Commodity Diversification & Resampled Efficiency

27 Mar

As we discuss optimal risk/reward portfolios, a popular consideration is whether or not utilize the evolved options for investing in commodities. Pauline Lam of Financial Advisor Magazine describes the diversification benefits of commodities in regards to low negative correlations to stocks and bonds and uncorrelated idiosynchratic return drivers between commodities themselves.

Commodity investing is no longer restricted to institutional investors as wide ranges of commodity indices, ETFs and even commodity futures have been introduced to the mass market. These options can be commodity specific, such as gold, silver or oil ETFs, baskets of commodities such as metals or agricultural products or whole asset class ETFs which invest in a mix of all publically traded commodities. Combining commodities into a portfolio of traditional assets can be a strong diversifier as many of the drivers of the asset class are sensitive to different global themes. For instance, in times of high inflation, investors typically turn to precious metals as a hedge against the declining value of their paper assets. In periods of global growth, industrial materials normally trade up in value. Regardless, each commodity market has its own supply/demand dynamics and all are sensitive to supply shocks aa well as cost cycles of extracting and delivering refined products to markets. It is these idiosynchrasies that make commodities such and attractive diversifier even if price movements can be quite volatile over time.

To optimize a portfolio of diffferent asset classes, Lam describes Resampled Efficiency, a newer approach to creating optimal portfolios that even Markowitz believes is superior to his mean variance portfolio construction approach. The concept was developed by New Frontier Advisors, LLC right here in Boston. I have attached a link to their website below. Resampled Efficiency produces a range of optimal portfolio for given levels of risk rather than a single point optimal portfolio. The approach is more flexile and produces portfolios that generate more stable returns according to Markowitz.

The combination of more flexible portfolio construction methods and introduction of commodities into a traditional paper asset portfolio could prove to be widely accepted asset allocation concepts as their virtues become more widely known and accepted. Read more below.

Lam article in Financial Advisor Magazine:

New Frontier Advisors, LLC Homepage:

Resampled Efficiency Articles:

Published by John Corron aka “jcbeantown”


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: