The Handbook of Commodity Investing

CHAPTER 22

Strategic and Tactical Allocation to Commodities for Retirement Savings Schemes

Theo E. Nijman, Ph.D.

F. Van Lanschot Bankiers Professor of Investment Theory

Tilburg University

Board of Scientific Directors

Network on Savings, Pensions, Aging & Retirement

Laurens A. P. Swinkels, Ph.D.

Senior Quantitative Researcher

Robeco Asset Management

Assistant Professor in Finance

Erasmus University Rotterdam

Institutions such as insurance companies and pension funds are investigating the benefits of investing part of their assets in alternative asset classes such as commodities. For example, the Dutch pension fund for civil servants ABP allocates 2.5% to commodities (€5 billion) and the pension fund for health care employees PGGM 5.0% (€4 billion). Also, the U.K. pension scheme of British Telecom allocated 3% (£1 billion) to commodities in 2006 and the California Public Employees’ Retirement System (CalPERS) announced in December 2006 that it will start a pilot program on commodity investing worth $500 million. The trade-off between risk and return in this relatively new asset class and the portfolio implications of investing in commodities are considered in this chapter. More specifically, we aim to shed further light on the benefits of investing in commodities for investors with a liability structure sensitive to the nominal or real interest rate and inflation, respectively.

The interest in commodity investments dates at least back to Bodie,¹ who points out the potential benefits ...