ByGregory Meyer in New York
Published: July 9 2010 09:29 | Last updated: July 9 2010 21:42
Oil, metals and grains have been pushed by commodity fund managers to US pension funds in the hope that some of the world’s biggest investors will pour billions of dollars into an asset class billed as a hedge against inflation.

But, amid disappointing returns and a prolonged bout of low inflation in the wake of the financial crisis, the top 10 US public pension plans have been slow to make the move.

US pension fund eyes commodity investments – May-31

US pension funds play safe with passive – Apr-11

Supply pressures play big part in driving the market – Feb-28

Pensions pour into emerging market debt – Jan-24

Cash inflows to commodities fell by a third in May from a year ago to $24.3bn, according to Barclays Capital. The investment bank last year said institutional investors were poised to boost commodity bets by “new record levels” in 2010.

The $202bn California Public Employees’ Retirement System, the largest US pension fund, has only 0.4 per cent of its assets in commodities, below a 1.5 per cent target. The board of the second-largest fund, the California State Teachers’ Retirement System (Calstrs), in June approved a commodities plan but said it would “gradually phase in” any allocation.

“If you looked at commodities as a stand-alone investment vehicle, it really didn’t make sense,” said Steven Tong, director of Calstrs’ innovations and risk unit. He said the new commodities investment would serve as “insurance” to “help fight off the impact of inflation on our portfolio”.

Other pension funds are holding back, put off by gyrating prices. The New York State Common Retirement Fund, the third-largest US public plan, shunned commodities because of their “unpredictable volatility”, a spokesman said. The Florida State Board of Administration, which manages the fourth-biggest fund, has gone no further than studies of the asset class.

“We’re large and we’re cautious, and you combine the two and that means we’re slow,” a Florida spokesman said.

Investing in commodity futures markets took off after research over the past decade found that they offered returns comparable to those achieved by share portfolios without being correlated to equity markets over long periods.

But, since the depths of the financial crisis in 2008, the two asset classes have not behaved as experts forecast. The S&P GSCI commodity index and the S&P 500 stock index have both declined in 2010.

Moreover, the commodity benchmark has been the more volatile of the two, according to Standard & Poor’s. US consumer prices have fallen for two straight months, muting fears of rising inflation.

Also, the rise in longer dated futures prices over spot market prices has shaved returns for pension funds that track commodity indices such as the GSCI. These funds have paid a premium for new contracts as they replace expiring ones.

Not every fund is moving slowly. The $68bn New Jersey State Investment Council recently urged boosting commodities to almost 4 per cent of its portfolio, the top of its approved range.