Welcome to Futures Industry
Will Acworth and Mary Ann Burns
Published 5/1/2005

Jim Rogers is bullish on commodities. He’s not only traveling all over the world to talk about the bull market, which he says began in early 1999, but he’s developed his own index—The Rogers International Commodity Index—and invested his own money in a fund designed to track that index.

Rogers, who had his first big investing success with George Soros, is also well known for his travels around the world which he documented in two books: Investment Biker and Adventure Capitalist. His latest book, Hot Commodities, gives investors the fundamentals of commodity investing and predicts the bull market will continue for at least 15 years. Rogers was interviewed by Will Acworth and Mary Ann Burns at the FIA International Futures Industry Conference in March.

FI: Why are you so bullish on commodities?

Rogers: Why commodities now? Because historically, if nothing else, every 25 or 30 years we’ve had a long multi-year bull market followed by a long multi-year bear market. In my view, we’re now in a new bull market. These things don’t just fall out of the sky, they occur because of supply and demand. There’s been no investment in productive capacity in most commodities for 25 years and demand has continued to grow. So supply goes down, demand comes up—it causes a bull market.  Let’s suppose you and I decide to go into the lead business. It’s going to take us a long time to find a deposit. Even if we find a deposit, we still have to raise money and deal with the government and unions and environmentalists and a hundred other people. So it takes a long time to bring a new lead mine online. That’s why bull markets last a long time. Ultimately, of course, lead goes to a very high price, a lot of lead mines come online more or less at the same time, and people cut back on lead consumption. All of a sudden there’s a huge glut and so the bear market begins, and it lasts a long time because we’ve built all these mines. This is very simple stuff, and it’s not as though I have any insight or genius, it’s just the way the world works.

FI: Are we going to see the kind of bull market we saw in the 70s when cattle, hogs and pork bellies were limit up every day on the floor of the Chicago Mercantile Exchange?

Rogers: We certainly are. We’re going to see it again. I don’t really think I have proof of limit up, but you’re going to see the great bull market that you saw in the 70s. It’s coming back, it’s here, and I can’t believe how wonderful it’s going to be. Right now people don’t talk about commodities at all. Most people can’t spell commodities. It’s like mutual funds were 25 years ago—if you said “mutual funds” to most people in the world, they didn’t know what you were talking about.

FI: The growth of the Chinese economy has been a huge factor in the increased demand for commodities. You are on record as saying that China is about due for a correction. Won’t that take a lot of the air out of the bull market for commodities?

Rogers: I expect a hard landing in the Chinese real estate market and perhaps other sectors later this year. It may not happen, but if it does, it could scare people and we might have a consolidation. There have always been corrections in every bull market in history in every asset class all over the world. There will be corrections in this bull market for whatever reasons. The smart people bought such corrections in the stock bull market of the 1980s and 1990s. The smart people will buy these commodity consolidations no matter what causes them.

FI: Let’s talk for a minute about how an investor might get into this market. There are a small number of funds out there that invest in derivatives based on commodity indices. In most cases, they use swaps or structured notes to get that exposure. Your fund, on the other hand, is structured more like a commodity pool, and the money is invested entirely in exchange-traded derivatives.

Rogers: Yes, futures. Everything in this index fund is publicly traded on an exchange somewhere.

FI: Why did you structure your fund as a commodity pool instead of a mutual fund?

Rogers: We wanted complete transparency and liquidity. Plus we wanted it to be a simple, pure index fund so we use the second nearest contracts. There are also some tax advantages for some investors this way.

FI: Why shouldn’t investors put their money in commodity stocks instead?

Rogers: The studies all show that you would make much more money in commodities than in commodity stocks. Think about it—natural gas has tripled. If you pick the right natural gas stock, you might do well, but there are 200 natural gas companies. Most people don’t get the right ones. That’s because when you’re dealing with commodity stocks, you’ve got to deal with management issues and a hundred other things that aren’t related to commodity prices. And there are always things going wrong with companies, including stock markets. Copper, on the other hand, is really dumb. Copper does not care who Alan Greenspan is. It’s going to do what it’s going to do based on supply and demand, full stop.

FI: What are the hindrances to growing the commodity markets?

