Why Investors Should Be Patient With Commodities

Stacks of red oil barrels with the word OIL written in white

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We added a commodity-focused fund to the Kiplinger 25, our favorite no-load mutual funds, two years ago because of rising inflation.

The TCW Enhanced Commodity Strategy (TGABX) aims to beat an index that tracks a basket of commodities, including copper and cotton, by investing in futures contracts backed by high-quality short-term bonds.

Since then, however, inflation rates have declined and, on the whole, commodity prices have as well, despite recent gains in the value of oil and gold. Over the past 12 months, the Bloomberg Commodity Index has dropped 8.7%. The fund has fared even worse, losing 9.8% over the past year. It lagged the benchmark and peer funds that invest in a broad basket of commodities.

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The short explanation is that in the back half of 2022, the fund's short-term bond portfolio, which accounts for about 90% of assets, was a drag on performance, as the Federal Reserve raised interest rates to fight inflation and cool the economy. (Bond prices and interest rates move in opposite directions.)

And so far in 2023, the decline in commodity prices overall has weighed on the fund's returns. "When you see slowing economies across the globe, you generally see softness in commodity prices," says Ruben Hovhannisyan, who co-manages the fund with three other TCW bond strategists.

Commodities could turn around in 2024

Some strategists expect commodity prices to move higher in 2024. The "commodity super-cycle bull continues to march on," says John LaForge, head of real asset strategy at Wells Fargo Investment Institute.

Hovhannisyan, on the other hand, says it's difficult to predict commodity cycles but that the fund should recover when the Fed begins to cut interest rates. "When the interest rate cycle turns," he says, "you should see some payback."

Commodities can be volatile assets at times. But a small stake in this fund as part of a broad portfolio can help hedge inflation and boost diversification. On the latter aim, the fund didn't disappoint in 2022. It gained 13% as both stocks and bonds posted double-digit declines.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.