Strategic and Tactical Allocation to Commodities for Retirement Savings Schemes

CentER Discussion Paper No. 2003-20

37 Pages Posted: 22 Aug 2003

See all articles by Theo Nijman

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

Multiple version iconThere are 2 versions of this paper

Date Written: February 26, 2003

Abstract

We examine whether the variance risk of investment portfolios of pension schemes investing in traditional asset classes can be reduced by extending the set of traditional investment opportunities with commodities. We investigate the economic and statistical significance of shifts in the strategic (three year), myopic (quarterly), and tactical (quarterly rebalancing) mean-variance frontier for pension schemes with a fixed liability portfolio. We find substantial differences in optimal strategic allocations for pension schemes with nominal and inflation-indexed pensions. While our results suggest that commodities reduce the risk on the funding ratio from an inflation-indexed scheme more than 30 percent, the optimal expected return and risk trade-off is unaffected for pension schemes with nominal claims. Similar results are obtained for the unconditional myopic investor with a quarterly investment horizon. When conditioning information about the macro economic situation is used, a pension scheme with nominal claims can during certain periods also improve its efficient risk-return trade-off by investing in commodities. Moreover, we investigate the use of quarterly timing strategies switching between commodities and stocks, in addition to the buy-and-hold investments in the traditional assets and commodities. Both for nominal and real pension schemes, timing strategies can be useful in addition to the strategic allocation. The liability hedging property of commodities is likely to reduce the probability of underfunding.

Keywords: Asset Liability Management, Commodities, Optimal portfolio choice, Pension funds, Strategic asset allocation, Tactical asset allocation

JEL Classification: G11, G18, G23

Suggested Citation

Nijman, Theo E. and Swinkels, Laurens, Strategic and Tactical Allocation to Commodities for Retirement Savings Schemes (February 26, 2003). CentER Discussion Paper No. 2003-20, Available at SSRN: https://ssrn.com/abstract=425320 or http://dx.doi.org/10.2139/ssrn.425320

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

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