COMMODITY INDICES
T
futures contracts and industrial metals are typically represented by
ABLE 1: SUMMARY OF MAJOR COMMODITY INDICES
contracts on the LME.
Commodity Rolling Rebalancing
Index Frequency Frequency
Fixed Weight, Fixed Roll Index:
The Treatment of Futures Rolling
DBLCI Monthly for energy contracts,
The traditional approach to commodity futures rolling is to roll to
annual for non-energy contracts Yearly the next nearby futures contract, a method employed by the S&P
Dow Jones-AIGCI Six times per annum Yearly
GSCI. However, the DBLCI and DBLCI-Mean Reversion, energy con-
S&P GSCI Monthly Yearly
tracts are rolled monthly while all the non-energy contracts are rolled
Reuters-Jefferies/CRB Monthly Monthly
annually. This rolling procedure was adopted given the historical ten-
RICI Monthly Yearly
dency for energy curves to be in backwardation and metal and agri-
LBCI Monthly Yearly
MLCX Monthly Monthly
cultural forward curves to be in contango.
UBS Bloomberg CMCI Daily rolling at Monthly
However, over recent years there has been a move away from a
constant maturity fixed rolling scheduled to a more dynamic rolling procedure to
Fixed Weight, Dynamic Roll Index: address the unstable nature of commodity forward curves. Examples
DBLCI-Optimum Yield Dynamic Yearly
of this approach are the family of Deutsche Bank Optimum Yield
DBLCI-OY Broad Dynamic Yearly
indices, which roll to that futures contract that maximises the roll
DBLCI-OY Balanced Dynamic Yearly
return from the list of tradeable futures contracts that expire in the
Dynamic Weight, Fixed Roll Index:
next 13 months.
DBLCI-Mean Reversion Monthly for energy
contracts, annual for
Figure 2 illustrates the destructive effect on returns from a pre-
non-energy contracts No rebalancing defined monthly rolling schedule in an environment of an upward
Source: DB Global Markets Research
sloping WTI forward curve. By adopting a dynamic rolling schedule
aimed at maximising the roll return, the Optimum Yield technology
Figure 2: The Benefits of the Optimum Yield
has delivered observable benefits.
Technology in a Contangoed Crude Oil Market
Rebalancing
The DBLCI-Mean Reversion is the only commodity index that
undertakes no rebalancing. Instead weighs are adjusted according
to a pre-defined formula which attempts to underweight ‘expensive’
commodities and overweight ‘cheap’ commodities.
The Commodity Index universe can therefore be classified
according to three broad categories:
1) Fixed weight, fixed roll index
2) Fixed weight, dynamic roll index
3) Dynamic weight, fixed roll index
Source: DB Global Markets Research Table 1. classifies the major commodity indices according to these
three categories.
Commodity Exchanges The sector composition of the major commodity indices are illus-
In terms of the family of Deutsche trated in Figure 3. The allocation to energy varies from 35% for the
Bank commodity indices, the commod- DBLCI-OY Balanced to 70% for the S&P GSCI. Table 2 outlines his-
ity futures contracts were chosen to torical performance data of the major commodity indices in the
represent the most liquid contracts in marketplace since the end of 2000.
their respective sectors. Consequently During the early stages of this commodity price rally, the perform-
NYMEX tends to dominate energy ance of commodity indices had been relatively uniform. However,
since the end of 2005 commodity
TABLE 2: HISTORICAL RETURNS, VOLATILITY & SHARPE RATIOS COMPARED
returns have become highly diver-
DBLCI - DBLCI - OY S&P DJ - gent. The commodity index winners
DBLCI MR Balanced GSCI AIGCI RICI MLCX LBCI
in 2006 were those indices with a
Annualised Return high allocation to grains such as the
For the last 1Y -0.04% 40.21% 4.74% -17.70% -0.54% -3.01% -5.88% -9.29%
Deutsche Bank Liquid Commodity
For the last 3Y 12.29% 20.16% 22.57% 2.54% 5.79% 9.65% 12.93% 3.75%
Index-Mean Reversion or indices
For the last 5Y 16.64% 21.47% 22.41% 9.95% 11.11% 16.04% 20.05% 10.91%
which used technology to tackle the
Since 29/12/2000 10.95% 15.47% 15.82% 2.94% 6.22% 10.77% 13.19% 5.00%
dynamic nature of commodity for-
Annualised Vol 20.51% 16.20% 13.77% 22.41% 15.02% 16.48% 20.47% 19.42%
Sharpe Ratio 0.53 0.95 1.15 0.13 0.41 0.65 0.64 0.26
ward curves such as the Deutsche
Bank Liquid Commodity Index-
* Annualised return based on excess return. ** Annualised vol of the daily normal returns. Calculated as a
quotient excess return and volatility. Data from 29/12/2000 to 29/12/2007 as historical data are only available
Optimum Yield. The commodity los-
for LBCI since this date. ers in 2006 were those with a high
Past performance is not necessarily indicative of future results. Annualised vol and Sharpe ratio data relate to the entire period.
allocation to energy, such as the S&P
Source: DB Global Markets Research
GSCI, which suffered on both a spot
42 SEPTEMBER 2007 COMMODITIES NOW
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