Commodities 'crucial' for portfolio resilience: QIC

The Queensland asset owner says that as institutional investors prioritise portfolio resilience, there's an asset class that stands out.

According to a new paper published by the Queensland Investment Corporation (QIC), commodities are positioned well, underpinned by trends emerging from evolving global dynamics.

The return of inflation threats, increasing geopolitical risk and competition, supply chain volatility, and greater demand for diversification remain as key factors, with QIC saying commodities be a "useful component" in a portfolio.

"Combined, these attributes - inflation protection, low correlation, and differentiated return drivers - make commodities, and commodity futures in particular, a valuable inclusion in a strategic asset allocation, especially in an environment where traditional asset classes may face headwinds," QIC said.

Commodity futures are standardised contracts traded on exchanges that transact a specific quantity of a commodity at a predetermined future date at an agreed price, QIC explained.

These contracts cover a broad spectrum of commodities including energy, metals, agriculture and other sectors and are marked-to-market daily.

Further, commodity futures contain low funding requirements, the ability to short markets, and are highly liquid in facilitating large institutional allocations.

It also eliminates the logistical complexities associated with storing and transporting physical commodities, QIC added. Particularly during inflationary regimes, commodity futures have "historically outperformed" and saw great returns in line with economic expansions.

However, it is important to distinguish commodity futures from other commodity exposures.

"While commodity price movements influence a range of assets, including the equity of commodity companies and the Australian dollar, we view these as inadequate substitutes for a direct allocation to commodity futures," the paper stated.

"Unlike other commodity-related exposures, commodity futures provide access to the commodity futures risk premium, direct exposure to commodity price movements and greater control over the underlying commodity exposures.

"In contrast, commodity-based equity and the Australian dollar offer indirect access only and are exposed to a wider range of non-commodity risks, such as equity or interest rate risk."

QIC said that in an environment shaped by inflation, geopolitics and rising uncertainty, "commodity futures offer institutional investors a combination of diversification, inflation protection and a persistent return premium - making them a powerful tool for long-term portfolio construction."