Portfolio Design: A Modern Approach to Asset Allocation

RETURNS ON COMMODITY FUTURES

Interest in commodities as an asset class has surged recently because returns have been so high. Over the seven-year period from 2000 to 2006, the Goldman Sachs Commodity Index (to be described below) provided a compound return of 10.7 percent. There is nothing like high returns to generate interest among investors. But another reason that investors have begun to pay more heed to commodities is the influential paper by Gorton and Rouwenhorst (2006) that began circulating as a working paper in 2004. The returns on commodity futures contracts that Gorton and Rouwenhorst reported were so impressive that they attracted considerable attention.

Gorton and Rouwenhorst gathered futures data from the Commodity Research Bureau database from 1959 to 2004. They formed an equally weighted index of these contracts and studied returns from fully collateralized futures positions. At inception in 1959, only nine contracts were included in the study, but additional contracts were added so that by 2003 there were 36 contracts in all. The first energy contracts appeared in 1978 (heating oil) and 1983 (crude oil). So the composition of the index has changed substantially over time.

TABLE 12.1 Gorton-Rouwenhorst Commodity Returns Compared with U.S. Stocks and Bonds, July 1959–December 2004

Data Sources: Commodity returns are from Gorton and Rouwenhorst (2006), Tables 1 and 2. Stock and bond returns are from ©Morningstar.

Table 12.1 compares the returns on Gorton and Rouwenhorst’s ...