ETF Trade Idea: CI Auspice Broad Commodity Fund Turns 1

Last year, CI partnered with Auspice Capital, the largest and most-tenured commodity manager in Canada, to launch Canada’s only broad commodity ETF during an opportune time for commodities.

Tim Pickering, Auspice Founder and CIO, says that "the ingredients for a commodity supercycle are upon us after a decade-plus of declining capex and countless demand factors.” He states that these factors include the inherently inflationary “green push,” as well as India becoming the world’s largest population and among the largest consumers of commodities globally. Commodities have been valuable as a portfolio diversifier, given that bonds tend not to hedge equities effectively in inflationary times. “We have seen this rotation from retail and institutional investors alike,” says Pickering, “with notable pensions making investments in commodities in the 10% range."

CI Auspice Broad Commodity Fund (CCOM) just reached its one-year anniversary. In its first 12 months, the strategy delivered a cumulative 5.24% net return versus -4.17% for the benchmark Bloomberg Commodity Index. Despite weaker commodity markets and some consolidation after the Russia/Ukraine conflict in the first half of 2022, CCOM’s tactical approach was able to sidestep energy losses earlier in 2023 while gaining from the stronger performance of agricultural markets.

A year in review

This past year successfully illustrated the diversification power of adding a commodity allocation to traditional equity and fixed income assets, especially with a tactical broad commodity strategy. The agility of the strategy proved its value as market trends changed quickly within the different sub-sectors, leading CCOM to opportunistically enter and exit positions during up and down trends, respectively. The effect can be seen with a long-only index like the Bloomberg Commodity Index showing negative returns while CCOM boasted positive returns above 5%. This is owing to CCOM’s long/flat rules-based methodology in 12 diversified commodity sub-sectors. Below are some comments on CCOM’s sub-sector positioning over the last year:

Energy

Weak Petroleum Energy markets had CCOM on the sidelines for much of the last year until the third quarter of 2023, when WTI Crude Oil, Heating Oil and Gasoline were added, while Natural Gas was similarly exited in late 2022 and has not been added back.

Metals

Unlike the Petroleum Energy market, the Metals market remained strong into late 2022. Led by Copper, markets were exited starting in the second quarter of 2023, and more recently for precious metals (Gold and Silver) in the third quarter.

Agriculture

Agriculture gains were led by Sugar, which was added ending 2022 and remains long and the portfolio’s top-performing commodity. Conversely, Cotton consolidated much of this time, only to be recently added in the third quarter of 2023. Grains have also remained in consolidation, choppy and trending lower, with Soybeans being an exception as a strong outlier that is currently held in the portfolio.

Diversification

Correlation table

Source: Morningstar Direct, as at September 30, 2023 – Daily Return Correlation since inception (2022-09-23)

With the recent market volatility, greater diversification from alternative asset classes with low correlation to stocks and bonds, such as commodities, is key for reducing volatility and building better portfolios. The benefits of this diversification that CCOM provides was seen in September as equity and fixed income markets struggled, with major bond and equity indexes both posting negative returns, while CCOM generated a strong relative return of nearly 1%.

Source: Morningstar Direct, as at September 30, 2023

Performance since 2000

Although CCOM only has a one-year track record to date, it tracks the longstanding Auspice Broad Commodity Excess Return Index (ABCERI), which goes back to 2000. See table below that compares ABCERI to the Goldman Sachs (GSCI ER) and Bloomberg (BCOM ER) benchmark commodity indexes.

*The performance of Auspice Broad Commodity Index prior to 9/30/2010 represents index data simulated prior to third-party publishing as calculated by the NYSE from 1/1/2000. Source: Morningstar. You cannot invest directly in an index. Performance as at August 31, 2023.

Outlook

Agflation

Sugar has made 10-year highs while Robusta coffee futures have reached 12-year highs. Cattle futures and orange juice futures have each made all-time record highs. This current situation, written about by Auspice Capital Advisors in their recent blog post, is a phenomenon known as Agflation, where food prices rise at a greater rate than the prices of other goods and services in an economy, given increased demand for agricultural commodities.

The blog discusses how broad-based inflation metrics remain elevated, but have softened substantially since the 40+ year peaks reached in 2022. While this seems like we’re making progress and there’s a light at the end of the tunnel, Auspice believes the recent trend could end since we’ve seen this before.

After surpassing 6% in 1970, inflation (as represented by CPI figures) dropped below 3% in 1972 before surging to above 12% in 1974. Inflation then softened a second time to 5% in 1976 before reaching a record 14.6% in 1980. While rising interest rates may reduce demand for manufactured goods and subdue consumer spending, it does not increase short-term commodity supply or incentivize long-term infrastructure investments. It also doesn’t reduce labour shortages, reverse aging demographics, alleviate supply-chain issues or resolve pandemics and wars. What it does do, however, is make spending on commodity capex more expensive in a world that has become increasingly difficult from an ESG perspective.

Cash return

Due to the cash efficiency of commodity futures, less than 5% of capital is required (on average) to put on the futures positions to track the Auspice Broad Commodity Index. This means that for every $100 invested, on average more than 90% earns a cash return, resulting in a meaningful increase in forward return expectations from the cash position alone, and a viable alternative to cash in a portfolio. From 2009 through 2021, the average Bank Rate in Canada was just 1.10%. As of today, this key rate is 5.00%, closer to the average 5.40% rate since 1980.

Even when the strategy opportunistically sits in cash through flat positions in specific commodities, CCOM benefits from current elevated interest rates, with assets invested in a money market fund (CI Money Market Fund, CIG 872) that presently has a gross yield to maturity of roughly 5%.

The product

The market demand for a multi-commodity strategy is evident as CCOM surpassed $150 million in AUM in its debut year as Canada’s only broad commodity ETF. CCOM effectively satisfies investor appetite for broad commodity exposure with greater diversification and strong risk management, given the current volatility and uncertainty in markets.

For more information on this innovative product and how to access it, please follow the links below:

• Sales tool
• Commentary
• Auspice website
• CCOM fund page