FWP 1 dfwp.htm FREE WRITING PROSPECTUS - IPATH COMMODITIES PPT Free Writing Prospectus - iPath Commodities PPT
0
The Case for Commodities
Free Writing Prospectus
Filed Pursuant to Rule 433
Registration No. 333-145845
February 12, 2008


Hello everyone and welcome to the Barclays Global Investors’ iPath presentation on The Case for Commodities.

 


1
New Access to Difficult-to-Reach Markets
Why commodities
Traditional ways to access commodities
iPath Exchange Traded Notes (ETNs)


In this presentation we will review why commodities may make sense in a portfolio and discuss some of the traditional ways that investors access the commodity market today. We will also spend some time talking about iPath Exchange Traded Notes, which offer investors new access to these markets.

Investors have shown increasing interest in commodities, which as an asset class can offer opportunities to fine-tune a portfolio’s risk and return characteristics or protect against inflation.

So what are commodities? And what is the rationale for including an allocation to commodities in investment portfolios?

 


2
Why Commodities?
Real assets vs. financial assets
Goods used in the first part of a manufacturing process
Commodities as an asset class
Portfolio diversifier
Potential to enhance portfolio risk-adjusted return
Inflation hedge


Commodities are the goods used in the initial phase of the manufacturing process, and refer to real assets such as energy, industrial and precious metals, agriculture, and livestock. Commodity and financial asset prices respond differently to capital market and economic conditions, although both are driven by the basic forces of supply and demand. Stocks and bonds can be publicly traded in the secondary market, and prices can quickly reflect forecasted earnings and future cash flows. Conversely, many factors may contribute to how commodity prices respond to market events including warehousing, delivery constraints, changes in supply and demand dynamics, and (in the case of physical commodities) a potential lack of fungibility.

One of the most compelling reasons to add commodities to a portfolio is their potential ability to provide diversification. Commodities have historically exhibited low correlations to financial assets such as stocks and bonds. Because of these low correlations, an allocation to commodities may enhance a portfolio’s risk-adjusted returns by lowering overall portfolio volatility. In addition, commodities may also provide protection against rising inflation.

 


3
Portfolio Diversification
Source:
BGI,
S&P,
Dow
Jones
and
AIG
Financial
Products
Corp.,
Lehman,
MSCI,
Bloomberg;
12/92
12/07
based
on
monthly
returns
Correlation Coefficient
Dow Jones-AIG
Commodity Index
Total Return
SM
S&P GSCI
TM
Total
Return Index
S&P 500 Index
0.10
0.01
Lehman U.S. Aggregate Index
0.01
0.06
MSCI EAFE  Index
0.24
0.14
Annualized Standard Deviation
12.70%
19.54%
Annualized Return
9.18%
7.88%


Commodities represent an investable asset class with measurable performance. Commodity and financial asset prices respond differently to capital market and economic conditions. As a result, commodity indexes historically exhibited low correlations with the returns of equity and fixed income indexes.

This table summarizes the correlations between the Dow Jones-AIG Commodity Index Total ReturnSM and the S&P GSCITM Total Return Index. The correlations are calculated using 15 years of monthly returns. The annualized standard deviation and annualized returns are calculated over the same 15 year period.

As shown in the table the commodity indexes exhibit low correlations with the S&P 500 Index, Lehman U.S. Aggregate Index, and MSCI EAFE Index. Because commodities have low correlations to stocks and bonds, an allocation to commodities may enhance a portfolio’s risk-adjusted returns by lowering overall portfolio volatility.

It is important to note the distinction between zero correlation and negative correlation. Two indexes with returns that have zero correlation have no relationship between their returns. So if one index goes up, it provides little information about how the other index might behave. In contrast, if two indexes have returns with negative correlation, they tend to exhibit an inverse relationship. So if one index goes up, the other index will likely go down.

