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When History is a Guide – The Case for Commodities Today

By: Shauna Hewitt, LGIM America

The challenges of a half-century ago bear an uncanny resemblance to the risks that we face today. In the 1970s, real returns on traditional 60/40 portfolios were eroded to almost nothing due to a mix of domestic political troubles, conflicts in the Middle East and, most directly, recurring waves of inflation. If this sounds familiar, institutional investors may need to consider allocating to an alternative asset class to preserve portfolio returns. Using history as a guide, LGIM America believes commodities may be an appropriate fit.

This is an excerpt from NCPERS Spring 2024 issue of PERSist, originally published April 25, 2024.

The challenges of a half-century ago bear an uncanny resemblance to the risks that we face today. In the 1970s, real returns on traditional 60/40 portfolios were eroded to almost nothing due to a mix of domestic political troubles, conflicts in the Middle East and, most directly, recurring waves of inflation. If this sounds familiar, institutional investors may need to consider allocating to an alternative asset class to preserve portfolio returns. Using history as a guide, we believe commodities may be an appropriate fit.

A brief history
The economic landscape facing the United States in the early 1970s was, to put it softly, challenging. Confronted by the complications of the costs of a hot war in Vietnam and a cold one with the Soviet Union, the Federal Reserve found it difficult to establish a consistent monetary policy to align with shifting political and economic conditions. As a result, the Fed pivoted several times during the decade in what historians now call the “stop-and-go” policies.



The back-and-forth positioning at the Fed had a tremendous impact on the economy, as policy was not sufficiently tight enough to quell long-term inflation. In addition, policy mismanagement substantially restrained traditional investor returns. By virtue of the several recessions and two substantial inflationary waves brought on by the stop- and-go policies, the real return on a 60/40 portfolio was a paltry 0.19% per year from 1969-1982. At the same time, however, commodities experienced substantial real returns of 15.10% per year, driven at first by the energy supply shock, and then during the second inflationary wave, by gold.







The strong rhymes of history
Though not exact, it's hard not to notice the substantial similarities between the economic and political circumstances of today and of a half-century ago. Proxy conflicts with Russia, ongoing wars in the Middle East, and a bitterly divided government and electorate dominate the headlines today as they did in the 1970s. But perhaps the most striking resemblance is reflected by the current economic situation and expected path forward.

In 1975, the Federal Reserve eased policy with inflation on the decline. The subsequent money supply growth drove inflation slowly higher at first, until expectations became de-anchored and inflation exploded. Now, following an eerily similar disinflationary trajectory, market participants are betting that the Fed will begin easing with a series of interest rate cuts soon. The question remains: if the Fed follows through, will it have kept policy restrictive enough to avert another inflationary relapse, unlike 50 years ago?





An appealing hedge amidst today's uncertainty
While it is impossible to predict the future, it is worth looking to history to create a plan for potential outcomes. If the Fed does indeed move too early, it is possible that excessive monetary growth could lead to de-anchored inflation expectations as it did in the late 1970s. Therefore, we believe institutional investors should consider an allocation to a diversified basket of commodities. This could increase the resiliency of the portfolio and, if history is a guide, the asset class may be well positioned to outperform in this scenario.
 
To address this, institutional investors should investigate a commodities strategy that offers several key features:
  • Efficient exposure to a diversified commodities benchmark.
  • TIPS exposure to deliver real yield returns.
  • Overweighted exposure to gold, which we believe may offer an incremental hedge to geopolitical uncertainty, monetary policy decisions, and recurrent inflation.

About the Author
Shauna Hewitt is a Senior Investment Director at LGIM America. In her role, she focuses on Consultant Relations and Institutional Sales efforts in the Midwest Region. She covers Corporate Defined Benefit and Defined Contribution clients, Public Plans, Taft-Hartley as well as Endowments and Foundations.

Shauna has over 25 years of investment industry experience. Prior to joining LGIM America in 2018, she served as Managing Director at Pavilion Global Markets. Shauna founded Lambright Financial Solutions which was later acquired by Knight Capital Americas. She has also held senior roles at Loop, BNY Brokerage and CRA Rogerscasey. Shauna began her career with Donaldson, Lufkin & Jenrette.

Shauna serves on various committees of community outreach services in Chicago in addition to being a former board member of Women Investment Professionals (WIP), current WIP Professional Development committee member and member of National Association of Securities Professionals. She is also the past chair of LGIMA's Women's Collective, served on LGIMA's Culture Working Group SteerCo and current member of the DEI SteerCo. Shauna was honored as a NASP Trailblazing Woman in 2023.


Disclosures: This material is intended to provide only general educational information and market commentary. This material is intended for Institutional Customers. Views and opinions may change based on market and other conditions. The material contained here is confidential and intended for the person to whom it has been delivered and may not be reproduced or distributed. The material is for informational purposes only and is not intended as a solicitation to buy or sell any securities or other financial instrument or to provide any investment advice or service. Legal & General Investment Management America, Inc. does not guarantee the timeliness, sequence, accuracy or completeness of information included. Past performance is no guarantee of future results. The strategies discussed above utilize investments in derivatives, which include inherently higher risks than other investments/strategies and may not be successful in all market conditions. Derivatives are for sophisticated investors who are able to bear the risk of loss of capital.

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