Rogers: Obviously speculative limits are a problem for the commodity markets. The data show huge amounts of money that want to be invested in commodities. Yale University and the University of Pennsylvania did a study recently that showed you would have made more money in the past 45 years investing in commodities with less risk and a better inflation hedge than in stocks and bonds. The academics have now said it’s okay—they have legitimized commodity trading. In the 1970s, the academics did a study on junk bonds and junk bonds became very legitimate and now there are billions of dollars invested in junk bonds. In the 60s there was a study done on stocks which said common stocks are okay again. The term they used was “total return,” and it made common stocks legitimate again after the 30s, 40s and 50s. This study is going to have the same effect. As commodities go higher and higher, and trustees are losing money in stocks and bonds, people are going to say, “Why aren’t you in commodities?” And they’re going to sneer and say, “Commodities?” And the other guy will say, “What are you talking about? Yale University said it’s okay and University of Pennsylvania’s Wharton School said it’s okay. And besides that, those guys are making money and you’re losing your shirt over there in the bonds and stocks that are going down or doing nothing.”

FI: What commodities would you like to see listed that aren’t currently exchange-traded?

Rogers: As many as possible. Twenty-five years ago there weren’t that many publicly traded stocks and now there are thousands. There’s nothing like a bull market to bring out people who say, “Hey, let’s go public.” And that will happen in commodities, too. As more and more people get interested in investing in commodities, they’re going to need to find things in which to invest and exchanges, we hope, are going to be smart enough to bring out new products. They’re talking about various things right now, some of which will succeed, some of which won’t. But in 10-15 years, there will be lots, I promise you.

FI: How do you decide the weight of the commodities in your index?

Rogers: That’s an extremely good question. I didn’t plan to do a commodities index. I had to do it because none of the rest of the indices was any good. I wanted something international—the others are U.S.-centric—and I wanted something that was obviously transparent, consistent, and liquid. But my main goal was to come up with some idea of what it costs to do business around the world, or just to stay alive—that was my concept. The problem is that living standards are very different. Let’s use Germany and Vietnam as examples. Those are both countries with 70 million people. Germany is an industrialized, mature, northern hemisphere country, lots of cars, etc. Vietnam is in the southern hemisphere; it’s not very industrialized, not many cars, but it’s booming. It may be the fastest-growing country in the world. How do you balance what’s important to Germany and what’s important to Vietnam? Oil obviously is extremely important to Germany, but not so important yet to Vietnam—but it will be. My decision was based on judgment to some extent. You have to consider liquidity of course. I have rice in my index; none of the other indexes have rice even though two-thirds of the people in the world eat rice every day. But I couldn’t put as much rice in my index as I would like because the liquidity isn’t there yet. Some day liquidity will come because huge amounts of rice trade every day, but right now it’s all over the counter. The volume will come to the exchanges as the demand comes. And then, some of these weightings may have to change, but that’s how I came up with it in the first place.

FI: So the basic mismatch is when you have elastic demand and inelastic supply.

Rogers: The demand is not that elastic either because, it’s unlikely soon, but if oil goes to $150 a barrel, we’re all still going to have electricity. The Chinese are not going to take out their electric lights any more than we are We’re still going to drive cars and ride buses. We’re not going to walk to work. We may reduce our usage some, but it takes a long time.

FI: You’re trying to anticipate demand?

Rogers: No, my concept was, what does it cost to stay alive? There’s no question that crude oil is the single most important commodity in the world. Look around your everyday life. Everything comes from energy, whether it’s cloth or material or plastic, energy, cars, buses, factories—everything runs on energy, so crude is the single most important commodity. Orange juice is not as important as crude. The CRB index gives orange juice and crude oil the same weighting. The idea that crude oil and orange juice have the same importance to life or to staying alive or to doing business is ludicrous. Even if you’re a Florida orange juice farmer, crude oil still is more important to you. That’s why I had to come up with my own index.

FI: How does your index differ from the Goldman Sachs or the Dow Jones-AIG indices?

