Commodities Index Fund ++

Financial Independence/Retire Early -- Learn How!
Post Reply
Oliver
* Rookie
Posts: 21
Joined: Wed Dec 04, 2002 4:00 am

Commodities Index Fund ++

Post by Oliver »

The Pimco fund looks interesting but I do not know if it is worth the fees.

Oliver
Hard Assets, Hardly Tame
by Anne Kates Smith
http://www.kiplinger.com/magazine/archi ... ities.html

Zigs and zags
Commodities tend to move in tandem with inflation and not in lockstep with the stock and bond markets. That explains why Lewis Altfest, a financial planner in New York City, has long advocated adding a touch of commodities (about 5% of assets) for the sake of diversification. He worries, though, that investors will buy commodity funds simply because of recent results and will bail out quickly after any setbacks.

If you're still interested in a commodity fund, we suggest you look closely at Pimco's. Its record isn't long, but it is more conservative than Oppenheimer's, and the Pimco D shares, with annual fees of 1.24%, are cheaper than any of Oppenheimer's classes.

http://www.mcapitalmgt.com/html/publishedarticle.html
A Bullet Proof Portfolio 'Lessons from An Insider'

Let me start by saying, I would suggest you do not invest in any single company or fund for the alternative class exposure. Just like individual stocks there are too much event risk and you are better served with pooled holdings. At my firm, Montecito Capital Management, we have between 25%-45% allocation to alternative classes and only use liquid vehicles (easily sold) with broad holdings and have nominal initial investments. Also we steer away from many hedge funds that have long minimum holding periods, short performance histories and avoid hedged strategy funds using over 25% leverage. One must be vigilant with hedge fund vehicles as they often are not regulated by SEC and are known for self-serving fees.

Like real estate, commodities -- oil, lumber and other hard assets -- have a decent record of negative correlation with stocks. Inflation sends the price of these hard assets up and it hurts the stock market. For example, the non-correlation between stocks and commodities was dramatically highlighted during 1973 and 1974 where stocks dropped 41% and commodity prices soared 114%. During the S&P's two worst declines during the past decade, managed futures recorded net profits. Also during September to November 1987, when the S&P 500 fell nearly 30 percent, managed futures rose 10%. And, the three-year return of Goldman Sachs Commodity Index (annualized from June 2002) is 10.91% - we invest in this class through the PIMCO Commodity Real Return, among other funds

Alternative asset classes are hard to understand and unless advisors understand the nuances of modern portfolio management, many advisors continue to steer clear from alternative investments, specifically hard assets. They look and say, 'Gosh, look at the poor returns and volatility. How can that possibly help my client?" Except when you sit down and do the math, a 5% to 15% allocation of hard assets goes a long way in reducing overall portfolio volatility, while improving returns.
How to Protect Your Portfolio from Inflation
by Russel Kinnel | 04-03-2003 http://poweredby.morningstar.com/Powere ... ?CN=brf295
There are two mutual fund alternatives that offer better inflation protections, however. One is rather plain-vanilla and can easily be incorporated into your bond portfolio, and the other is more of a Tabasco flavor that's best used sparingly.

TIPS Funds
The Treasury sells inflation-protected bonds whose par value is adjusted to rise and fall based on the Consumer Price Index. Thus, you could significantly reduce your inflation risk by shifting up to a quarter of your high-quality taxable-bond portfolio into TIPS funds.
...................................................................
Commodity-Linked Funds
There are only two members of this club. Mutual funds aren't allowed to buy commodities directly, so commodity-linked funds buy derivatives that track commodity prices. The end result is quite similar to a direct investment in commodities. The strategy throws off a lot of income, though, so these are best left in tax-sheltered accounts such as IRAs and 401(k)s.

Commodity prices change rapidly, so these funds will definitely act like Tabasco in your portfolio. Oppenheimer Real Asset A QRAAX tracks the Goldman Sachs Commodity Index, which is dominated by energy prices. PIMCO Commodity Real Return Strategy PCRIX is a new entrant that tracks the Dow Jones-AIG Commodity Index, which is more evenly spread among different commodities and therefore may produce a somewhat smoother ride.

