63.78% 309.58% na 110.37%

Annualized Returns1 Year 22.57% 19.89% 28.50% 25.74% 25.95% 23.83% 30.28% 26.59% 24.12% 37.77% 6.32% 6.71%

3 Years 2.19% -13.98% -8.86% -7.14% -7.64% -2.22% 0.68% -5.65% -11.38% -7.08% 0.03% 5.15%5 Years 2.87% -3.19% 1.77% 4.09% 3.68% 9.01% 8.00% 4.79% -2.01% 3.90% 5.08% 6.78%

7 Years 4.22% 1.22% 3.70% 11.79% 10.94% 17.36% 6.50% 6.50% 0.86% 11.17% 5.93% 5.32%

10 Years 2.62% 3.16% 4.27% 12.63% 11.81% 16.72% na 7.48% 1.85% 12.25% na 6.07%

Risk (% pa)3 Years Std Dev 21.90% 31.10% 25.75% 29.38% 28.84% 24.34% 20.29% 23.59% 25.45% 32.74% 10.49% 8.65%

5 Years Std Dev 17.88% 27.21% 22.13% 25.58% 25.38% 21.65% 17.71% 20.84% 22.65% 28.08% 8.90% 7.34%

10 Years Std Dev 16.12% 24.98% 18.36% 22.74% 22.96% 19.98% na 17.70% 20.96% 24.92% na 7.02%Sharpe Ratio

3 Years 0.13 -0.21 -0.10 0.01 -0.01 0.15 0.25 0.02 -0.20 0.04 0.15 0.61

5 Years 0.13 -0.13 0.04 0.14 0.13 0.36 0.36 0.19 -0.15 0.17 0.32 0.63

10 Years 0.05 0.16 0.20 0.55 0.51 0.77 na 0.36 0.09 0.51 na 0.59

* Includes back tested data. Details in the Performance Disclosures on page 22

Source: Standard & Poor’s. Data as of 28 February, 2011. Charts are provided for illustrative purposes. Past performance is not a guarantee of futureresults.


S&P Indices – Correlations

Source: Standard & Poor’s. Data as of 28 Feb, 2011. Charts are provided for illustrative purposes. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

Jan 2004 - Feb 2011S&P 500 S&P GSCI

S&P GSCI Light

Energy

S&P GSCI 3 Month

ForwardS&P GSCI Enhanced*

S&P GSCI Dynamic

Roll*

S&P GSCI Covered

Call Select*

S&P GSCI Equal

Weight Select*

S&P GSCI Capped

Component 35/20* S&P WCI* S&P DFI*

S&P BG/Cantor 7/10 yr*

S&P 500 1.00 0.42 0.50 0.42 0.42 0.40 0.42 0.53 0.42 0.43 -0.19 -0.19S&P GSCI 1.00 0.95 0.99 0.99 0.96 0.72 0.87 0.96 0.96 0.22 -0.21S&P GSCI Light Energy 1.00 0.95 0.95 0.92 0.86 0.97 0.97 0.92 0.16 -0.16S&P GSCI 3 Month Forward 1.00 1.00 0.98 0.74 0.88 0.96 0.97 0.21 -0.20S&P GSCI Enhanced* 1.00 0.98 0.74 0.88 0.95 0.97 0.21 -0.20S&P GSCI Dynamic Roll* 1.00 0.72 0.85 0.93 0.95 0.22 -0.15S&P GSCI Covered Call Select* 1.00 0.87 0.82 0.71 0.11 -0.03S&P GSCI Equal Weight Select* 1.00 0.94 0.84 0.13 -0.14S&P GSCI Capped Component 35/20* 1.00 0.90 0.23 -0.15S&P WCI* 1.00 0.16 -0.23S&P DFI* 1.00 -0.15S&P BG/Cantor 7/10 yr* 1.00


Performance Disclosures

It is not possible to invest directly in an S&P index. Past performance of an index is not an indication of future results.

