Commodity Mutual Funds Part 2: Performance and Returns
Book: Commodities: Markets, Performance, and Strategies
Editors: H. Kent Baker, Greg Filbeck, Jeffrey H. Harris
Publisher: Oxford University Press, 2018
ISBN: 9780190656010
How CMFs Actually Performed
This is Part 2 of the Chapter 14 retelling, and we are getting into the numbers. How did commodity mutual funds do between 1996 and 2016? The short answer: it depended heavily on when you invested and what type of fund you picked.
Over the entire sample period, the average annualized return for all CMFs was 11.6%. Gold CMFs averaged 12.7%, and energy CMFs topped the list at 17.0%. Those sound pretty good until you dig deeper.
The frequency-weighted average (which gives more weight to short-lived funds that might have exited early) was only 5.3% for all CMFs. And the value-weighted average (giving more weight to bigger funds) was 8.2%. So the headline number of 11.6% is inflated by smaller, longer-lived funds. The biggest funds and the funds that died early did worse on average.
The Three Periods That Mattered
Performance varied wildly across different market environments:
The Commodity Boom (2004-2008): This was the golden era. All CMFs averaged 26.1% annual returns. Gold CMFs returned 33.3%. Energy CMFs returned 28.7%. Sharpe ratios were excellent across the board, with energy CMFs hitting 0.95 on a value-weighted basis. During this period, commodity prices were surging and everyone investing in the space looked like a genius.
The Financial Crisis (2008-2010): Returns dropped but stayed positive. All CMFs averaged 8.3% annual returns. Gold CMFs held up best at 19.9% as investors rushed to safe-haven assets. Energy CMFs managed just 5.3%, which is understandable given the oil price crash. Sharpe ratios compressed but stayed positive for gold funds.
The Post-Crisis Period (2011-2016): This is where things fell apart. All CMFs averaged just 2.5%, and on a frequency-weighted basis the return was essentially zero (-0.2%). Gold CMFs actually went negative at -1.2% (unweighted) and -2.5% (frequency-weighted). Energy CMFs squeaked by with 4.5% unweighted but turned negative on a frequency-weighted basis. Sharpe ratios were near zero or negative across the board.
The pattern is clear: commodity mutual funds do great when commodity prices are rising and terribly when they are not. That is not surprising, but it matters for your expectations.
Do CMFs Track Commodity Prices?
Here is something investors should know: CMFs do not track commodity prices very well.
The correlation between overall CMF returns and a broad commodity price index was 0.393 over the sample period. That is positive but not strong. Meanwhile, the correlation between CMF returns and equity market excess returns was 0.630. So CMFs moved more with the stock market than with commodity prices.
This makes sense when you remember that the average CMF holds about 81% of its assets in equities. When you own shares of mining and energy companies, you are exposed to stock market risk as much as commodity risk.
For gold CMFs specifically, the correlation with the gold price index was just 0.348. But gold CMF returns were highly correlated (0.790) with overall CMF returns. Again, owning gold mining stocks is not the same as owning gold.
The chapter includes a great chart comparing $100 invested in gold CMFs versus gold ETFs versus the gold price index starting in 2005. Gold ETFs tracked the gold price closely. Gold CMFs diverged significantly, especially after late 2011 when gold mining stocks got crushed even as gold prices held up relatively better.
One positive finding: CMF returns did show a small positive correlation (0.169) with inflation, consistent with the idea that commodities serve as a partial inflation hedge. But the broad commodity price index had a much stronger correlation with inflation (0.625), suggesting that a direct commodity investment hedges inflation better than a mutual fund that invests in commodity-related stocks.
Fund Flows and AUM Trends
CMF assets under management grew from about $10.3 billion in 2003 to a peak of $154.1 billion in 2011. This growth coincided with the commodity boom. After 2011, assets declined to about $120 billion by June 2016. That is still relatively small – just 0.61% of all mutual fund AUM in the CRSP database ($19.7 trillion).
Fund flows tell an interesting story. Large inflows came during 2003-2006 and again during 2009-2011. Energy CMFs actually had positive net flows between 2013 and 2016 even as energy prices were falling, suggesting investors were “buying the dip” in oil and gas.
An important question: did all this money flowing into CMFs push commodity prices higher? The chapter says probably not, for two reasons. First, CMFs are tiny relative to overall commodity markets (gold CMF AUM was only 1.6% of the total gold market in 2010). Second, most CMFs invest indirectly through equities, not through commodity futures or physical commodities, so the transmission channel to commodity prices is weak.
Risk-Adjusted Performance (Alpha)
Now for the question that matters most: did CMF managers add value after accounting for risk?
The authors used the Carhart four-factor model (market, size, value, and momentum) to measure alpha – the return you get above what a portfolio with similar risk characteristics would deliver.
CMFs had large loadings on the market factor throughout the sample, meaning they carried a lot of stock market risk. This confirms that CMFs behave more like equity funds than pure commodity plays.
Over the entire 1996-2016 period, the unweighted average alpha for all CMFs was negative but small. During the commodity boom (2004-2008), alpha was significantly positive – fund managers genuinely added value, or at least appeared to. The value-weighted alpha during this period was 11.2% annualized.
But during the post-crisis period (2011-2016), alpha was significantly negative across all fund types. The unweighted alpha for all CMFs was -6.9%. Gold CMFs had an alpha of -4.5%. Energy CMFs were at -6.9%. Other CMFs hit -7.6%.
The takeaway: CMF managers appeared to generate positive alpha during good times but destroyed value during bad times. On average, across the full sample, risk-adjusted performance was negative. Most of the money in the industry lost value after adjusting for the risks being taken.
What Explains the Alphas?
The authors ran regressions to figure out what drove better or worse alpha across funds. Three variables mattered:
Expense ratios were generally not a significant predictor of alpha, except for gold CMFs where the relationship was inconsistent. This is a bit surprising. You would expect higher fees to drag on performance, and they do in the raw numbers. But after risk adjustment, the relationship is weaker.
Turnover ratios were negatively correlated with alpha. Funds that traded more frequently performed worse after risk adjustment than funds that traded less. This is consistent with the broader mutual fund literature: hyperactive trading tends to hurt performance because of transaction costs.
Fund size (AUM) was positively correlated with alpha. Bigger funds tended to perform better on average. This held across fund types and time periods. Possible explanations include economies of scale, better research teams, or simply better access to investment opportunities.
My Take
The performance data in Chapter 14 tells a sobering story. CMFs can deliver strong returns during commodity booms, but they are not great vehicles for long-term commodity exposure. Their high equity content means they behave more like stock funds with a commodity tilt. If you want direct commodity price exposure, ETFs that hold physical commodities or futures are a better bet.
The alpha picture is especially discouraging. After adjusting for risk, the average CMF manager did not add value over the full sample period. And during the rough post-2011 years, managers actively destroyed it. If you are going to pay active management fees, you should expect active management results. The data says that expectation is not being met.
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Next: Commodity Mutual Funds Part 3: Fees, Selection, and Analysis