The Portfolio Benefits of Commodity Index ?· PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 2 In a Barclays Capital commodity investing survey of

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Analytic services and products by Standard & Poors are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poors has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. Analytic services and products by Standard & Poors are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poors has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. The Portfolio Benefits of Commodity Index InvestingAnalysis and OutcomesMarch 2012PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 1Assets under management in commodities has about tripled since the low in 2008commRR_phil_28aSource: Societe General , Cross Asset Research, Commodities Investment Flows, March 2012PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 2In a Barclays Capital commodity investing survey of over 100 institutional investors.commRR_phil_28aSource: Barclays Capital, Commodities Research, Commodity Cross Currents Commodity investing to rebound, February 2012For more than 70% of the survey the appropriate long-term average weighting for commodities in a portfolio is over 6%, a long way above current norms. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 3What are the historical benefits that has driven investments in commodities as an asset class?commRR_phil_28a Diversification Low correlations to stocks and bonds Inflation Protection Positive correlation to inflation AND changes in the rate of inflation Risk/Return Profile Equity-like risk and returnSource: PIMCOPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 4What is an asset class?commRR_phil_28aThere are no conclusive definitions of an asset class Super Asset Classes11. Capital assets Stocks, bonds, real estate2. Consumable/transformable assets Commodities3. Store of value assets Currency, fine-art Beta (Market) Exposures21. Exposures that produce a return NOT based on skill Financial markets, interest rates, credit spreads, volatilitySource: Ibbotson Associates 2006, Strategic Asset Allocation and Commodities, Commissioned by PIMCO and Prepared by Thomas M. Idzorek. http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/Commodities.pdf1.Greer (1997) PIMCO2.(Ibbotson [2006], Anson [2002], Waring and Siegel [2003,2005] and Dopfel [2005])PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 5What makes COMMODITIES an asset class?commRR_phil_28aCommodities offer an inherent or natural return that is not conditional on skill. Coupled with the fact that commodities are the basic ingredients that build society, commodities are a unique asset class and should be treated as such.Source: Ibbotson Associates 2006, Strategic Asset Allocation and Commodities, Commissioned by PIMCO and Prepared by Thomas M. Idzorek. http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/Commodities.pdf1.Greer (1997) PIMCO2.(Ibbotson [2006], Anson [2002], Waring and Siegel [2003,2005] and Dopfel [2005])PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 6Futures are the most practical way get direct commodity exposure Direct investing- buy the commodity and store it (Cash or Spot Market) How would you store 40,000 pounds of live cattle or 1,000 barrels of oil? Not practical for most investors Equities of commodity producers (RIO, BHP) Less direct commodity exposure Less diversification, inflation protection Higher exposure to broad stock market movements Influenced by management decisions May hedge out commodity exposure May provide exposure where futures markets are less tradable Timber, Water, Steel, Coal Futures contracts Most direct and practical solution Exchange-traded contracts offer uniformity and are regulated Provides the inherent asset class returnInvestors may choose to get commodity exposure by directly investing, using futures contracts or by using equities, but may not capture the asset class returnPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 7A special quality makes commodities tradable Commodities are fungible, raw materials used to produce the products consumers buy, from food to furniture to gasoline. Some examples include crude oil, natural gas, corn, wheat, cattle, aluminum, copper, and gold. Where the raw materials trade for cash is called the Spot MarketPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 8 Supply > Demand => Excess => Spot Price Declines Demand > Supply => Shortage => Spot Price IncreasesSupply and demand drive commodity prices in the