We don't have much of a record for the PIMCO fund, but these offerings are clearly volatile. This year, Oppenheimer Real Asset has been on a wild ride. It gained 9% in January and 12% in February, only to lose 14% in March.
http://www.pimcofunds.com/cms_files/sal ... /pb690.pdf
Double RealTM: Attempting to Combine the Inflation-Hedging Qualities of Commodities and Inflation-Indexed Bonds
Commodities have historically had a positive correlation with inflation and a negative correlation with stock and bond returns, making them an
attractive vehicle to enhance portfolio diversification and guard against inflation.

Double RealTM Strategy:
Commodity-Index-Linked Derivative
Instruments + Inflation-Indexed Bonds
Buy commodity swap agreements
(using small percentage of assets)
Buy and actively manage a portfolio
of inflation-indexed bonds and other fixedincome
securities (using remaining assets)
Last edited by Oliver on Thu Sep 18, 2003 7:07 pm, edited 2 times in total.
Oliver
* Rookie
Posts: 21
Joined: Wed Dec 04, 2002 4:00 am

Post by Oliver »

More Links

Oliver

http://www.pimco.com/Spotlight/June03/index.htm
Robert Greer Discusses the Benefits of Commodity Investing (Greer is Port Mang, Pimco)

http://www.pimco.com/pdf/Benefits%20of% ... cation.pdf
The benefits of real asset
portfolio diversification
by Adam De Chiara and Daniel M. Raab, AIG Trading Group Inc.
Euromoney International Commodities Review 2002
Imagine a country that has a unique and diverse economy. Operating within this country are many well capitalised corporations. Shares in these corporations are traded on well established global exchanges. A highly liquid index of these companies also trades on a global exchange.This index has exhibited the following properties: positive returns over time; negative correlation with stocks and bonds; and excellent liquidity. In fact, such an index does exist, only it is not an equity index, but an index of real asset prices.

It does, however, exhibit the above characteristics - all of which may provide unique benefits to financial portfolios. As institutional investors seek ways to diversify their portfolios, they are increasingly turning to commodities as an asset class. The unique characteristics of real assets warrant serious consideration by sophisticated investors.


http://www.ibbotson.com/download/resear ... Assets.pdf
Investing in Global Hard Assets:
A Diversification Tool for Portfolios
Ibbotson Associates (1999)
bpp
** Regular
Posts: 98
Joined: Tue Nov 26, 2002 6:46 am
Location: Japan

Post by bpp »

Hi Oliver,

Thanks for the informative links. The Pimco fund certainly looks interesting, though I haven't figured out how exactly it moves with commodities prices yet.

I understand that the basic mechanism is to buy forward contracts on commodities, and you earn (usually) the rise in the contract's value over time as it converges towards the spot price (which is usually higher, though not always). As I understand it, you are basically selling insurance to commodities producers; they are willing to sell a little below expected final market price to guarantee that their shelves get cleared. By buying contracts, you insert yourself in the commodities chain as a middle man.

If my understanding is correct (corrections welcome!) then I can also see how this would follow the short-term movements of commodities prices, within the window of the contract, which is typically a few months, I gather. What I don't quite get is whether this means that the index would track commodities prices long-term or not. I.e., if commodities go to a new price level and stay there, would things shake out such that the middle-men don't get any more than they were getting before the price change? If so, it would almost seem like the NAV should follow the slope of the commodities price trend rather than the prices itself. Or is there some reason to expect the NAV of the fund to track the prices of the underlying commodities? This I don't understand.

Does anybody have any insight into this? I wonder if pondering Gummy's Black-Scholes tutorial would be enlightening...

In other matters, the manager from Montecito says:
Let me start by saying, I would suggest you do not invest in any single company or fund for the alternative class exposure. Just like individual stocks there are too much event risk and you are better served with pooled holdings.