 


4
Commodity Index Sector Composition (% Weight)
36.49
73.83
34.08
13.28
13.34
7.08
6.95
9.15
0
10
20
30
40
50
60
70
80
90
100
Energy
Agriculture
Industrial Metals
Precious Metals
Livestock
Commodity Index Comparison
Source:
Dow
Jones
and
AIG
Financial
Products
Corp.,
S&P;
weights
as
of
12/31/07.
Subject
to
change.
Dow Jones-AIG Com-
modity Index Total
ReturnSM
S&P GSCI
Total
Return Index


Two of the most popular broad-based commodity indexes are the S&P GSCITM Index and the Dow Jones-AIG Commodity Index Total ReturnSM. This chart shows the sector or commodity group composition of the Total Return sub-indexes of both indexes.

While each index intends to provide a measure of the commodity market and its composition, distinct differences in the construction and methodology of the two indexes result in very different sector exposures.

The S&P GSCITM Total Return Index reflects the world’s production of the commodities included in the S&P GSCITM Index and is production and liquidity weighted. The Dow Jones-AIG Commodity Index Total ReturnSM is both liquidity and production weighted with constraints on individual commodities and commodity groups. This results in the Energy commodity group being represented differently in each index.

 


5
Source:  BGI, Goldman Sachs, Standard & Poor’s and Lehman Brothers.
Expected return/risk profile
Expected risk (standard deviation) %
6.15
6.5
15.3
7.75
5.15
4.75
Commodities %
0%
5%
10%
Fixed Income
Equities
Enhance Portfolio Risk-Adjusted Return


Adding commodities can actually strengthen a portfolio by providing some differentiated sources of both risk and return as demonstrated above. Here we have an efficient frontier curve with and without commodities folded into the portfolio (which represents a mix of equities and fixed income). We see that a modest allocation of 5-10% offers material benefits, particularly at the lower end of the risk spectrum where the curve is pushed out the furthest. Here we see that a portfolio with a 10% commodity allocation to it will generally have an expected return of 5.15% and the least amount of expected risk at 6.15% for that level of return.

 


6
Traditional Ways to Access Commodities
Physical Commodities
Futures / Swaps / OTC Notes
Mutual Funds


There are several other ways that investors have traditionally gained access to the commodities market.

 

   

Physical commodities provide pure exposure to the underlying commodity, but may be impractical (except for direct users) due to storage and delivery requirements. In addition, physicals might be expensive to store due to security or spoilage concerns or even space restrictions.

 

   

Futures, Swaps and OTC Notes have predominantly been limited to large institutional investors with the resources and experience to administer complicated futures portfolios themselves, or to use a total return swap and manage the related counterparty risk.

 

   

Mutual Funds, until recently, presented the most viable option for individual investors or small institutions because they provide convenient access to commodity-linked investment at reasonable costs and low investment minimums.

 


7
Accessing Commodities Through Equities
Equity returns of commodity producers may not strongly
correlate with commodity indexes
Company risk vs. commodity risk
Companies hedge commodity exposure
Source:
BGI,
S&P,
Dow
Jones;
12/02
12/07
Correlation Coefficient
S&P GSCI
TM
Crude
Oil Total Return
Index
S&P Global Energy Index
0.50
Dow Jones Oil & Gas Index
0.46
S&P North American Natural Resources Sector Index
0.50


Can an investment in commodities be achieved by investing in companies that produce commodities, instead of investing in the actual commodities? For example, do equity Energy sector indexes provide similar exposure as the S&P GSCITM Crude Oil Total Return Index?

This table gives 5-year historical correlations using monthly returns of the S&P GSCITM Crude Oil Total Return Index with three equity Energy sector indexes. This table shows that equity returns of commodity producers do not correlate strongly to commodity indexes.

An investment in the equity of commodity producers provides exposure to company-specific risk in addition to commodity-specific risk. For example, the stock price of an oil company will reflect oil price fluctuations as well as the company’s management, accounting, marketing, sales and fundamental valuation.

Moving on, we will spend the next few minutes talking about iPath Exchange Traded notes and how the iPath suite of commodity-focused ETNs can help investors access commodity markets.

