Edmund Shing
Hello and welcome to another podcast from BNP Paribas Wealth Management. I am Edmund Shing, Chief Investment officer.
Today we're going to talk about the role of commodities in a diversified portfolio. The starting point is that everyone seems to be underweight commodities at the moment. For instance, according to the latest Goldman Sachs survey of global family offices, these family offices, you know, some of the wealthiest investors in the world only hold a 1% total allocation of their portfolios to commodities. This compares to an average allocation of 12% in cash and another 11% in bonds and corporate. I find this somewhat surprising for two reasons. Firstly, commodities as an asset class have performed strongly over 2025 and indeed over the last five years. The S&P. GSC Are Equal Weight Commodities Index has risen 14% in US dollars this year and has doubled in value over the last five years, and that means an average annual return of 15% per year. Of course, if we look this year. Precious metals, namely gold, silver and platinum, they've been the star performers, returning so far between 39% and 58% this year. But we can also point to strategic industrial metals, such as copper and tin, that have also performed pretty well. Benefiting from technology related demand and of course, electrification of the global economy. Now, I believe that commodities can play an important role in a well diversified portfolio. Why? Well, firstly, I think achieving true diversification in investment portfolio has become a lot harder today. Global stock indices, for one thing, are more concentrated than the in the past, following the long term performance outperformance of technology stocks in the US such as Nvidia. Any reversal of these technology stocks would have a pretty heavy, damaging effect on the performance of even the most diversified stock indices, such as MSCI world, because even in the MSCI World Index, which has 1350 companies in it, the Magnificent Seven still have a weighting of over 22%. So if the Magnificent Seven suffered just seven companies in one sector in the US, if they suffer, the whole MSCI World Index suffers with it. What makes portfolio diversification even more difficult today is the positive correlation between stocks and bonds now, according to Amundi. If you look at the five year correlation between stocks and bond markets, this varies between a plus 0.44 for the UK to as high as zero plus 0.62 for the US. This is very important to know when constructing multi-asset portfolios, as it suggests that today stocks and bonds tend to go up and down together. Most importantly, it suggests that bonds will no longer act as a cushion to portfolio performance when stock markets correct or enter a bear market, as was generally the case from the year 2000 to 2019. So we could take, for instance, the relatively recent example of 2022, notable for the Russian invasion of Ukraine. Over this year, global bonds returned -16% in dollars, while global stocks returned -18% over the same period. Not much diversification of performance evident here. In contrast, the Bloomberg Commodity Index offered a plus 16% over the same period, so adding commodities in 2022 certainly would have helped your overall portfolio performance. Now, if we look at the commodities index, it is by nature diversified, split into four separate subcategories, namely precious metals, energy, industrial metals and soft commodities such as foodstuffs and cotton. Now, soft commodities are often affected by climate and crop yield, while energy and industrial metals are by nature closely tied to the ups and downs of the global economic cycle. Finally, precious metals are seen to a large extent as a store of value. Of course, gold is a particular case in point, and so precious metals do tend to perform well at times of crisis and geopolitical stress. And certainly we've had a lot of that recently. And I think this is one of the explanations behind the very strong recent performance of precious metals as a group. Now, since early 2020, we have seen, uh, a resurgence in the performance of commodities after what was actually quite a poor period of performance following 2008. I'll remind you, from 2020 until today, thanks firstly to the economic boom on the post-Covid global reopening and secondly, the boost to commodity prices following the 2022. Russian invasion of Ukraine. We have seen a 144% gain in the S&P Equal Weight Index for commodities, which roughly equates to it 18% annual average return since 2020. Today, how could you easily add commodities to a multi-asset portfolio? Well, we think there are a number of so-called intelligent ways to add commodity exposure easily to a diversified portfolio. We particularly like commodity strategies and indices that capture what we call the roll yield in commodity futures. That is, you buy commodity futures, which are where the long data futures going far out the future are much cheaper than the spot price right now. The idea is you buy the long dated commodity futures and you just hold. And hopefully that cheaper future will then converge to the higher spot price for that commodity over time. And this is called the roll yield. One shot strategy. Trying to capture this so-called roll yield is the BNP Paribas Energy and Metals Enhanced Roll Index. Now, this index has returned 15% in euros and 18% in dollars over the last year. Now, this index only holds exposure to commodities in backwardation currently exposed to gold, silver, natural gas, crude oil and copper. Or a second way. Very easy is to invest in funds and ETFs that basically replicate the Bloomberg Equal Weight Commodity Agriculture Index. This holds a basket of 12 different commodities split between energy, industrial metals and precious metals, and returned 9% over the last year in euros and 15% in dollars. Finally, if you want to be more adventurous, there are a number of funds in ETFs that give exposure to single commodities such as physical gold, silver, platinum, copper, aluminium, tin and even crude oil. And at the moment, we as a house particularly like exposure to the precious metals gold, silver and platinum, as well as selected industrial strategic metals such as copper, aluminum and tin. So that is also a final choice. And I'll remind you, these particular metals have all performed very well over 2025 to date. Thank you very much for listening to this podcast from BNP Paribas Wealth Management. Please do like, share and subscribe to our weekly series of podcasts.