Hmm, good point. I have been debating the merits of Japanese REITS, which just started being traded a couple of years ago. Eye-popping yields by local standards (5%-ish), but no index yet, so would have to buy individual issues at this point. The single-share prices are set high enough that it would take a long time to get properly diversified that way for me... but boy the yields look good.

Cheers,
Bpp
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Commodities Index

Post by peteyperson »

Hi Oliver,

You've given us a lot to digest there.

I like this kind of post because it gives some of us the chance to weigh-in on an investment or class of investment and others the opportunity to learn something new (whether we would ultimately choose to invest or not).

Petey
Oliver wrote: The Pimco fund looks interesting but I do not know if it is worth the fees.

Oliver


Hard Assets, Hardly Tame
by Anne Kates Smith
http://www.kiplinger.com/magazine/archi ... ities.html
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Commodities Index

Post by peteyperson »

Hi Oliver,

I've had a bit more time to review this since I posted my original reply.

The question perhaps outside of whether these funds are of interest or indeed whether the risk with commodity funds are worth it given their volatile nature, is whether you want to invest in the full basket of commodities available.

From the data, it appears at least 2/3rds have not kept up with inflation over the years. Gold, Natural Gas & Crude Oil seem to be the best ones and most used commodities (with the possible exception of Gold which is a safe haven asset in times of geopolitical instability.

It is worth investing in all of them or merely the main energy sources that we used today? Beyond that, is there really a need to invest via risky strategies to get exposure to the total commodities asset class vs. a more specific fund that invests in Gold or Oil & Gas etc? Other than the two funds you discussed being an exotic fund with some pizzaz so to speak, I'm not sure the risk vs reward adds up.

Thoughts anyone?

Petey
Oliver wrote: The Pimco fund looks interesting but I do not know if it is worth the fees.

Oliver
MacDuff
* Rookie
Posts: 31
Joined: Wed Jun 18, 2003 8:20 pm
Location: Centralia, WA

Re: Commodities Index

Post by MacDuff »

peteyperson wrote: It is worth investing in all of them or merely the main energy sources that we used today? Beyond that, is there really a need to invest via risky strategies to get exposure to the total commodities asset class vs. a more specific fund that invests in Gold or Oil & Gas etc? Thoughts anyone?


As one who has successfully used commidity futures and commodity based equities for over 20 years, in a generally down market, I would like to say that there is no answer to your question. However, your apparent underlying supposition, that you can a priori choose a small subset of the commodity universe to track commodities is not consistent with the preference that you and others on this forum show for broadly diversified, aggregated investments.

On the other hand, if all you are trying to do is hedge energy prices, then buy crude or natural gas futures. It might get hairy if prices get really high. Conversely, margin calls can be a problem if prices dip. A closed end equity fund like Petroleum and Resources, while it will not track perfectly with crude or gas quotations, will at least show some co-movement and one can avoid the emotional difficulties of futures.

Mac
bpp
** Regular
Posts: 98
Joined: Tue Nov 26, 2002 6:46 am
Location: Japan

Post by bpp »

Hi MacDuff,
As one who has successfully used commidity futures and commodity based equities for over 20 years


:great: Would you happen to have any insight on my question about how the Pimco fund NAV might be expected to track commodities prices? (Or were my starting assumptions so far off base that you can't get there from here?)

Cheers,
Bpp
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Commodities Index

Post by peteyperson »

Mac,

I was looking at the past results over the last 50 years and it seemed that sources of energy that we still use today and gold as a safe asset class people run to in down markets, look good. Other commodities which aren't needed for essential energy markets don't seem to perform and thus I was excluding them. From one of the linked reports, fully 2/3rds of the commodities listed had a long-term negative return vs inflation and hadn't maintained their value let alone returned enough after fees to live off their income above inflation. So it wasn't so much not broadly diversifying, but avoiding areas that no longer come under the general header of investments that stand a reasonable chance of delivering real income over the long term. Placing money in an asset class spread evenly just for the sake of completeness and ignoring the real return after fees would be investing blindly and dare I say it, unintelligently.

