By following traditional and passive futures approaches to commodity investment, pension funds may discover more losses than returns, says a recent Mercer Investment Consulting report.
Though commodities are emerging as one of the more popular asset classes for investments, including by pension funds, the position of futures market could yield lower investor returns than the change in commodity prices.
Returns on commodity futures have been flat in recent months, even as commodity prices have risen dramatically.
This shortfall comes as a result of a market position that was and is in a situation dubbed “contango.”
Contango is the situation where commodity futures prices are higher than current spot prices.
This is the reverse of the typical situation where futures prices are lower, which is more likely to create positive roll returns for pension funds with passive investment in commodities. And if cash flows into commodity markets remains high, it will be difficult to get out of contango.
“If there is an increase in the number of investors seeking to purchase commodity futures, then prices can be pushed up,” says Andy Green, European director of investment policy at Mercer. “This could be one of the reasons why markets have fallen into contango.”