Buy Commodities In Canadian Loonies With Brookshire's CEF

One of the things I do for kicks is peruse the SEC Web site for new fund filings. Usually, I skip over the filing for closed-end funds (CEFs). There's something about CEFs that sticks in my craw. The fact that people pay commissions to buy the fund - and then could buy the same fund without commissions just one day later - strikes me as fundamentally wrong.

Still, they're popular, and occasionally, you see an interesting closed-end fund come along. That's what happened this week, when I stumbled across this filing for new commodities funds from Brookshire. The filing covers 10 commodity CEFs tied to Brookshire-designed indexes in five asset classes:

• Core commodities futures
• Accelerated core commodities futures
• Agricultural futures
• Metals futures
• Energy futures

The asset categories are fairly traditional. The "accelerated core" fund is simply a leveraged version of the core commodities fund, which tracks a well-diversified portfolio of commodity futures.

But this filing jumped out at me for two reasons.

First, the underlying index, the Brookshire Raw Materials Index, is a great index - definitely a legitimate challenger to the commodities indexing pantheon. The index covers 26 commodity futures contracts traded around the globe, and has a sensible allocation right now:

• Energy: 41.5%
• Agriculture: 30%
• Base Metals: 19.5%
• Precious Metals: 9%

What's great about the index is that it includes exposure to commodities traded not just in the U.S., but globally in Tokyo, Canada and elsewhere. As a result, the fund includes futures that are missing from many other commodity indexes: Lumber, Rubber, Rice and Barley. The Rogers Commodity Index tracks some of these, but so far, there's no good, low-cost way to tap into that index (an exchange-traded note is under development for the Metals and Energy sub-segments of the index, but there are no plans currently for low-cost exposure to the index as a whole.)

The Brookshire funds have another wrinkle that is very interesting: Brookshire is offering them in both U.S. dollar and Canadian dollar denominations. That's an interesting twist, as many investors buy commodities in part to hedge exposure to the greenback. By pricing the fund in loonies, you get a two-for-one bet: You get a dollar hedge from the commodities exposure, and a further dollar hedge from the Canadian denomination. The loonie versions of the funds will also invest their collateral cash in Canadian treasury instruments, rather than U.S. Treasuries, meaning you will earn Canadian interest rates.

The Canadian dollar just hit a 30-year high against the U.S. dollar, which means that the benefits of the Canadian angle may already be priced into the fund. But then again, there are plenty of dollar bears out there who think that the greenback's slide is just beginning.

To be clear, the fund comes with MAJOR caveats. First, there is the load on the initial sale, which is priced at 3%. Then, there is the ongoing expense ratio, which is also priced at 3%; in an era when exchange-traded funds (ETFs) offer broad-based commodities exposure for just 0.75%, 3% is a throwback. Finally, the index underlying these funds is very active. The prospectus suggests that the fund's weighting is more or less subjective. While I like what they've done with it here, the risk of active management remains.

All in all, an interesting filing.

Comments

[gembree:]

3 and 3? Good lord, I think I'd rather pay 2 and 20.

2007 Sep 17 08:38 AM

[Greg Pinelli:]

There are many different alternatives to this particular group of funds..They are definitely getting their cut up front..what is it about CEFs that sticks in your "craw?" That you can buy funds such as BGR or GCS with miniscule management fees and at a 10% and better discount? Or CEFs that pay better than 5% and invest a significant percentage of their portfolio in Canadian bonds?
Must be anything that makes more sense than Brookshire's give me mine first and last approach.

2007 Sep 17 11:33 PM

[SBBob:]

You said that there's no good low-cost way to tap into the Rogers Commodity Index. Well, there is RJI.

2007 Dec 03 06:51 AM