You could apply this kind of thinking to why people now invest in Asia ex Japan due to Japan's collapse, underlying weakness in their banking system and the risk involved in allocating even a small amount to the market. It could rebound strongly at some point but do you want to stick money there waiting for a time that may never come? (Latin America equity market has a similar problem where many local investors invest in US$ funds and ignore their own market making a solid return difficult to achieve. Source: World Wealth Report). Either are probably more preferable than investing in certain commodities just because we all must keep to the party line of broadly diversifying. Common sense must play a part and if you are nicely diversified elsewhere then you're well enough covered anyway. It is after all, an investment approach and not a science where your results will be peer reviewed after. :wink:

Petey


MacDuff wrote:
peteyperson wrote: It is worth investing in all of them or merely the main energy sources that we used today? Beyond that, is there really a need to invest via risky strategies to get exposure to the total commodities asset class vs. a more specific fund that invests in Gold or Oil & Gas etc? Thoughts anyone?


As one who has successfully used commidity futures and commodity based equities for over 20 years, in a generally down market, I would like to say that there is no answer to your question. However, your apparent underlying supposition, that you can a priori choose a small subset of the commodity universe to track commodities is not consistent with the preference that you and others on this forum show for broadly diversified, aggregated investments.

On the other hand, if all you are trying to do is hedge energy prices, then buy crude or natural gas futures. It might get hairy if prices get really high. Conversely, margin calls can be a problem if prices dip. A closed end equity fund like Petroleum and Resources, while it will not track perfectly with crude or gas quotations, will at least show some co-movement and one can avoid the emotional difficulties of futures.

Mac
MacDuff
* Rookie
Posts: 31
Joined: Wed Jun 18, 2003 8:20 pm
Location: Centralia, WA

Post by MacDuff »

bpp wrote: :great: Would you happen to have any insight on my question about how the Pimco fund NAV might be expected to track commodities prices? (Or were my starting assumptions so far off base that you can't get there from here?)


I am going to copy a section from the Pimco Fund promotional literature taken from the link above:

What are some of the risks of investing in this Fund?
Because of the Fund's exposure to commodities, it is subject
to a number of specialized risks, including liquidity
and credit risks. Also, commodity prices are driven by a
wide range of forces, like the weather and geopolitical
events, creating substantial supply-demand uncertainties
in the marketplace. This can cause individual commodityprices to move sharply higher or lower, exposing the
Fund to volatility. And any fund investing in commodityindex-
linked derivative instruments could lose more than
the principal amount invested. That is why an investment
in PIMCO CommodityRealReturn Strategy Fund
is not for everyone and should only be a small part of a
diversified portfolio. These are just a few of the risks of
investing in this Fund. For a more complete list, please
refer to the prospectus.

So, if you are interested in this, first carefully read the whole prospectus.
You may notice that they reference commodity prices and credit risks as fund risk factors. So you take all the things that affect commodity quotes, and add to them that in extreme circumstances the counterparty to your contract or derivitive instrument may not be able to perform.

They also mention that the fund may do better than the DJ-AIGCI, which it is designed(or engineered) to track. This also means that it can do worse, because it is a synthesized tracker of this index. This technique is common in certain equity funds too.

The exact nature of how they atempt to track the index is technical, and I would imagine that they reserve quite a bit of freedom to use whatever instruments and techniques that they feel will best suit their needs at given time.

Unless you are now, or can become an expert in this field, an investment like this will always be a bit of a mystery. Which is not to say that it might not work for you.

For myself, I prefer to minimize the levels of complexity-so this is probably not for me.

Mac
MacDuff
* Rookie
Posts: 31
Joined: Wed Jun 18, 2003 8:20 pm
Location: Centralia, WA

Re: Commodities Index

Post by MacDuff »

peteyperson wrote: You could apply this kind of thinking to why people now invest in Asia ex Japan due to Japan's collapse, underlying weakness in their banking system and the risk involved in allocating even a small amount to the market.


