Commodities -- the seemingly unstoppable growth of prices therein -- has been a hot topic for investors in recent months.
Traditionally, exposure to commodities has been achieved using futures contracts on individual materials such as metals or agricultural output. These highly leveraged vehicles
Paul Brigandi, portfolio manager of the
Direxion Commodity Trends Strategy Fund
, agreed to answer some questions about the commodities markets.
Brigandi will discuss alternative ways to gain exposure to commodities that avoid the wild volatility as well as the leverage of as much as 50-to-1 associated with some commodity futures contracts. It turns out that alternative investments in commodities are available. They offer ways to hedge against inflation in addition to potentially lowering the overall volatility of an investor's total holdings.
(Note: The Commodity Trends Strategy Fund, whose total expense ratio is 1.84%, was launched on June 10 and is not yet covered by TheStreet.com Ratings database. A
mentions another fund managed by Brigandi, the
Direxion Commodity Bull 2X Fund
about mutual funds and the commodities boom.)
TheStreet.com: Paul, being the manager of a commodities mutual fund, I'm sure you are imminently qualified to talk about commodity investment alternatives to traditional futures contracts.
In the past, and still today to some extent, commodities have typically been used as short-term trading vehicles rather than long-term buy-and-hold investments. There are a variety of reasons for the short holdings periods, including the leverage, the extreme levels of volatility and the up and down cyclical nature of the various asset classes.
A better and less risky way, to invest in commodities and have the staying power to hold positions over the intermediate to long term, is through commodity mutual funds, exchange traded fund and commodity-related stocks. Investors can invest in these with a portion of their portfolios and they will not be subject to the daily margin requirements associated with commodity futures. This immunity to margin calls means they can withstand volatile moves in the commodities markets without having to post additional cash.
Also, since an investor can purchase these products without leverage, they do not have to worry about losing more than their initial investment. All of these benefits can allow commodities to become part of an overall diversified asset allocation portfolio for the long term.
TheStreet.com: What about specific solutions offered by your firm?
Direxion offers two such mutual funds:
The Commodity Bull 2X Fund
, which provides 200% exposure to a commodity related stock index, and the newly introduced
Direxion Commodity Strategy Fund
, which tracks the S&P CTI index and is the first long/short commodity fund of its kind.
DXCTX offers exposure to commodities with more diversification and less volatility than an individual commodity future contract or a long-only commodity index investment.
TheStreet.com: Is the Direxion Commodity Trends Strategy Fund designed to exactly replicate the performance of the Standard & Poor's Commodity Trends Indicator (S&P CTI)?
The Direxion Commodity Trends Strategy Fund is designed to seek daily investment results, before fees and expense, of the performance of the S&P CTI. Due to the fees and expenses, the fund's performance will not typically be exact to that of the index.
TheStreet.com: How does DXCTX differ from other open-end mutual funds and exchange-traded funds that focus on commodities?
The Direxion CTSF is the first "pure" commodity mutual fund that takes both long and short positions on 16 different commodities across six sectors.
The Direxion Commodity Trends Strategy fund can take advantage of the cyclical nature of commodities because the S&P CTI index goes both long and short various sectors. The long components can hedge inflation, while the short components can benefit from down-trending commodity markets that are oversupplied.
As a replicator of the S&P CTI index, the fund is an all-weather vehicle that can potentially profit in any market environment. The long/short combination of holdings mitigates the extreme volatility sometimes exhibited in individual commodities and long-only commodity indices. The index maintains low correlation to stocks, bonds and other long-only commodity indices.
Standard & Poor's Web site also offers insight into the broad-base long-short S&P Commodity Trends Indicator index and provides an overview of the gauge, a fact sheet and a methodology paper that explains it in more depth.
TheStreet.com: Why should an investor consider your fund as part of an investment program?
One of the main reasons that an investor should consider the Direxion CTSF as a part of their investment program is that it allows them to diversify their portfolio with non-correlating assets. The S&P CTI has typically maintained a near zero correlation to stocks and bonds, as measured by the
index and the Lehman Brothers Aggregate Bond index. This diversification should help during periods of uncertainty in the markets.
Additionally, the long/short nature of the S&P CTI allows the Direxion CTSF to capitalize on both positive and negative trends in various commodities. This long/short approach also tends to make the fund less volatile than other commodity alternatives.
TheStreet.com: How does the S&P CTI determine if and when to either long or short a commodity? What are the parameters? How often does the index re-adjust?
The long/short decisions are made by monitoring the price of the sectors in relation to their respective seven-month moving average price. The long/short decisions are implemented at the sector level on a monthly basis. The exception is the energy sector which, due to geopolitical issues, economic changes and other factors uniquely related to the sector, is positioned either long or neutral (flat). If energy is positioned flat, its weightings are allocated proportionately across the other five sectors.
Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.