Meyado Private Wealth Management Singapore believes modern portfolios should include commodities for two key reasons.
It says commodity prices usually rise when inflation rises and so they offer protection from the effects of inflation. As demand for goods and services increases, so their prices increase – as does the price of the commodities used to produce those goods and services.
In addition, commodities usually have a negative correlation to traditional asset classes, such as shares and bonds. This is a key point in reducing overall risk in a modern portfolio.
In simple terms, as bond and/or stock prices fall, commodity prices tend to increase: as inflation increases, commodity prices also increase.
For most investors, the easiest way to access commodity markets is through a unit trust. However, Meyado says care needs to be exercised if the aim is to diversify away from traditional asset classes. This is because many funds, such as natural resources funds, will often obtain exposure to certain commodity markets by purchasing the shares of companies engaged in their extraction or production. This will increase exposure to equities, albeit diversifying industry and/or geographic exposures.
True asset class diversification comes from investing in a raw commodity fund that uses derivative markets, such as futures, to get direct exposure to the underlying commodity price.