Petey mon ami, you have given an excellent example of why we have markets! I looked at the same thing you did this spring, and decided I wanted a 10% allocation to Japan. That allocation is up almost 50% in 6 months or so. Now I believe Brazil and Argentina may have done even better, but I will place full-size bets on any major Asian nation, but on no Latin country. And again speaking specifically about Japan, I expect that it's prospects going forward are at least as good as those of the USA.

I am not an indexer, but I thought you were. I merely wanted to point out that an indexer indexes. If you are going to slice and dice an asset class, you are no longer an indexer.

I think someone on another thread replied to my doubts about the prospects of the S&P going forward by pointing out that some fund of other in the early 70's decided to index, but they wanted to exclude a "few obvious bankruptcy candidates". Chrysler was one that was excluded on this basis. Then along came Lee, and the rest is history.

Mac
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson »

Yep, I read that whole section before replying to you previously.

This was why I made the comments I did about too much risk, not enough potential upside given the investment class.

Petey
MacDuff wrote:
bpp wrote: :great: Would you happen to have any insight on my question about how the Pimco fund NAV might be expected to track commodities prices? (Or were my starting assumptions so far off base that you can't get there from here?)


I am going to copy a section from the Pimco Fund promotional literature taken from the link above:

What are some of the risks of investing in this Fund?
Because of the Fund's exposure to commodities, it is subject
to a number of specialized risks, including liquidity
and credit risks. Also, commodity prices are driven by a
wide range of forces, like the weather and geopolitical
events, creating substantial supply-demand uncertainties
in the marketplace. This can cause individual commodityprices to move sharply higher or lower, exposing the
Fund to volatility. And any fund investing in commodityindex-
linked derivative instruments could lose more than
the principal amount invested. That is why an investment
in PIMCO CommodityRealReturn Strategy Fund
is not for everyone and should only be a small part of a
diversified portfolio. These are just a few of the risks of
investing in this Fund. For a more complete list, please
refer to the prospectus.

So, if you are interested in this, first carefully read the whole prospectus.
You may notice that they reference commodity prices and credit risks as fund risk factors. So you take all the things that affect commodity quotes, and add to them that in extreme circumstances the counterparty to your contract or derivitive instrument may not be able to perform.

They also mention that the fund may do better than the DJ-AIGCI, which it is designed(or engineered) to track. This also means that it can do worse, because it is a synthesized tracker of this index. This technique is common in certain equity funds too.

The exact nature of how they atempt to track the index is technical, and I would imagine that they reserve quite a bit of freedom to use whatever instruments and techniques that they feel will best suit their needs at given time.

Unless you are now, or can become an expert in this field, an investment like this will always be a bit of a mystery. Which is not to say that it might not work for you.

For myself, I prefer to minimize the levels of complexity-so this is probably not for me.

Mac
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Commodities Index

Post by peteyperson »

Hi Mac,

Being situated in the UK and British, we simply don't have index funds available globally. We have index UK, Europe ex UK, USA, Pacific Rim. These indexes are for the S&P or equivalent or total market.

Having read a considerable amount regarding whether total market is correct and whether slice and dice is correct, I disagree with your statement that slice and dice is not indexing. The US has many funds that focus on large cap or small cap, value or growth all via low cost index funds. An even split between small and large cap across all markets delivers the average return across the two types of assets, it is not a sector play in any way. A total market fund in reality is really a large cap fund with minor exposure to small & mid cap but one that won't deliver the average performance between small, mid and large cap but be dominated by the higher or lesser performance of the large cap. Therefore ' total market ' is both a misnomer and highly misleading. Misleading to such an extend that I hazard a guess that more than 90% of total market investors will not understand that their investments are way unbalanced towards large cap.

