Bestinvest says
As the returns generated by this fund are derived from the change in the underlying commodity prices, and not from natural resource companies, this fund has a lower correlation to equity indices that most commodity funds. Furthermore, natural resource companies tend to be more volatile than the underlying commodities, so this fund tends to have a lower volatility as well. The corollary to this is that equities can produce higher returns in rising markets. However we think that this fund represents an excellent addition to portfolios and we have a high degree of conviction in the skill of the underlying managers.
Because the fund qualifies as a UCITs product the managers cannot invest directly in the futures curve. Instead they use swap contracts which are traded daily at the market close to avoid slippage and settle fortnightly to reduce counterparty risk. Currently they have two counterparties, Goldman Sachs and JPM. The swaps traded are excess return swaps and the arrangements with these banks are such that the managers have flexibility to effectively invest along the futures curve. This allows them to generate positive returns through changes in the structure of the yield curve. Over the long term this should contribute about one-third of returns to the fund.
The structure of the yield curve is one factor driving returns. The others are fundamental views on each commodity, seasonality and technical factors.
The fund can invest across all 25 different commodities in the index which encompasses Metals, Energy, Agriculture and Soft Commodity. The Dow Jones index has a much lower weight to energy than the S&P GSCI index, which means it is normally less volatile.