The Invisible Hands by Steven Drobny & Diamond Jared

Author:Steven Drobny & Diamond, Jared [Diamond, Jared]
Language: eng
Format: mobi, epub
Publisher: John Wiley & Sons, Ltd.
Published: 2010-03-15T21:00:00+00:00

But is an active commodity manager a good hedge to inflation?

If you are invested with a commodity manager who turns bearish halfway through a bull cycle, the result will be disappointing. Losing money when inflation is soaring could doubly hurt, so manager selection is key. That being said, if the goal is simply to hedge against inflation, then I would advocate a mix of active management and enhanced indexing.

In the same vein, does it make sense for real money investors to gain exposure to commodities via commodity equities?

Buying an equity stake in a commodity producer will not properly hedge against headline inflation because you then become reliant on one of the contributory problems of inflation: supply. Buying a mine or an oil company, which subsequently has supply issues or even management issues could simultaneously drive down the stock price and drive up the commodity price. So, while there is strategic merit to having part of your portfolio invested in the major oil companies and the miners, it is not a clean inflation hedge. Thus, the decision about which companies to buy is again critical. Many of the major oil companies, for example, are experiencing long-term difficulties in identifying new areas of exploration because the producing countries are exploiting the new fields themselves through their own national oil companies. If you look at the production profiles of the major old-fashioned “seven sisters”-type companies, several of them are actually pretty flat and some are even in decline (see box on page 222).

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