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February 6, 2013

Pension Funds Cut Back On Commodity Indexes

Pension funds and other institutions are retreating from popular investments linked to commodities after finding they did little to protect their portfolios against inflation risk and the unpredictable returns of stocks.

Investors have yanked nearly $10 billion from tradable indexes tied to energy, food, metals and other commodities after two years of record outflows. That leaves about $133 billion, said Kevin Norrish, a managing director at Barclays PLC.

The trend is accelerating this year, analysts and investors said, driven by lackluster returns and looming U.S. regulations that could make these investments more complicated and costly. The reversal could affect the way commodities are traded and temper price swings in everything from cereal to gasoline to gold, some economists said.

Among those scaling back is the California Public Employees’ Retirement System. Calpers, the nation’s largest pension fund, pulled out 55% of its holdings in commodities indexes in October, after losing about 8% annually over five years, according to the fund’s most recent financial statement. That left $1.5 billion of Calpers’s assets in commodities indexes, 0.6% of the fund’s total. The money was switched to inflation-linked bonds, under a policy that allows Calpers to make quick moves within investment areas based on market conditions, a spokesman said.

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Speculators account for more than half of futures contracts in certain commodities, according to the Commodity Futures Trading Commission. But signs of cooling abound. In April 2012, for example, investors held 225,869 contracts for a wheat traded in Chicago, a record. Now, they are down to 144,487 “Chicago wheat” contracts, the lowest point in several years.

Calpers turning around and getting out is sending this signal to other institutions,” said David Frenk, research director for Better Markets Inc., a Washington-based advocate of financial change. “There is a huge transformation starting to take place.”

The group has been a critic of index investing, arguing that pension funds are risking losing money and influencing prices of underlying assets.

Mr. Frenk flew to California in November 2010 to urge the California State Teachers’ Retirement System to reconsider an investment of about $2.5 billion it was considering making in commodities, including the DJ-UBS, minutes of the meeting show. The pension fund allocated just $150 million but hasn’t invested the money. Given that the index has lost 13% since the meeting, Mr. Frenk estimated, “they saved about $300 million.”

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Read full Wall Street Journal article here

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