For Britains, there is no present way to index either in the UK market, Europe, USA or elsewhere evenly between small cap and large cap, let alone by value/growth. The funds do not exist. No S&P / Barra indexing. Therefore it is inaccurate to say that I am an indexer. I can only be a partial indexer, if I wish to gain exposure to small-cap in any of the markets or exposure to Emerging Europe, Central & Latin America, Emerging Asia etc I cannot do so without active management at 5% sales load and 1.5%+. You could certainly question whether it makes sense to pay the fees to gain the exposure however emerging market investing nicely offsets low returns from other markets and is a key part to a diversified portfolio setup right for retirement. Small-Cap via active investment is a little more of a stretch, will the outperformance of small-cap vs large-cap continue? Will the actively managed results cover the extra 1% fee and still match the small cap index? I also plan to invest in several special situation mutual funds that are actively managed but have interestingly non-correlated results to the main markets, positively benefiting from drops in prices to pick up bargain companies.

I've recently found three UK property funds, two of which hold 60% of freehold property and manage them. Closest thing we have to a REIT at present. I'm not sure how that would be classified, active or passive. I would say that it is actively managed but prefereable to no property exposure or managing it myself where you really need to be good at DIY to keep the costs of repairs down and I'm no good there.

So overall I would think that I'll be at least 50% actively managed due to limited index fund offerings here and choosing an appropriate asset allocation that works in good and bad markets. It has been commented on that in international markets actively managed can perform better than indexing due to the size, complexity and variety of countries to invest in. The markets don't work as efficiently. I don't buy much of the efficient market crap as it is - a con that says you cannot invest better than the index when in fact not too many do but it is possible to do so consistently as many 20%+ annualized return investors have shown. Some markets you can see clearly the outpeformance is limited but in places like Asia / Pacific Rim many perform well and the index funds suffer. Because of that I'm inclined to take a part and part approach to Asia.

I would be interested to read more about why you think Japan is a better bet than most. Here funds even index funds specifically avoid Japan investment in Asia and I've heard that people dislike your global ex USA MSCI index because it includes Japan. I would certainly want to read several books on Japan to understand what went wrong and how they are fixing it to determine long term prospects.

Petey
MacDuff wrote:
peteyperson wrote: You could apply this kind of thinking to why people now invest in Asia ex Japan due to Japan's collapse, underlying weakness in their banking system and the risk involved in allocating even a small amount to the market.


Petey mon ami, you have given an excellent example of why we have markets! I looked at the same thing you did this spring, and decided I wanted a 10% allocation to Japan. That allocation is up almost 50% in 6 months or so. Now I believe Brazil and Argentina may have done even better, but I will place full-size bets on any major Asian nation, but on no Latin country. And again speaking specifically about Japan, I expect that it's prospects going forward are at least as good as those of the USA.

I am not an indexer, but I thought you were. I merely wanted to point out that an indexer indexes. If you are going to slice and dice an asset class, you are no longer an indexer.

I think someone on another thread replied to my doubts about the prospects of the S&P going forward by pointing out that some fund of other in the early 70's decided to index, but they wanted to exclude a "few obvious bankruptcy candidates". Chrysler was one that was excluded on this basis. Then along came Lee, and the rest is history.

Mac
User avatar
BenSolar
*** Veteran
Posts: 242
Joined: Mon Nov 25, 2002 5:46 am
Location: Western NC

Re: Commodities Index

Post by BenSolar »

peteyperson wrote: I would be interested to read more about why you think Japan is a better bet than most.

Hi Petey, :)

I'll but in here with my own perspective. I see that Japan is still one of the world's largest economies. It's stocks are valued significantly lower than US stocks. So, I'm happy to own Japanese stocks via my International fund. I know their economy has problems, but what economy doesn't? Japanese stocks may not offer huge returns, but I'd rather put money there than in the US S&P 500, or at least I'd be just as happy putting money there, purely on valuation issues.
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Commodities Index

Post by peteyperson »

Hey Ben,

What would you say to some who pointed out that an investment in Japan held over the last decade would have lost a significant percentage vs. overvalued S&P that still made money? I agree the S&P500 has little upward room to move before coming back down to earth (much like gold and energy funds at the moment due to their run-up) but Japan has shown negative growth, is experiencing deflation and whilst one of the major largest economies, has done so on the back of enormous borrowings which have now toppled their economy completely? :lol:

At the start of the year their market was back to where it was 20 years ago. That is simliar to the 20 year drops the US market has seen from time to time. The question could be asked, is their economy, funding and deflation problems better, same or worse than experienced when that happened in the 20s or 60s? What did America do to pull out of deflation, do the same conditions apply to Japan?

