RT Journal Article
SR Electronic
T1 Factor Model Index for Commodity Investment
JF The Journal of Index Investing
FD Institutional Investor Journals
SP jii.2021.1.110
DO 10.3905/jii.2021.1.110
A1 Daniel Broby
A1 Andrew McKenzie
A1 Olivier Bautheac
YR 2021
UL https://pm-research.com/content/early/2021/10/26/jii.2021.1.110.abstract
AB In this article the authors propose an appropriate commodities benchmark for pension funds. Commodity investment, like traditional investment, requires suitable benchmarks for performance measurement and attribution. Investing in commodities as an asset class has increased dramatically as a result of financialization. It is typically conducted by pension funds through the futures market. The tools to implement and benchmark the success or failure of such an investment strategy are still in their infancy. The authors argue that factor model indexes (FMIs) are a viable alternative to existing production-based indexes that make use of futures contracts. Using principal component analysis, they identify five factors related to grains, meats, industrial metals, energy, and precious metals. They suggest that FMI benchmarks constructed using such an approach would allow commodity investors to better measure their investment objectives.Key Findings▪ Proposed commodity factor model index (FMI) derived from principal components for use by institutional investors.▪ The FMI addresses the issue that the market capitalization concept does not make sense when applied to commodities.▪ The FMI is a viable alternative to existing production-based indexes that make use of futures contracts.