As of mid-April, energy products, such as heating oil and gasoline, accounted for about 66% of the dollar-weighted value of the GSCI, making it by far the most influential sector. Together, industrial and precious metals accounted for about 8.5% of the index, and agriculture and livestock products another 25%.
The fund and the GSCI usually move in the same direction because Baum keeps the five broad sector weightings fairly close to that of the index. That means the energy component plays a very strong role in the fund's overall returns. He always maintains a long position in commodities, and doesn't place bets on long-term price moves.
To add incremental value to the index, Baum tries to capitalize on what he calls "temporary price dislocations" within each sector that he expects to play out in weeks or months, rather than years. For example, if seasonal factors have made heating oil relatively more expensive than gasoline, and he expects the price of heating oil to drop in the near future, he might increase his exposure to gasoline beyond that of the index.
Despite this active subsector management, and the return added by fixed-income securities, beating the benchmark for an extended period has proven to be an elusive goal. Over the five years ending December 31, 2002, the fund had an average annual return of -.92%, compared to 4.04% for the GSCI. Annual fund operating expenses, which range from 1.27% to 2.45%, depending on share class, account for some of the shortfall.
Still, some advisors see Oppenheimer Real Asset as the most convenient and practical way to gain access to the unique diversification benefits commodity prices offer. Marjorie Fox, JD, CPA, of Rembert, D'Orazio & Fox in Falls Church, Va., began investing in the fund about five years ago after reading studies that pointed to the lack of correlation between the stock market and the fund's benchmark. The decision was particularly rewarding in 2000 and 2002, she says, when the fund defied bear-market odds in the stock market to deliver outstanding returns.
She also remembers 1998, when it underperformed the stock market by a whopping 73%. Given the nature of its strategy, she says, that was understandable. "But it also failed to beat its benchmark that year, a fact that made it "doubly difficult" for me to explain its presence to clients," she says. "I remember sweating bullets after 1998 when people asked why I continued to hang on."
Because of its volatility, Fox limits her client's positions in Real Asset to no more than 5% of a portfolio. Baum pegs an appropriate portfolio allocation at about 5% to 10%, although he points out that some studies say an allocation of as much as 20% of portfolio assets toward commodities is appropriate.
But any exposure may be too much for clients who absolutely can't stomach the gut-wrenching ups and downs of commodity prices. In those cases, Fox substitutes a somewhat more traditional, less volatile alternative, such as the T. Rowe Price New Era Fund. "I know I'm getting hybrid performance with a natural resource stock fund," she says. "But if someone just can't stomach incredible volatility, it's a worthwhile trade off."
Investors willing to close their eyes and go along for the wild ride for a small percentage of their portfolios will find the commitment worthwhile, Baum contends. Although commodity prices have risen dramatically in recent years, he believes the current environment of low inventories, a weaker dollar and budget deficits set the stage for further increases. "Commodity markets respond to supply, demand and inventories," he says. "Over the last couple of years, a curtailment of supply has driven prices up. In the future, an improving economy will help the demand side of the equation to kick in."