The $36.7 billion Los Angeles County Employees Retirement Association last month hired PIMCO and a partnership of Lehman Brothers Asset Management and Gresham Investment Management for a total allocation of $400 million from its commodities mandate. PIMCO was awarded $250 million and Lehman/Gresham $150 million.
PIMCO’s approach to commodities investing consists of two elements: swaps to gain commodity exposure and an enhanced cash portfolio, adding value in both elements of the strategy. In addition to “plain vanilla” swaps, PIMCO invests up to 40% of its portfolio in swaps designed to outperform the index. To date PIMCO has implemented seven types of enhancement trades they call “structural trades.” These trades include rolling futures on different days than the index, or rolling into further-dated futures than the index.
In 2005, Lehman entered into a sub-advisory agreement with Gresham to offer commodities investing to institutional investors. Gresham developed a rules-based commodities investment strategy called TAP, which seeks to minimize the volatility of futures investing. The TAP methodology predates the Goldman Sachs and Dow Jones commodity indices, and since 1998 has had higher returns and lower volatility than either index, according to Gresham.