spot marketSource: Gunzberg, J. and Kaplan, P., 2007, The Long and Short of Commodity Futures Index Investing: The Morningstar Commodity Index Family, Chapter 10 in H. Till and J. Eagleeye (eds), Intelligent Commodity Investing, p 245.PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 9Futures ContractsWhat is a futures contract?A standardized agreement between two parties. The buyer agrees to buy and the seller agrees to deliver (sell) the underlying asset at a specified price on a set future date or expiration date. Most positions are closed before expiration to avoid delivery. The futures contracts in indices are exchange-traded and regulated.Futures prices are directly related to spot pricesThe collection of futures contracts with the same underlying commodity but different expiration dates make up a forward curve. Storage situations drive the relationship between futures contracts with different expiration dates.PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 10Risk premium 2Futures contract prices are directly linked to expected spot market prices SOURCE: PIMCOSample for illustrative purposes only.October65 Producers break-even70 Acceptable profit72 Expected cash price8460Potent ial range of c ash price of c attle in cents per poundFebruary67Currentcash pricecommRR_phil_10PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 11For what risk does the index investor get paid?The futures markets exist to facilitate hedging, not to forecast prices Investors Earn An Insurance Premium Monetize this risk by owning commodity futures contracts Producers need protection against price drops Excess short hedging Keynes theory of normal backwardation Sell production forward at a discount => downward price pressure Hicks theory of congenital weakness Producers are more vulnerable than consumers Source: Till, H. and Gunzberg, J., 2006, Absolute Returns in Commodity (Natural Resource) Futures Investments, Chapter 3 in I. Nelken (ed), Hedge Fund & Investment Management.PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 12Fundamental sources that drive the commodity asset class returnscommRR_phil_12aSOURCE: PIMCOSample for illustrative purposes only.T-Bill RateExpected Inflation(plus real rate of return)Risk PremiumPrice Uncertainty (producers vs. processors)Unexpected GeneralInflation(plus... Individualmarket surprises)ExpectationalVarianceUncorrelated Volatility(mean reversion)RebalancingLow InventoryRelative to DemandConvenienceYieldComponents of ReturnCauses of ReturnPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 13Commodity indexing captures the asset class returnIn order to obtain the market return or beta from commodities,index investments should measure returns from a process that: Constructs and calculates with a passive, specified method Considers only exchange-traded futures contracts on physical commodities Assumes only long positions Collateralizes each position fullySource: PIMCOPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 14S&P GSCI Index PURE BETA Weighting Scheme World production-weighted Constituents (24) Must meet eligibility criteria on an annual basis Futures contracts on physical commodities Total Dollar Value Traded (TDVT) minimums Reference Percentage Dollar Weight minimums Denominated in USD and Trading Facility Organization for Economic Cooperation and Development (OECD) Pricing and volume availability Sectors (5 groups) Agriculture, Energy, Livestock, Precious Metals, Industrial Metals Rebalance Annual rebalance, Monthly review Roll 20% each day of the 5th through 9th S&P GSCI Business Days of each month Next nearby most liquid contractInformation as of December 30, 2011 PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 15 The historically higher energy weight stems from the production weighting that potentially leads to greater diversification, inflation protection, and liquidityS&P GSCI Index PURE BETAS&P GSCI SectorIndex Weight as of 12/30/2011 (%) Agriculture 14.7Energy 70.5Industrial Metals 6.6Livestock 4.7Precious Metals 3.5Futures VolumeCrude Oil 9,993,642 Natural Gas 5,878,263 Corn 4,055,191 Comex Gold 2,901,868 Heating Oil 2,619,425 CME Group Exchange Volume Report - Monthly Dec 2011 Sample VolumesSource: S&P Indices and CME Group at http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_Volume_Report_CMEG.pdfPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 16Source: Standard & Poors, Bloomberg. Data as of February 29, 2012. