Commodities have been strong this year, but not as strong as the return suggested by Pimco CommodityRealReturn Strategy (symbol PCRDX). Year-to-date through November 30, the fund, a member of the Kiplinger 25, gained 38.3%, a stunning 22 percentage points more than the benchmark it purports to follow, the Dow Jones–UBS Commodity Index. How to explain?
Most of the discrepancy is related to the way Pimco structured this somewhat complex fund. The DJ–UBS index holds a basket of futures contracts on 19 commodities from the energy, metals and agribusiness sectors. When Pimco puts down the collateral that backs its commodity futures positions, it chooses how to invest those dollars.
From the fund’s inception in 2002, Pimco chose to invest the collateral in Treasury inflation-protected securities, or TIPS, and to actively manage those bond holdings. Mihir Worah, manager of Pimco CommodityRealReturn, is also the manager of Pimco Real Return, which invests primarily in TIPS.
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Worah says that because TIPS are also having a super year, the decision to invest the collateral in TIPS (as opposed, say, to investing in three-month Treasury bills) has added ten percentage points to CommodityRealReturn’s gain this year. By contrast, a poor TIPS market in 2008 detracted from performance last year.
Worah’s skill in managing TIPS has added another eight points (Real Return has beaten the TIPS index by eight points so far this year). And he says that some light management of the commodity positions has tacked on another point or two over the index. Over the past five years, incidentally, the fund returned 1.3% annualized, beating the commodity index by an average 0.8 percentage point per year.
Over the medium to long term, Worah says, he’s bullish on commodities. Pimco expects higher inflation in three to five years, and Worah notes that hundreds of millions of new consumers from places such as China and India will underpin robust demand for commodities, some of which are constrained by tight supply. “Most people are underinvested in inflation hedges,” he says.
But for the next three to six months, Worah says, he’s mildly bearish on both TIPS and commodities, which he thinks have risen faster than the slow pace of economic recovery justifies. In fact, he’s moved some of his collateral out of TIPS and into medium-maturity Treasuries, corporate bonds and foreign debt.
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