Analyzing Inventory Patterns and Actively Controlling Risk Can Help Enhance Returns From Commodities, According to Mellon Capital Management

BNY Mellon Investment Boutique Sees Benefits of Diversification, Inflation Hedging

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Apr 12, 2010, 08:12 ET

SAN FRANCISCO, April 12 /PRNewswire-FirstCall/ -- Analyzing inventory patterns and actively controlling risk can help enhance returns for commodities investors, according to a recent white paper by Mellon Capital Management Corporation. The analysis also concluded that commodities can act as a hedge against inflation and provide diversification in a properly designed strategy for those investing in traditional securities portfolios such as stocks and bonds.

"We believe active investors can improve portfolio performance by taking advantage of the factors affecting commodity prices, such as the length of time required for producers and consumers to react to and correct physical inventory shortages," said Kenton K. Yee PhD, senior research analyst, Mellon Capital. "In addition, investors potentially can benefit by trading in the same markets as participants who have goals other than profit maximization. This could include merchants seeking to hedge operating and inventory risks."

Analyzing fundamental characteristics of each commodity, such as inventory patterns, within a disciplined economics framework is a key ingredient of Mellon Capital's approach. This approach contrasts against commodity trading advisors that employ technically oriented strategies based on momentum, Yee added. The Mellon Capital approach assigns attractiveness scores based on fundamental economic analysis of each commodity. The approach builds diversified portfolios from the bottom up after taking into account factors such as inventory shortages, hedging pressure, speculative money flows, price trends, and the shapes and dynamics of futures curves.

To reduce trading costs and control risks, Mellon Capital's framework also emphasizes diversification across a broad basket of commodity futures. Mellon Capital's strategy seeks to avoid the most popularly traded future contracts, which often are overbought by indexers and speculators.

Yee noted that drawbacks to commodity investing historically have included sharp and prolonged downturns. He said, "Commodities can be highly volatile, and traditional long-only passive investing in the asset class over time has produced poor risk-adjusted returns for many investors, even as recently as 2008. Mellon Capital has developed an approach designed to mitigate volatility and potentially enhance returns without surrendering the appealing features of this asset class – diversification and inflation hedging – that attract investors in the first place."

Further details of the analysis can be found in a white paper now available at bnymellonam.com:

http://us.bnymellonam.com/core/library/documents/knowledge/AlphaTrends/CommodiesMCM.pdf

Notes to Editors:

Founded in 1983 by innovators in the investment management field, Mellon Capital Management Corporation applies a disciplined and analytical approach to global investment management strategies. As of December 31, 2009, the firm had $177.9 billion in assets under management, including assets managed by dual officers of Mellon Capital Management Corporation, The Bank of New York Mellon and The Dreyfus Corporation, and $9.9 billion in overlay strategies. Additional information about Mellon Capital is available at www.mcm.com. It is part of BNY Mellon Asset Management, one of the world's largest asset managers.

BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $22.3 trillion in assets under custody and administration, $1.1 trillion in assets under management, services $12.0 trillion in outstanding debt and processes global payments averaging $1.6 trillion per day. Additional information is available at www.bnymellon.com.

All information source BNY Mellon Asset Management as at 31/12/09. This press release is qualified for issuance in the UK and US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorised. This press release is issued by BNY Mellon Asset Management (US) and BNY Mellon Asset Management International Limited (ex-US) to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance. Registered office of BNY Mellon Asset Management International: The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorised and regulated by the Financial Services Authority

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