This post is one of a series looking at returns in the decade after the financial crisis.

Commodities were hot in the early noughties. Prices boomed, they became easily accessible through the invention of Exchange Traded Commodities (ETCs), and the broad commodities story was amazing:

• Long-term returns approaching equities.
• Low to zero correlation with equities and bonds.
• High correlation with unexpected inflation.

That list of selling points made broad commodities the dream diversifier.

Unfortunately it really was a dream, at least so far as the past ten years is concerned. Trustnet provides the chart that tells our story1:

Subsequent research has poured hot and cold hogwash over the claims of equity like returns and reliable inflation hedging from commodities.

Meanwhile anyone living the dream woke up to high volatility and a decade of losing returns: -2% annualised over the last decade, or a -5% real return (see lime line C).

I looked at the ETFS Energy ETC due to its exposure to oil and gas (cyan line B). Oil’s boom during the 1970s was used as evidence that it’s a strong hedge against stagflationary recessions.

The oil price hit nosebleed territory in 2008 and despite the 2009 pullback, the rise of those energy-hungry emerging markets meant the oil price could only go one way, right?

That’s right, it went down. Subsequently the ETFS Energy ETC lost -9.5% annualised (-12.5% real), the worst performer of all in this review.

Goldie lots

Maybe the gold bugs were right along? Physical gold had a tremendous Global Financial Crisis returning 90% between November 2007 and February 2009. Since then it’s brought in a 7% annualised return (4% real).

Not bad for an asset with an expected real return of zero.

Gold is meant to be valuable because of its low correlation with other assets and that bears out in the chart above. Compare the pink line D (gold) with the black line A (MSCI World).

I’ve stayed out of gold in my accumulation years due to its lack of expected return and dividends but there’s a case for it in a deaccumulation portfolio.

Note that in our last 10-year retrospective recap we discussed in some detail getting gold exposure via the gold miners. That’s as opposed to owning the metal itself, which is what we’re talking about here.

Are any readers keeping their faith with broad commodities as an asset class over the next ten years? Let us know in the comments below.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

1. Trustnet provides annualised and cumulative return data for periods of up to 10 years. The results below are quoted in nominal £ returns, with dividends reinvested from 14th September 2009 to 13th September 2019. [↩]

What caught my eye this week.

I am away from my (home) office again today, so it’s another premature round of Weekend Reading links.

When I go early with these I sometimes miss good stories. If you do see anything others should read, please add it in the comments below.

A few people have said they’d prefer to always get the links by early Friday afternoon. Apparently these paragons slackers are done with their working week by then. I admire the spirit, but when we publish early we don’t really see much of an uptick in views or comments so it seems to be a minority who can start the weekend early.

If you are reading this before 6pm on Friday and you wish you always could – at the cost of some missing links – let me know below. It will all be evaluated and taken into consideration, Sir/Madam.

Have a great weekend! 🙂

p.s. If we do get a Brexit resolution where Northern Ireland is in the single market but not the customs union – with an ocean border with mainland Britain and no physical checks on the border with the Republic of Ireland – then I suspect there may be a case for buying investment property in Belfast before the boom! There will surely be arbitrage opportunities in such a scenario.

[continue reading…]

This post is one of a series looking at returns in the decade after the financial crisis.

Prognosticators did a roaring trade back in 2009. Predictions are never so believable as when our world is falling apart. And a decade ago the ETF industry was increasingly ready to put our money where those forecast-peddling mouths were, via a burgeoning range of specialist ETFs.

What links the trackers featured in today’s article is they all offered exposure to a plausible growth trend that had been widely identified by 2009.

Let’s see how well backing your crystal ball-gazing turned out, compared to investing in the MSCI World (the black line A below, with all graphs sourced from Trustnet):

You didn’t need to be a visionary in 2009 to spot that the digital economy was expanding like a red giant. The smartest companies were already busy removing annoying, expensive humans from the equation.

Convinced? Then you might have expressed your view through Invesco’s Nasdaq 100 ETF with its big tech bent. (That’s green line G lording it over the graph like Zeus.)

You’d now be sitting on the biggest heap of corn grown by any of the trackers I’ve included in this ten-year review. You’d have smashed the S&P 500. You’d be rolling like Demi Moore on a bed of spondoolicks feathered by 21% annualised returns – or a 574% cumulative return over the decade.

Of course back then I’d just completed my efficient market module that said all known information was already in the price. Everyone knew that Apple, Google, and Amazon et al were the future, so what were the chances of raking in outsized returns on growth stocks that looked expensive even in 2009?

I cry myself to sleep every night.