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.Performance varies across commodity indicesExhibit 1: Index Total ReturnsTotal ReturnFebruary 2012 YTD12-Month 3-Year 5-YearSince 1999S&P GSCI 6.06% 8.43% 0.23% 55.05% -7.64% 91.23%S&P GSCI Enhanced 6.07% 8.47% 0.04% 63.73% 16.93% 355.37%S&P GSCI 3-Month Forward 5.85% 8.52% -0.01% 64.63% 19.83% 373.20%S&P GSCI Dynamic roll 4.32% 7.72% -1.48% 54.77% 37.39% 513.22%S&P GSCI Light Energy 3.86% 7.08% -6.39% 50.03% -2.45% 65.71%S&P GSCI Covered Call Select 2.14% 3.65% -11.67% 42.32% 21.07% naS&P World Commodity Index 7.11% 12.52% 7.07% 100.01% 32.70% 338.53%S&P Systematic Global Macro -0.11% 3.54% -1.34% 30.49% 78.53% naAlthough the S&P GSCI is considered the simplest beta, many indices have modifications that may affect performance. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 17Source: Russell Investments // Active Commodity Investing. Russell Research by Lee Keyser, Research Analysthttp://www.openworldinvesting.com/files/active_commodity_investing.pdfActive strategies have many choices of fund structures and implementation options Long-only products utilize curve strategies under/overweights to commodity sectors and individual commodities Long-neutral products tactically allocate to cash Long-biased products allow limited shorting Long-short products benchmark-agnostic and seek absolute returns use spread trades and outright long or short directional bets Specialist managers limit investments to specific sectors Thematic strategies employ long-term macro views on commodity sectorsPROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 18Source: Russell Investments // Active Commodity Investing. Russell Research by Lee Keyser, Research Analysthttp://www.openworldinvesting.com/files/active_commodity_investing.pdfRisk factors to consider in active commodity investing Liquidity Large position sizes Over-the-counter derivatives Collateral management Invest collateral opportunistically May use leverage Credit/counterparty risk May use custom derivatives Speculative limits Size and implementation strategies may be disrupted Delivery risk Non-commercial players may get squeezed during delivery Model/analytics risk Many risk systems only handle stocks and bonds appropriately PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 191. Source:http://www.nfa.futures.org/nfa-registration/cta/index.htmlMany active managers use more than just commoditiesA Commodity Trading Advisor (CTA) is an individual or organization which, for compensation or profit, advises others as to the value of or the advisability of buying or selling futures contracts, options on futures, or retail off-exchange forex contracts.1What does this mean?A CTA registers with the National Futures Association (NFA) so that it is regulated by the U.S. Commodity Futures Trading Commission.WHY IS THIS SO CONFUSING?!The word commodity in CTA doesnt reflect what the strategies are trading! The CTAs are trading any futures contracts including ones on stocks, currencies, interest rates, fixed income, and commodities.PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 20Implications of active strategies versus passive ! "! # # $ ! $ ! % &! &! % % % PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 21Commodities have provided diversification from equities and from nominal bondsSource: S&P Indices. S&P 500, BarCap US Agg , and S&P GSCI represent Stocks, Bonds, and Commodities, respectively.In only 4 years from 1970 through 2011 did both the S&P 500 and the S&P GSCI drop in value. Correlations on Monthly Returns from 1/76-12/11S&P 500 BarCap US Agg S&P GSCIS&P 500 1.00 0.23 0.17 BarCap US Agg 0.23 1.00 (0.02)S&P GSCI 0.17 (0.02) 1.00 PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 22Commodities have provided diversification during historical crises Commodities provided diversification during a political crisis Persian Gulf War Commodities provided diversification during a financial crisis Black MondaySample for illustrative purposes only.SOURCE: Goldman Sachs, Bloomberg Financial MarketsRefer to Appendix for additional chart and index information.commRR_phil_23S&P GSCI VS. S&P 5006080100120140160Jun '90 Jul '90 Aug '90 Oct '90 Nov '90 Dec '90 Feb '91 Mar '91Growth of 100 DollarsS&P GSCI S&P 500S&P GSCI VS. S&P 50060708090100110Sep '87 Oct '87 Oct '87 Oct '87 Oct '87 Oct '87 Oct '87Growth of 100 DollarsS&P GSCI S&P 500PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 23This pattern has led to increased portfolio efficiency and capital preservationSource: S&P Indices. S&P 500, BarCap US Agg, and S&P GSCI represent Stocks, Bonds, and Commodities, respectively. Monthly return data.Historical