No Complaints Against Negative 'Roll Yield' for Goldman's Commodity Index?

Since commodities became a nascent asset class in the early 2000s, most institutional money, particularly pension funds, have gained exposure to it through long-only, passive indices, including the S&P GSCI, DJ-UBS and the Reuters-Jefferies CRB. . . .

The mechanics of selling the expiring contract and buying the nearby future – known as “rollover” in the industry jargon – is behind the main problem of the indices and the reason why many investors are questioning the wisdom of using them. Because the investors sell one future and buy the following one, the shape of the futures curve is crucial to the profitability of commodities indices. In addition to the spot return, commodity index investors obtain a separate return – the roll yield – as they roll trades over each month, just before the futures contract expires. That return is positive when futures prices are lower than the prevailing front-month price – a backwardated market – and negative when futures prices are higher – or in contango. . . .

episodes of contango since 2006 have eroded gains, in some cases more than offsetting the rise in spot prices, or added to losses when spot prices were declining. . . .

Since January 2005, the S&P GSCI spot index – measuring just the appreciation of the commodities – has risen a massive 60 per cent on the back of China’s voracious appetite for raw materials. But when taking into account the roll yield, the total return is a loss of about 15 per cent during the period due to the contango, according to Reuters data. . . .

In spite of all the problems, bankers believe commodities indices – vanilla ones affected by the contango or the more exotic new varieties built to mitigate the problem – will continue to be popular as the easy way to gain access to the commodities asset class.

Commodity indices: ‘rollover’ practice hits investors

Javier Blas, Financial Times November 1, 2009

I am shocked that there are not more pension funds suing their consultants over this!? Did these pension funds really understand that they were investing in a mythical creature called “roll yield.” And if they did understand that, then why did they go ahead and put their retirees money into “fool’s gold?”

In the last four years commodities are up 60% (even with the bubble popping last year) and yet “investors” in the GSCI have losses totaling 15%. That is greather than a 75% difference!

Whatever happened to fiduciary duty?