Commodities: an asset class in their own right?

Investor interest in commodities has risen in recent years in line with the spectacular surge in most commodity prices. Some institutional investors, for instance Dutch or Californian pension funds, have confirmed that they have gained or intend to gain moderate exposure (less than 5% of their assets) to commodities. In parallel, the development of new investment vehicles has enabled individual investors also to gain commodity exposure. Expectations of continued strong economic growth in Asia, which should result in Asian countries’ sustained demand for commodities, may be the driver of the increased appetite for these assets. Interest also seems to be spurred by studies by academics and market analysts that highlight commodities as an effective way of diversifying portfolio risk. This assessment and interpretation suggest that investors are slowly but sustainably including commodities in their portfolios. Can we however assert that commodities constitute an asset class in their own right? This study suggests they do, given that over the long term, returns on commodity-related investments appear to outperform risk-free returns, seem to have a low or negative correlation with other asset classes and can apparently not be replicated with a simple linear combination of assets.