Additionally, the Parametric Commodity Strategy Fund differentiates itself by bucking the template established by the benchmark. For example, the fund’s portfolio is underweight gold, which had a strong 2020 but then lost its luster this year.
“That’s driven by the fact that gold is the largest commodity in the benchmark, and we’ll be underweight those large commodities and overweight those smaller commodities,” he says. “Gold was down close to 10% in the first quarter, which benefited us. We also benefited from a large position in gasoline, as the whole energy complex except natural gas had a strong first quarter. Being overweight gas oil and heating oil was also a benefit.”
Commodity Curve
Another major component of the fund’s strategy entails commodity curve positioning, which relates to the portfolio’s underlying positions in commodity futures. Like most commodity funds, the Parametric fund gains access to commodities through futures contracts, because it’s difficult to store physical commodities such as barrels of oil or, if you don’t have a farm, feeder cattle or lean hogs.
Liebl and his co-managers must decide where they’re going to own their exposure across the commodity curve for each commodity—i.e., when to roll over their futures contracts.
“We’re trying to capture inflationary pressures, and inflation is essentially a spot price phenomenon, so we like to be as close to spot prices in the commodity asset class as we can because we’re trying to capture those inflationary spikes,” he explains. “But it’s pretty well documented that there’s a lot of congestion and passive money that exists on the short end of the curves for commodities, so if you’re investing in front-month contracts, you’ve historically faced higher roll costs regarding your exposure.
“We want to avoid the higher costs of commodity investing at that front-month position, so we move out more on the forward curve for most commodities to minimize some of the costs that can come with investing in commodity futures,” he continues. “We see this as a balance of capturing inflationary pressures but minimizing the term structure effects of investing in commodities.”
But that’s not always a winning bet. As noted in the fund’s fourth-quarter commentary sheet, the portfolio was dinged that quarter by holding longer-maturity contracts in natural gas.
Futures contracts aren’t buy-and-hold instruments, so expiring contracts and subsequent rebalancing drive the fund’s portfolio turnover.
“Roughly 60% to 80% of our portfolio matures every month, which is the percentage that we roll over and rebalance back to our target weights,” Liebl says. “We use that rolling over process to re-establish our diversification.”
Another feature of the fund is that fixed-income securities contribute the largest chunk of its portfolio. That’s because derivatives contracts can be bought with little money down, leaving a lot of leftover cash needing to be parked. “We tend to invest that cash collateral in a risk-free way in U.S. Treasury securities with a 12-month or less maturity,” Liebl says.
Team Effort
Parametric Portfolio Associates LLC is an investment advisor and majority-owned subsidiary of Eaton Vance Corp. Liebl, who is based in Minneapolis, and Seattle-based Thomas Seto are listed as the fund’s lead portfolio managers. But Liebl says that understates the contributions from the other three members of the fund’s five-person investment committee, who meet monthly to review performance and look at the research agenda.
“As lead strategist, I’m responsible for monitoring performance and evaluating our rule sets and making sure our systematic process evolves over time as market conditions evolve,” he says. “But I can’t unilaterally make changes to the portfolio. It’s very much a team-based approach. The investment committee is the decision-making body for the strategy.”
And, Liebl believes, their approach has created a value-added product for investors.
“We’ve tried to build something in the commodity space using a rules-based, systematic process that can create repeatable results for investors,” he says. “I think our performance speaks to that.”