Rogers: Goldman Sachs components fluctuate dramatically every year. Goldman Sachs can have livestock at 6% one year and 26% a few years later. It can have energy at 46% one year and 75% a few years later. AIG is the same thing. Its components change every year. AIG right now has natural gas and crude oil at the same weight. Most people have never heard of natural gas, much less use it. They also give aluminum a bigger weighting than wheat. Listen, aluminum is great stuff and it’s a miracle metal, but everybody in the world uses wheat every day. How you can say that aluminum is 50% more important to the world than wheat is beyond my comprehension. My weightings never change; they’re steady. This has my money and I want to know where it is going. You can have no idea at all what will be in the Goldman Sachs index or the AIG index in three or four years. Plus those two increase the weightings of things that go up! Bless their hearts, but do you know any serious investor who buys more after price rise?

FI: What would cause you to change the weightings?

Rogers: Well, if it was suddenly announced that orange juice causes cancer, there probably won’t be a market in orange juice any more. If cotton cures cancer, there’d probably be a bigger market in cotton. If we find that cotton cures cancer, I assure you, the liquidity in cotton is going to go through the roof, as will the demand, as will the production. If something dramatic like that happens, that would change the weightings. We are a pure, simple index fund—the only one as far as I know. We do not want the fund influenced by anything except the price of the commodities so we have to use the second nearest contract.

FI: I assume that you take a position in futures contracts, and then just roll them forward. Do you always go for the front months?

Rogers: No, the second month. Because it’s an index fund, we’re not trying to time anything. It is very, very simple. You can’t get a spot month, obviously, because then you’d get all kinds of delivery problems. We don’t get into far-out months either because then you get contango and backwardization and you’ve got to make judgments. This is a simple index. This is so simple, and it’s the only one that’s pure. We’re not trying to judge anything. For collateral, we use short-term Treasury bills. We’re not trying to be smarter than anybody else. We’re just trying to be.

FI: How do you see the relative benefits of your index strategy versus a managed futures strategy, which involves buying and selling?

Rogers: All the studies have shown that index investing consistently outperforms managed investing. Index investing beats 80% of the managers year after year after year. Believe it or not, the Rogers index has done 450% better than the average CTA in the last six years. Again, the reason I started an index fund is because I may be the best manager in the world, I may also be the worst. Why should I find out which it is when I know that an index is going to beat 80% of the people in the world? Sure, if you can find a great manager, invest with her. And introduce her to me because I’ll invest with her too. The problem is, finding the great managers, and finding them while they’ve still got a future is tough. Everybody finds the great managers after they’ve been great.

FI: Why not use commodity swaps in your fund to get exposure to the commodity prices instead of the futures?

Rogers: We might, and we might have to. Right now, the liquidity and the transparency, especially the transparency, are so much better with futures. The tax laws are good for futures, too, and I don’t think the same tax laws apply to swaps. Futures are taxed at 60/40% on the long-term gain, whether you own it a day or 10 years, so there are tax advantages to using futures, too.

FI: Can you talk a bit more about that transparency?

Rogers: The world is full of examples of people that made up their prices. That’s not the kind of thing I want to be involved with. I don’t want ever to have to make up a price. It’s not as though I’m trying to get rich off of this. I’m trying to be simple, legitimate and honest and straightforward. And you don’t have to worry about credit risk either with futures.

FI: Your fund is currently offered by Uhlmann Price Securities. Do you have plans to broaden the distribution?

Rogers: There are over 50 firms that sell the funds. We are always seeking more distribution and new firms.

FI: You also have a partnership in Europe with Diapason Commodity Management. Can you tell us more about that relationship?

Rogers: There are many foreigners these days who want to be able to invest in currencies besides the US dollar so this is for them. There are also many who are afraid to invest even in an offshore fund that has a US company behind it. “Homeland Security” is driving more and more non-US investors away.

FI: One last question. I think I overheard you saying that you’re looking at setting up shop or an outpost in Asia.

Rogers: No, we’re thinking about moving to Asia because we’d like to live outside the country for awhile. I’ve got it in my blood. I’ve been around the world twice; I like the world. China’s a very exciting country right now. We’re thinking about Spain, but China’s on top of the list at the moment. My wife Paige says this is just idle chitchat on my part so we’ll see. Our 23 month old baby girl is learning Mandarin so we might do it part of every year for her if nothing else.

Riding the Bull:

Monthly returns on the Rogers International Commodity Index since inception

August 1998 to March 2005


Note: Total return includes yield on collateral and roll returns as well as fluctuation in futures prices.

Source: Jim Rogers

Will Acworth is the editor and Mary Ann Burns is the editor-in-chief of Futures Industry magazine.
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