Invesco launches non-traditional commodity product

Invesco has spun-out the commodity portion of its Premia Plus strategy as a standalone product in response to investor demand for non-traditional commodity investments.

In March the company secured a $100 million seed investment from a single investor for the Balanced-Risk Commodity strategy. The product is available as a co-mingled fund or as a separate account.

The Balanced-Risk Commodity strategy was initially developed as a component of Premia Plus, a risk-based tactical asset allocation strategy investing in equities, government bonds and commodities.

By capturing the beta of the underlying asset classes, Premia Plus aims to generate total returns above cash in three economic scenarios: non-inflationary growth, inflationary growth and recession.

The allocations to the underlying asset classes are weighted so each contributes a similar amount of risk to the overall portfolio. The risk of the combined portfolio is set at 8%.

The Premia Plus strategy gained over 20% in 2009 and was up around 3% at the end of May this year. The strategy currently has $800 million in assets under management in co-mingled funds and separate accounts.

The decision to roll out the commodity portion of Premia Plus as a standalone product is a response to demand from investors who view commodities as a hedge against inflationary growth, said Scott Wolle, chief investment officer for Invesco's global asset allocation group.

"There is a general concern about inflationary outcomes resulting from the loose monetary policies around the world, which is feeding into demand for commodities," he said.

The Balanced-Risk Commodity strategy takes non-traditional approach to investing in commodities.

The portfolio consists of allocations to four main commodity complexes: agriculture, energy, industrial metals and precious metals.

Unlike in a typical commodity index, the allocations are risk-balanced rather than production or volume weighted.

Energy commodities account for around 33% of the Dow Jones-UBS Commodity Index and over 70% of the S&P GSCI. The Balanced-Risk Commodity strategy has an allocation to energy of less than 20% and the sector contributes just 25% in terms of risk to the overall portfolio.

"It was clear to us that the common commodity indices failed to capture the excess return in the asset class, so we decided to take a benchmark agnostic approach based on risk balanced exposure to the various commodity complexes," Wolle explained.

The balanced risk approach means the portfolio benefits from true diversification across the various commodity complexes, noted Wolle.

"Commodities are not a homogenous asset class and the different complexes have relatively low correlation to each other," said Wolle. For instance, energy tends to outperform during periods of economic growth, precious metals do better during periods of market turmoil, while agricultural commodities "march to the beat of their own drummer".

Commodity indexes which are overweight energy fail to capture the benefits of this diversification, said Wolle.

"People can misinterpret exposure to a large number of assets as diversification. The key is to have solid exposure to each of the commodity complexes.This level of diversification can provide true insurance against inflation," added Wolle.

The Balanced-Risk Commodity strategy aims to generate excess returns by focusing on commodity assets that Invesco believes are most likely to outperform over the long run.

The investment team's research revealed that commodities that are harder to store often generate excess returns. That has led to some unusual investment choices. For instance, soymeal is a key component of the strategy's allocation to agricultural commodities.

Invesco also looks to capture additional returns through rebalancing. "The low correlation across complexes and the high volatility of commodities can result in quite significant rebalancing returns," said Wolle.

On a tactical basis, Invesco employs an optimal roll yield process to enhance returns.

The tactical weights assigned to each commodity complex are also actively adjusted to maximise returns.

The Balanced-Risk Commodity strategy aims to generate returns of 5% over the Dow Jones-UBS Commodity Index and seeks to outperform cash over the long-run.