Both schwesser and cfai discuss the arguments why commodities are not an asset class. On the other hand on p.113 q3 in cfai and on p.94 q3 it is said that it actually is an asset class. So, what it is according to cfai, an asset class or not ???
Generally speaking: They are considered an alternative asset class. They can be a: a) store of value (like gold) b) input of something that creates value (like copper for pipes) They are not a capital asset however like equity as they do not pay cash flows.
of course they are an asset class- i don’t think anyone was saying it’s not, just that like Tikka said they dont throw off cash flows, but you can sell them for cash so they do have value clearly. Not to mention they are inflation hedges.
Also I think the argument against them being an asset class, was that on average historically commodities tend to have been in backwardation
That’s true Ped Penny. I remember that being in the reading last year, but the caveat there is that lately we’ve seen a lot of contango as more and more investors looking to speculate don’t force the hedgers to accept lower future prices.
Just know the arguments for both. They’re not going to as you “Are commodities considered an asset class?” on the test.
My argument would be that individual commodities are not necessarily an asset class as that would be considered more speculative than anything. A broadly diversified basket of commodities that incorporates periodic rebalancing of the holdings would certainly be considered an alternative asset class. You receive a number of benefits from including the commodity portfolio into the overall portfolio: low correlation relative to traditional asset classes, inflation protection, etc…
IMHO barrel of oil or ounce of gold (or futures for them) are both assets because of storage of value and inflation hedge etc… BUT if the books spend couple of pages to argue that it is not an asset class than it may be more logic to remember it for exam purpose. Thanks for clearing this topic!
There are arguments against commodities being an asset class that you should know for the exam. However, there is a strong message in the CFA curriculum that commodities are in fact an asset class when market is in backwardation since speculators can expect to make a positive roll yield. In contango, it is not as clear since roll yields are expected to be negative. However, if speculators hold long position they can achieve positive returns if underlying appreciates in value (or active management) Hope this helps!