As most asset classes suffer from rising interest rates and fears of recession, commodities such as oil and wheat have generated high returns on the back of the war in Ukraine and supply chain disruptions.
But institutional investors are not in agreement on the long- term viability of the asset class or its strength as an inflation hedge.
Moves by the Federal Reserve to raise interest rates, combined with World Bank Group’s recent report lowering global growth projections to 2.9% from 4.1% in 2022, have added to investors’ anxiety as they look to stem losses in their portfolios. Even if a global recession is avoided, “the pain of stagflation could persist for several years — unless major supply increases are set in motion,” said David Malpass, president of World Bank Group, Washington, in the foreword of its Global Economic Prospects report.
While many institutional investors hesitate to make commodities a significant portion of their portfolios because of their volatility, others see long-term potential.
“Commodities, I think, are long-term bullish market,” said Patrick Fleming, chief investment officer of Wyoming’s $24.5 billion State Loan and Investment Board, Cheyenne. Mr. Fleming said he believes there is currently a commodities super cycle going on due to underin- vestment in commodities, environmental challenges and the ongoing supply shock.
“This is a real-time example of showing what happens when you don’t have large enough reserves or capacity to increase when you need to … the price goes up dramatically because there’s just certain things you have to have to be able to function,” Mr. Fleming added.
The board has a lot of indirect exposure to oil and through leasing. “Our major feature is the state has significant oil and gas lease exposure,” he said. “So all of the land that we leased to the companies, just for instance, a rule of thumb is every $10 increase in the price of oil we receive about $100 million in additional revenue,” Mr. Fleming said. About a third of the board’s income comes from that leasing exposure.
The board had a little more than $1 billion invested in master limited partnerships as of March 31, according to an investment report.