HardAssetsInvestor

Written by Drew Voros  |

October 03, 2011

Jim Rogers: Rogers International Commodity Index’s Construction Fuels Its Outperformance

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Legendary investor says stability of weightings, broad list of commodities give true reflection of the cost of doing business.

All commodity indexes are not the same. But what are the differences between the S&P Goldman Sachs Commodity Index, the Reuters/Jefferies Commodity Index, the Dow Jones – UBS Commodity Index, the Rogers International Commodity Index, the UBS Bloomberg CMCI Index and the Deutsche Bank Liquid Commodity Index? Hard Assets Investor continues its ongoing series examining how the major commodity indexes work by interviewing the people and discussing the strategies behind them. In this installment, Managing Editor Drew Voros caught up with legendary investor Jim Rogers, who created the Roger International Commodity Index in 1998.

Previous “Behind the Index” interviews:

McGlone: S&P GSCI Index Purest Measure Of Commodity Markets

Carroll: UBS-Bloomberg Index Offers Commodity Curve Diversification

Kowalik: Dow Jones–UBS Commodity Index Offers Broad Diversification, Uniform Distribution

Hard Assets Investor: Why did you create the Rogers International Commodity Index?

Jim Rogers: At the end of 1998, I thought the bear market in commodities was coming to an end. I wanted to invest in commodities. So I decided what I’d do is just invest in a commodity index. But then when I went and looked at commodity indexes, they were all so horrible that I couldn’t bring myself to put my money into them.

HAI: When you say “horrible,” what do you mean?

Rogers: For instance, at the time, the Goldman Sachs [Goldman Sachs Commodity Index] was about two-thirds energy. I said, “Gosh, what kind of index is that?’ You might as well invest in oil. More important, they change the index every year. You have no idea what you’re going to own if you invest in the Goldman Sachs index. In my book, “Hot Commodities,” I have a study which shows the dramatic changes in the Goldman Sachs index.

For instance, one year something’s 26 percent and a few years later it’s 4 percent. I said to them, “How can anybody invest in that? If I invest in the Goldman Sachs index, I have no idea what I’m going to own in three or four years. And you don’t either.” This is my money I’m talking about, I’m not talking about clients’ money. And as you know, Goldman Sachs used to have extensive arbitrages against its own customers. I didn’t have any customers. And I wasn’t interested in arbitraging against customers; I was interested in investing my own money. So I eliminated that one.

I then went to Dow Jones. I happened to go to college with a guy, Paul Segal, who was running The Wall Street Journal at the time. I said, “Paul, I want to license your commodities index.” And he said, “We don’t have a commodities index, Jim.” So I pulled out The Journal and showed him the Dow Jones Commodities Index. They later got in bed with AIG and updated their index. Then a few years ago sold it over to UBS. The index changes all the time. There are things in there like aluminum, which is weighted more important than wheat. Some people in the world had never seen, much less used, aluminum. Everybody uses wheat.

Then there’s the RJ/CRB Commodity Index that has changed 10 times in its history. At the time I was looking, they had orange juice and crude oil as the same weighting. In most people’s lives, crude oil is a whole lot more important than orange juice. I wouldn’t put my money into any of them. I had to come up with my own index, which has beaten the socks off all of the others. Equally important, mine has been stable and consistent. The changes have been de minimis in the Rogers Index since it started in 1998. Those others change all the time. I don’t know how anybody could have conceivably invested in them. That’s not even gambling. At least with gambling you know how many cards are in the deck. But with these other indexes, it’s not even random. It’s totally unknown what you’re investing in. That may be one reason that I’m beating the socks off the others.