The nature of different commodities – and how investors can access them – can vary across market regimes and economic conditions. So what were the perceived opportunities and rationale behind our recent decision to expand our alternatives allocation beyond gold to include a broader basket of commodities and industrial metals in client portfolios?
Our starting point is the Bloomberg Commodity Index – a widely-used benchmark that splits the universe into roughly a third in energy (36%), a third in agriculture and livestock (35%) and a third between industrial metals (mainly aluminium, copper, nickel and zinc, totalling 14%) and precious metals (mainly gold and silver, totalling 15%).
Unlike some other alternatives, such as absolute return funds, commodities are not generally suited to downside protection when markets are volatile – although gold does have qualities that make it different in this regard. Its historically low correlation to stocks and bonds means it is often preferred as a safe haven during times of geopolitical or economic uncertainty.
Broadly speaking, commodities are not a low-returning asset class and historically – looking at data back to 1960 – they have delivered total returns in excess of cash, bonds and the industry-standard 60/40 investment strategy.
The flipside, however, is higher volatility: the long-term volatility-adjusted ratio (the return earned for each unit of risk taken) for commodities significantly lags both equities and bonds over most periods, while drawdowns for the asset class are extremely high. Still, recognising the risk and return characteristics of the wider asset class gives us a good understanding of the role commodities can play in portfolios today.
Why commodities – and why now?
Commodities tend to perform well in exactly the conditions where traditional 60/40 portfolios struggle: periods of unexpected inflation. Returns have clearly varied hugely by economic era – very strong in the 1970s and since 2020, for example, and notably weak during the low-inflation, secular stagnation regime of 2009-20. That variability matters because it shapes how we think about the asset class today. Commodities are not consistently ‘good’ or ‘bad’ across the board – they are highly sensitive to the market regime.
Using a post-war market regimes framework as the basis for our analysis, there have really only been two periods where performance was extreme in either direction: the Bretton Woods breakdown regime (1968–79), when commodities dramatically outperformed everything else, and the ‘secular stagnation’ period (2009–20), when they underperformed cash, bonds and equities alike. In every other regime, performance has tended to sit close to a 60/40 portfolio – neither a standout nor a drag.
Since 2020, we have been in a regime of ‘global fragmentation’ characterised by higher and more volatile inflation, supply chains being restructured, strong government and corporate investment and less spare capacity in the system to absorb shocks. Such an environment is more like the supportive regimes of the past than the weak one of the last decade – part of why we are broadening beyond gold to improve the overall risk and return profile of client portfolios.
Another supporting factor behind adding commodities is their inherent historical diversification benefit. While investors do need to take into account the aforementioned volatile nature of the asset class, the backward-looking data suggests commodities broadly protected portfolios in every inflation shock of the past 60 years, offering a hedge that traditional bonds and equities cannot.
This is, of course, no guarantee of future performance and these inflation-surprise episodes are relatively rare – making up under a quarter of the period studied – but commodities did outperform a 60/40 portfolio in every single one.
That consistency is one of the strongest arguments for holding the asset class as insurance against a stagflationary scenario – high inflation, slow or stagnant economic growth, and elevated unemployment at the same time – even for investors who are not taking a strong directional view on prices.
“Commodities are not consistently ‘good’ or ‘bad’ across the board – they are highly sensitive to the market regime.
Building blocks
Let’s now consider in more detail the sectors that form our commodities allocation – each with a different driver of returns behind it. The first part of the basket – the broad diversified mix of energy, agriculture and metals – has perhaps the strongest historical case, as well as the most consistent diversification benefit, particularly during inflation surprises.
These sectors have also proven less regime-dependent than commodities’ reputation for volatility might suggest: outside the two extreme episodes mentioned earlier – during the Bretton Woods breakdown and ‘secular stagnation’ regimes – returns have generally tracked broader markets reasonably closely.
Precious metals include silver, platinum, palladium and a host of others – although the main component of this allocation is gold, which we have held in portfolios for some time now. Our conviction in gold remains, based in part on our longstanding view on currency debasement. Gold has delivered strong, differentiated returns historically and the case for holding it does not depend on the same industrial supply-and-demand dynamics as other commodities.
Industrial metals – mainly copper and aluminium – are the new addition to the allocation. Unlike the broader basket of commodities and gold, the historical return case alone is not compelling – on the numbers, industrial metals have not historically protected a 60/40 portfolio as reliably as broad commodities have. So this recommendation relies more heavily on our specific forward-looking view: that demand will outpace supply over the next decade, tightening the physical market and supporting prices.
Copper supply is constrained by years of underinvestment in new mining projects, while demand from power grids, electric vehicles, renewables and AI infrastructure is growing faster than demand from the rest of the market is shrinking. We expect demand modestly to outstrip supply over the next 10 years, supporting prices – although this is a moderate rather than high-conviction view, given a large share of demand still comes from slower-growing areas, such as construction, which could disappoint.
So what could go wrong? No asset class comes without its risks – and commodities are no exception. One key risk that could derail the story is a potential return to ‘secular stagnation’ style conditions – low growth, weak inflation, and ample supply – which is the one environment where commodities have historically disappointed across the board.
This appears less likely than average right now – particularly given the structural forces pushing towards higher and more persistent inflation – but it remains the main risk to be monitoring. Alongside this macro risk, we will also be watching the physical copper market directly to assess whether the market is behaving in the way our thesis expects – or whether additional supply-and-demand substitution are keeping the market better balanced than anticipated.
Highest-conviction recommendations
The result of all this is our portfolios now have a wider commodities allocation – moving from gold-only to include broad commodities and industrial metals. In typical portfolios, the commodities allocation within alternatives has risen from 20% to 25%, funded from alternative equity, such as listed private equity and infrastructure investment companies. This is sized to reflect moderate – as opposed to high – conviction on the industrial-metals component specifically, while our conviction in broad commodities and gold remains higher.
In seeking the right vehicles for the portfolios, we began with a universe of more than 350 broad-commodity funds and applied specific hard gates – including track record length, investment structure, and daily dealing – before narrowing further on quantitative measures including drawdown behaviour, consistency of returns, and scale. A small shortlist went through manager meetings and full due-diligence questionnaires, from which two funds emerged as our highest-conviction recommendations.
Of these, JSS Commodity – Transition Enhanced implements broad commodities exposure through a constant-mix, direction-agnostic strategy. In short, this means monthly rebalancing back to equal weights within each sector, which systematically sells recent outperformers and buys underperformers.
A complementary addition is Neuberger Berman Commodities, whose process is built on the idea that in commodities, unlike equities, sustained high volatility is usually a sign of acute physical supply stress rather than a risk investors should be paid to hold. The fund systematically reduces exposure to commodities showing that kind of stress-driven volatility, while allowing structural overweight positions in commodities with calmer, more persistent scarcity dynamics.
We have deliberately chosen two managers with genuinely different processes, rather than one. Beyond the diversification of investment approach this brings, using two funds also lets us build a meaningful commodities position without concentrating the allocation too heavily in a single vehicle.
Robert Wilson is an analyst and portfolio manager – alternatives at Sarasin & Partners
