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By Arijit Dutta | 10-08-2009 05:18 AM

Will Commodities Hold Up as Diversifiers?

PIMCO Commodity Real Return manager Mihir Worah on commodities' performance patterns during the crisis and what we're likely to see going forward.

Securities mentioned in this video
PRRIX PIMCO Real Return Instl
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Arijit Dutta: Hi, my name is Arijit Dutta; I'm a mutual fund analyst at Morningstar. I have with me today Mihir Worah, portfolio manager of PIMCO Commodity Real Return, which is by far the biggest mutual fund in the commodity futures space. And Mihir also runs PIMCO Real Return, which is the second biggest Treasury inflation protected bond, or TIPS fund.

Mihir, thank you so much for stopping by here today.

Mihir Worah: Thanks, it's a pleasure.

Dutta: I wanted to start with a big question on everybody's mind from the experience last year, [which] is that maybe the diversification argument in favor of commodities investment is not so strong based on what happened last year.

It seems like there's a belief now, that as more and more investors have piled into the commodities space, it's necessarily so that commodities as an asset class have gotten more correlated with other financial assets. How would you respond to that allegation?

Worah: That's a great question, and it's an important point. Because as you point out, several investors--besides the inflation hedging abilities of investment commodities--[use commodities] to diversify their investment portfolios from the regular financial assets, like bonds and equities.

And it's clear that what happened in 2008 during the crisis of the fourth quarter of 2008, every asset except U.S. Treasuries went down in price at the same time, as levered investors had to unwind their holdings in every asset--whether it was equities, it was corporate bonds, or it was commodities--all at the same time. And you saw prices going down together.

So in moments of de-levering crisis, it's well known that correlations between uncorrelated assets go to 1.0, which is what we saw in 2008. The question is, what are we likely to see going forward?

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