There was also a demographics story. Aging global populations required expanding health spending and that meant a bright future for big pharma and other medical companies. Hmm, yes, well everybody knows that, so what’s the point? 15.1% annualised returns over a decade is the point. See grey-blue line H on the graph and score another win for the future-gazers who took a position in L&G’s Global Health & Pharmaceuticals Index Trust.

The iShares Global Water ETF twins the population growth theme with the spectre of climate change. The advance of developing economies and environmental pressures meant this idea was a surefire winner, surely? Well, yes, it sure was. The 13.1% annualised returns of this ETF (ticker IH2O) pushed it just ahead of the plain ol’ World index tracker – see the blue line D vs the black line A.

Still climate change wasn’t all good news as iShares Global Clean Energy props up the bottom of the table. Ticker WTF? How did this one lose 1.7% every year since 2009 given all those graphs in The Guardian about the growth of wind and solar? Maybe predicting the future isn’t so easy, after all.

One idea I very nearly bought into was timber. Call it pulp fiction but the theory as I recall it was wood stocks were supposed to enjoy low correlations with common stocks because their profits were influenced more by the weather and political factors. Supposedly, if timber prices fell then you could leave your trees to keep growing and reap greater rewards in the future.

Whatever the truth of timbernomics, you can see from lines A (world equities) and C (world wood) on the graph that the iShares Global Timber & Forestry ETF is no diversifier.1 The world tracker and the timber ETF see-saw in unison, but ultimately the log shows that branching out into wood sapped your returns with a 10.3% annualised result vs 12.1% annualised for MSCI World.

Infrastructure was another tall tale constructed from one-part economic stimulus (remember all the talk about how shovel-ready projects could stoke demand post-GFC?), one-part emerging market expansion (more airports and bullet trains), and one-part public-private-partnership regeneration. Once again you were better off sticking to MSCI World.

That leaves gold miners.

I could just say the gold miners lost 0.8% annualised per year (blue line F) and move on. But there is a genuine diversification story here if you’ve got the stomach for it.

The thesis is that the long-term returns of precious metal equities are far higher than physical gold and on a par with broad market equities. The reason these equities might be precious to us portfolio constructors though is that they’ve historically enjoyed low correlations with the rest of the stock market according to Bill Bernstein.

The problem is precious metal equities are more volatile than bungee jumping.

Bernstein warned:

…since 1963, the precious metals equity (PME) series has lost more than 35% five different times and, on one occasion, nearly 70%.

Between October 1980 and August 1998, it lost a total of 53.8%, or 4.2% annualized—a 7.7% annualized loss after inflation.

For the more than 24 years between October 1980 and December 2004, the real return of PME was –0.3%.

Bernstein suggested that investors with large portfolios could theoretically put a few percent into precious metal equities (such as gold miners) and earn a chunky rebalancing bonus by buying when the sector is in free-fall and selling when it soars.

But would you have the iron discipline to rebalance your precious metal equities against the run of play?

Bernstein didn’t think so:

What percentage of investors has the discipline to stay the course with an asset capable of withering away for an entire generation before reverting to its mean? (If indeed the past 41.5 years have given us a realistic picture of its mean.)

I wouldn’t even venture a guess, but I’m pretty sure that the answer is not too far above zero.

Back in 2009 I placed myself among the zero per cent camp and you should know that the articles I’m quoting above are more than 20-years old. Bernstein was still a believer in precious metal equities in 2015, though. As was Allan Roth in 2016, but Ben Carlson delivered a sanity check in 2014.

Trustnet’s numbers scarcely matter when arrayed against the wealth of data mustered by Bernstein, Roth, and Carlson but they do bring the story up-to-date. Trustnet provides discrete annual returns for each of the last five years. In every single one of those years the L&G Gold Mining ETF was either the best or worst performer when ranged against the other ETFs in my table above.

You can see how wild the ride is by pitting the precious metal equity ETF versus the MSCI World:

Year	L&G Gold Mining ETF return (%)	iShares MSCI World ETF return (%)
2018-19	-35.8	0.7
2017-18	133	24.3
2016-17	-5.5	19
2015-16	-26.3	11.9
2014-15	67.4	8.8

Source: Trustnet

Of all the sector investing ideas in this section, gold equities is the only one I’d place any store in for the future. The trouble is only Vulcans and sociopaths are likely to pull it off.

Don’t try it if you can’t afford to lose everything you put into this sector or you doubt your ability to withstand double digit losses year in, year out.

In other words… what Bill Bernstein said.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

1. Note from The Investor: One issue with this ETF is on a look-through basis it’s only partly exposed to trees in the ground. Lots of the companies in the index it tracks are invested in wood processing facilities and similar ‘down forest’ activities. [↩]