The inception date for the S&P/BGCantor U.S. Treasury Bond and S&P/BGCantor U.S. Treasury Bill Indices is March 24, 2010 at the market close. These indices have not been in existence prior to that date. All information for these indices prior to March 24, 2010 is back-tested. The back-test calculations are based on the same methodology that was in effect at the time that the index was launched. The actual performance period shown begins March 24, 2010 at the market close. Complete index methodology details document available at www.indices.standardandpoors.com.

The inception date for the S&P Global Natural Resources Index is May 27, 2008 at the market close. This index has not been in existence prior to that date. All information for these indices prior to May 27, 2008 is back-tested. The back-test calculations are based on the same methodology that was in effect at the time that the index was launched. The actual performance period shown begins May 27, 2008 at the market close. Complete index methodology details document available at www.indices.standardandpoors.com.

The inception date for the S&P North American Natural Resources is May 4, 2007 at the market close. This index has not been in existence prior to that date. All information for these indices prior to May 4, 2007 is back-tested. The back-test calculations are based on the same methodology that was in effect at the time that the index was launched. The actual performance period shown begins May 4, 2007 at the market close. Complete index methodology details document available at www.indices.standardandpoors.com.

S&P acquired the GSCI from Goldman Sachs on February 2, 2007 and it was subsequently renamed the S&P GSCI. Goldman Sachs began first publishing the GSCI related indices in 1991 but has calculated the historical value of the GSCI beginning January 2, 1970 based on actual prices from that date forward and the selection criteria, methodology and procedures in effect during the applicable periods of calculation (or, in the case of all calculation periods prior to 1991, based on the selection criteria, methodology and procedures adopted in 1991). The GSCI has been normalized to a value of 100 on January 2, 1970, in order to permit comparisons of the value of the GSCI to be made over time.

Prospective application of the methodology used to construct the back-tested data for any of the indices may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the indices. Please refer to the methodology paper for the index, available at www.standardandpoors.com for more details about the index, including the manner in which it is rebalanced, and the timing of such rebalancing, criteria for additions and deletions and index calculation. The index is rules based, although the Index Committee reserves the right to exercise discretion, when necessary.

Also, another limitation of hypothetical information is that generally the index is prepared with the benefit of hindsight. Back-tested data reflect the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.

The index returns shown do not represent the results of actual trading of investor assets. Standard & Poor’s maintains the indices and calculates the index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of theses fees and charges would cause actual and back-tested performance to be lower than the performance shown. In a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-based fee of 1.5% were imposed at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or US$ 8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2% (or US$ 27,200).


General Disclaimer

• This document does not constitute an offer of services in jurisdictions where Standard & Poor’s Financial Services LLC (“S&P”) or its affiliates do not have the necessary licenses. All information provided by S&P is impersonal and not tailored to the needs of any person, entity or group of persons. S&P receives compensation in connection with licensing its indices to third parties. Any returns or performance provided within are for illustrative purposes only and do not demonstrate actual performance. Past performance is not a guarantee of future investment results.

• It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P is not an investment advisor, and S&P and its affiliates make no representation regarding the advisability of investing in any such investment fund or other vehicle. A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by S&P to buy, sell, or hold such security, nor is it considered to be investment advice.

• S&P does not guarantee the accuracy and/or completeness of any S&P index, any data included therein, or any data from which it is based, and Standard & Poor’s shall have no liability for any errors, omissions, or interruptions therein. S&P makes no warranties, express or implied, as to results to be obtained from use of information provided by S&P, and S&P expressly disclaims all warranties of suitability with respect thereto. While S&P has obtained information believed to be reliable, S&P shall not be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages, even if it is advised of the possibility of same.

• S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. S&P and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.

• Copyright © 2011 by Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part is prohibited without written permission.

• S&P, S&P INDICES, GSCI and STANDARD & POOR’S are registered trademarks of Standard & Poor’s Financial Services LLC


Analytic services and products by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.

For questions, please contact:

Mike [email protected]

s&p commodities · world's most widely tracked commodity index with numerous sub and...

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