Performance for Hypothetical Portfolios from 1/76-12/11Portfolio 1 Portfolio 2 Portfolio 3S&P 500 100% 50% 40%BarCap US Agg 50% 50%S&P GSCI 10%Annualized Return 7.28% 7.77% 7.78%Annualized Risk 15.27% 8.71% 7.77%Sharpe Ratio 0.48 0.89 1.00 PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 24020406080100120140160180200Dec-01Jun-02Dec-02Jun-03Dec-03Jun-04Dec-04Jun-05Dec-05Jun-06Dec-06Jun-07Dec-07Jun-08Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11Dec-11Portfolio 1 (100% S&P 500)Portfolio 2 (50% S&P 500, 50% S&P/BGC 7/10 Yr T)Portfolio 3 (40% S&P 500, 50% S&P/BGC 7/10 Yr T, 10% S&P GSCI)This pattern has led to increased portfolio efficiency and capital preservationPortfolio 1 Portfolio 2 Portfolio 3Annualized Return 0.92% 4.03% 4.50%Annualized Risk 15.93% 7.61% 7.26%Sharpe Ratio 0.06 0.53 0.62 Historical Performance for Hypothetical Portfolios from 1/02-12/11Source: S&P Indices. S&P 500, S&P BG/Cantor 7/10 Yr. U.S. Bond, and S&P GSCI represent Stocks, Bonds, and Commodities, respectively.PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 25There have also been low correlations between sectors which has benefited well-diversified indicesSource: S&P Indices. S&P 500, S&P BG/Cantor 7/10 Yr. U.S. Bond, and S&P GSCI represent Stocks, Bonds, and Commodities, respectively. !"#$% &'!!( )*+( )*,+( )*+( )*-+( )*)+( )*+ '()) )('' )(*+ )(), )(*-( )*,+ )('' '()) )('. )()/ )('0( )*+ )(*+ )('. '()) )()* )(*1( )*-+ )(), )()/ )()* '()) 2)()-3( )*)+ )(*- )('0 )(*1 2)()-3 '())In only 4 years since 1984 did all of the sectors move in the same direction and that direction was positive. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 26Commodities have provided protection from inflationS&P GSCI yoy% and CPI yoy Index have 0.68 correlation since 1991 and 0.75 correlation in the past 10 yearsSource: S&P Indices and United States Department of Labor, Bureau of Labor Statistics. http://www.bls.gov/cpi/PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 27Commodity index investments may provide a levered response to inflationSOURCE: PIMCO, Bloomberg, "Facts and Fantasies about Commodities Futures": Gary Gorton and Geert Rouwenhorst (rolling 12-month calculations)Bolded numbers above (representing inflation beta) are measured by CPI-U and numbers in parentheses are r-squared.R-squared signifies the percentage that inflation explains of the variability in commodity index returnsInflation beta can be interpreted as: (using DJUBSCI 1992-2009 as an example) A 1% increase in inflation results in 10.8% increase in return of the DJUBSCI during the period from 19922009Time periods shown reflect inception of G&R data (1960), first full year of returns for the S&P GSCI (1971), first year crude oil was included in the S&P GSCI (1987) and first full year of returns for the DJUBS CI (1992)G&R refers to Gorton and Rouwenhorst, who constructed an equally-weighted collateralized futures index with data through 2007.Hypothetical example for illustrative purposes only.Refer to Appendix for additional hypothetical example, index and risk information. commRR_phil_78INFLATION BETASPGSCI DJUBSCI G&R*19602007 1.6 (0.08)19712007 1.1 (0.02) 1.5 (0.06)19712009 2.8 (0.11)19872007 8.7 (0.18) 4.1 (0.14)19872009 13.7 (0.50)19922007 11.7 (0.13) 7.6 (0.14) 7.5 (0.23)19922009 17.0 (0.50) 10.8 (0.46)A dollar of commodities may hedge more than a dollar of the portfolio from inflation PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poors. 28Source: Russell Investments // Active Commoditiy Investing. Russell Research by Lee Keyser, Research Analysthttp://www.openworldinvesting.com/files/active_commodity_investing.pdfVirtually everyone is short commodities so to investing through indices may provide protectionThere is a simple reason everyone might want to invest in commodity indices to capture the asset class returnIf you buy products like gas, food, and clothing, then you are a consumer. Remember consumers are short commodities so owning them through an index may at minimum protect against price spikes and hence provide insurance. Analytic services and products by Standard & Poors are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poors has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. Analytic services and products by Standard & Poors are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poors has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. Contact Us:www.spindices.com/Commoditiesmike_mcglone@standardandpoors.comjodie_gunzberg@standardandpoors.com

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