Morningstar article which I thought might interest you:
http://www.morningstar.co.uk/news/marke ... country=GB

How would you counter my main arguement? I have considered a small Japanese play but have yet to come up for a good rationale behind it other than global completeness. Investing in something where you know it is an emerging market and will have a lot of volatility is one thing, investing in something that had occasionally bumps but over the long term just hasn't delivered in the last 20 years, that is something else entirely.

Petey
BenSolar wrote:
peteyperson wrote: I would be interested to read more about why you think Japan is a better bet than most.

Hi Petey, :)

I'll but in here with my own perspective. I see that Japan is still one of the world's largest economies. It's stocks are valued significantly lower than US stocks. So, I'm happy to own Japanese stocks via my International fund. I know their economy has problems, but what economy doesn't? Japanese stocks may not offer huge returns, but I'd rather put money there than in the US S&P 500, or at least I'd be just as happy putting money there, purely on valuation issues.
MacDuff
* Rookie
Posts: 31
Joined: Wed Jun 18, 2003 8:20 pm
Location: Centralia, WA

Re: Commodities Index

Post by MacDuff »

peteyperson wrote: What would you say to some who pointed out that an investment in Japan held over the last decade would have lost a significant percentage vs. overvalued S&P that still made money?


Not sure what Ben would say, but I would say value is now; and "returns" are history.

Also, at 11,000 the Nikkei is not the raging buy it was at less than 8000. So I am not really making a brief for Japan, although I plan to hold for the time being. What happens to Japan must depend at least somewhat on what happens here in the US, and also elsewhere in the world.

On one of the other boards, I think Index Funds, there is a discussion of concavity in investing vs. convexity. I read this as what any farmer knows-when it comes to staples, buy them cheap, sell them dear. I look upon the USA and Japan as staples. Buy 'em cheap, sell em dear.

I would also say that a beautiful thing about investing is that one doesn't have to win any debates. Just place your bet, and spin the wheel. As the beer ad used to say, "It doesn't get any better than this."

Mac
User avatar
BenSolar
*** Veteran
Posts: 242
Joined: Mon Nov 25, 2002 5:46 am
Location: Western NC

Re: Commodities Index

Post by BenSolar »

peteyperson wrote: What would you say to some who pointed out that an investment in Japan held over the last decade would have lost a significant percentage vs. overvalued S&P that still made money?


If you compare the valuation of the two a decade ago, or 13 years ago or whenever the Japan bubble burst, then you'll see very extreme overvaluation in the Japanese markets. That has largely been corrected. The S&P 13 years ago was reasonably valued. I can't say that Japanese stocks are a raging bargain now, but they aren't grossly overvalued, from what I've seen.

They do continue to have problems. But, investing in the US in 1976-77 would have taken severe fortitude. Everything looked appallingly bad except for the valuations. I think predicted the when and where and how of recoveries of economies and stock markets is beyond me. But looking at valuation and saying, ok, this doesn't look to high, I wouldn't mind owning it is pretty simple.

Maybe too simple, but that's how I think about it.
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
bpp
** Regular
Posts: 98
Joined: Tue Nov 26, 2002 6:46 am
Location: Japan

Post by bpp »

Hi MacDuff,
The exact nature of how they atempt to track the index is technical, and I would imagine that they reserve quite a bit of freedom to use whatever instruments and techniques that they feel will best suit their needs at given time.


I guess I'll have to read the prospectus. I'm actually not so worried about the risks (if I ever did buy something like that, it would be a very small percentage anyway), I'm more just curious about the fundamental money-making mechanism.

Thanks.

Cheers,
Bpp
Post Reply