Big investors buying into baskets of commodities saw lower returns in the first half of this year, compared with a year ago, as oil generated slimmer gains and the search intensified for new strategies.
Analysts said the main indexes, used by investors to access raw materials, were saved from a worse first-half performance and, in some cases, a loss, by a sector-wide rebound in the last two days of June after a sell-off driven by inflation concerns.
Indexes were still the first port of call for investors new to commodities, but an array of rival products, including different styles of index, are providing competition.
A case can be made that markets have changed substantially and it is unlikely that what worked in the past will do so going forward, said James Paget, head of European Commodities Distribution at UBS investment bank.
We are seeing interest in enhanced index products.
Since its launch in mid-June, UBS's Oilfield Strategy Index has generated a total return of seven percent.
Of the established indexes, which group a range of commodities and focus on contracts for near-term delivery, Deutsche Bank's Liquid Commodity Index (DBLCI) was the best performer, gaining 13.2 percent in the first half.
Its rise was fueled by its comparatively big exposure to metals, including aluminum.
Aluminum returns continue to be the star performer across the six components of the DBLCI, Deutsche Bank said.
Aluminum gained 16 percent in the first half, compared with a loss of 12 percent the same time a year ago.
Oil, which dominates the biggest index, the Goldman Sachs Commodity Index (GSCI), gained around 20 percent in the first half of this year versus 35 percent over the same period in 2005.
The Dow Jones-AIG Commodities Index (DJ-AIGCI), the second biggest of the main indexes, posted the weakest performance, gaining 3.6 percent in Jan-June 2006, compared with 6.4 percent a year earlier, according to Reuters data.
It was also the only commodity index to underperform the Dow Jones Industrial Average, which rose by four percent.
Spokesmen were not available to comment on the DJ-AIGCI or the GSCI, although Goldman Sachs said the GSCI now held nearly $60 billion. The figure has more than quadrupled since 2002.
At the end of June last year, a spokesman said the GSCI had grown to around $35 billion-$40 billion.
Analysts have estimated that in total more than $80 billion is benchmarked to the commodities indexes. Some have put the figure at as high as $110 billion.
Of the smaller indexes, the DBCLI would not disclose the value of money benchmarked to it.
Industry sources said the Reuters/Jefferies CRB index holds investments totaling between $3 billion and $5 billion, while U.S. investor Jim Rogers said his Rogers International Commodity Index held at least $4 billion.
Apart from gains generated by the performances of the various components of the indexes, returns can derive from rolling positions from one contract into a later one.
The GSCI, with its roughly 74 percent energy weighting, has been under pressure from an uncharacteristic structure on the energy markets.
Historically, prompt oil contracts have been more expensive than those for later delivery because of the cost of storage, but high inventory levels have helped to reverse the price structure and eroded indexes' roll returns.
After negative returns in the last quarter of 2005 and first quarter of this year, one London-based analyst calculated the GSCI had only been rescued from another period of negative returns by the late June commodities rebound.
Advocates of the indexes have repeatedly said their main aim is to provide diversification over the long term, making short-term gains or losses relatively meaningless.
Many analysts agree the big indexes will have a role for years to come, but say investors are also looking elsewhere.
They offer a simple and effective investment route for investors seeking broadly diversified exposure across commodities, Paget at UBS said of the main indexes.
But he said products with modified roll dates or more targeted strategies were attracting increased interest.
High commodity prices are also generating caution but many investors still see the asset class as a good bet.
No one will be able to tell for sure which market is going to give the next five percent gain, said Eliot Geller, managing director of Jefferies Financial Products.
But I think investors will continue to seriously look at commodities as an asset class and diversification tool in their portfolios.
(additional reporting by Barani Krishnan)