View from City Road: Finding a way into commodities

The conventional wisdom is that commodities are a highly volatile and dangerous investment, and not the kind of thing pension funds should be investing in. BZW Investment Management is sticking its neck out later this month and hoping to prove that idea wrong.

BZW has had a look back at the record and found some surprising conclusions. Commodities as a group turn out to have been less volatile than equities while producing an almost identical rate of return since 1970.

And over shorter periods, they tend to move in the opposite direction to both equities and bonds. They are also a much more reliable hedge against inflation than usually supposed.

The problem, of course, is finding the right way into the commodities markets. These trends are based on analyses of portfolios spread across all the main commodities markets, from oil through metals to coffee and cocoa. It is still a fact of life that individual commodities are extraordinarily volatile. Look at the spectacular rise in coffee prices this year.

BZW's solution is a fund investing in a basket of commodities using exchange-traded futures. It will be based on the Goldman Sachs Commodities Index, although the firm hopes to outperform it. The fund will be offshore, because of Inland Revenue restrictions on futures trading by investment trusts and pension funds. With commodities only now rising from depressed levels, the timing looks good.