Commodities have enjoyed a renaissance in recent years as a strategic tool in portfolio design. The allure boils down to the low correlation between the prices of raw materials and stocks and bonds. Adding commodities to a conventional investment portfolio enhances the overall expected risk-adjusted returns. But what looks good in an optimizer can get messy in the real world. Yes, there are a number of mutual funds and exchange-listed securities that offer investors one-fund solutions to owning commodities broadly defined. But when you buy one of these funds you’re buying commodities futures rather than raw materials proper. There’s nothing wrong with futures, and in fact they’re a reasonable proxy for commodities. Then again, futures contracts are quirky animals and they introduce an additional layer of risk as well as opportunity over and above those dispensed by the underlying commodities.
A recently launched ETN seeks to exploit those risks and opportunities while still providing broad, passive exposure to the asset class. On the surface, the S&P GSCI Enhanced Commodity Total Return Strategy Index (NYSE: GSC) looks like one more fund tracking the Goldman Sachs Commodity Index. And to an extent, it’s just that, considering that GSC stays true to its benchmark by weighting the various components as per the underlying index. Where GSC differs is in its management of the futures contracts. The idea is that GSC will outperform GSCI by taking a more proactive approach to exploiting opportunities and minimizing risk inherent in futures. Will it work? Kochis Fitz, a San Francisco wealth management shop, thinks so. In fact, the firm, which partnered with Goldman Sachs in GSC’s design, initially invested $70 million in the new fund as a vote of confidence. Is the bet likely to pay off? In search of an answer, your editor recently interviewed Jason Thomas, chief investment officer at Kochis Fitz. To learn more, read on….