 


8
Introducing iPath
®
Exchange Traded Notes (ETNs)
Securities issued by Barclays Bank PLC
Senior, unsecured debt
No principal protection, interest payments or leverage
Linked to the return of the underlying index, less investor fees
Unlike ETFs, no underlying assets are held
Daily exchange liquidity
Daily redemption feature
No tax prior to cash receipts
iPath ETNs trade daily on an exchange at market prices. Brokerage commissions will apply to  purchases and sales of the Securities in the
secondary market. Subject to requirements described in the prospectus, the Securities may be redeemed daily from the issuer in large,
institutional blocks (typically 50,000 Securities).  A  redemption charge will apply to early redemption of certain iPath ETNs.


Under current law, non-currency-related iPath ETNs should not require investors to pay tax in advance of cash receipts. Rather, they should be treated for tax purposes as prepaid contracts with respect to the relevant index, and if they are so treated, an investor will only recognize capital gain or loss upon the sale, redemption or maturity of the iPath ETN.

Unlike mutual funds, non-single currency iPath ETNs will not make capital gain or income distributions, ensuring investors control over the timing of taxable events related to their investment in iPath ETNs. The IRS and Treasury are actively considering the tax treatment of securities like non-single currency iPath ETNs which could change.

For a more complete description, please see the description of the U.S. federal income tax treatment of iPath ETNs in the prospectus.

 


9
iPath
®
Commodity ETNs
*The investor fee is equal to the Yearly Fee times the principal
amount of your securities times the index factor, calculated on
a daily basis in the
following manner: The investor fee on the inception date will equal zero. On each subsequent calendar day until maturity or early redemption, the
investor fee will increase by an amount equal to the Yearly Fee times the principal amount of your securities times the index factor on that day (or,
if such day is not a trading day, the index factor on the immediately preceding trading day) divided by 365.  The index factor on any given day will
be equal to the closing value of the index on that day divided by the initial index level. The initial index level is the value of the index on the
inception date.
10/22/2037
0.75%
NYSE Arca
GAZ
iPath
®
Dow Jones-AIG Natural Gas Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
JJE
iPath
®
Dow Jones-AIG Energy Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
JJN
iPath
®
Dow Jones-AIG Nickel Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
JJC
iPath
®
Dow Jones-AIG Copper Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
JJM
iPath
®
Dow Jones-AIG Industrial Metals Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
COW
iPath
®
Dow Jones-AIG Livestock Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
JJG
iPath
®
Dow Jones-AIG Grains Total Return
SM
Sub-Index ETN
10/22/2037
0.75%
NYSE Arca
JJA
iPath
®
Dow Jones-AIG Agriculture Total Return
SM
Sub-Index ETN
8/14/2036
0.75%
NYSE Arca
OIL
iPath
®
S&P GSCI
TM
Crude Oil Total Return Index ETN
6/12/2036
0.75%
NYSE Arca
GSP
iPath
®
S&P GSCI
TM
Total Return Index ETN
6/12/2036
0.75%
NYSE Arca
DJP
iPath
®
Dow Jones-AIG Commodity Index Total Return
SM
ETN
Maturity
Date
Yearly
Fee*
Primary
Exchange
Trading
Symbol


Currently, there are 11 iPath ETNs that offer access to a range of commodities indexes. These ETNs give investors the opportunity to make broad commodities investments or more focused commodities investments. They are linked to the performance of the:

 

 

 

Dow Jones-AIG Commodity Index Total ReturnSM

 

 

 

S&P GSCITM Total Return Index

 

 

 

S&P GSCITM Crude Oil Total Return Index

 

 

 

Dow Jones-AIG Agriculture Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Grains Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Livestock Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Industrial Metals Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Copper Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Nickel Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Energy Total Return Sub-IndexSM

 

 

 

Dow Jones-AIG Natural Gas Total Return Sub-IndexSM

 


10
Innovation in Exchange Traded Products
Convenient access
Broader strategies
New flexibility


iPath ETNs provide investors the vehicles to construct broadly diversified portfolios of traditional assets and alternative, low-correlating assets. They offer:

 

   

Immediate, cost-effective exposure to asset classes that haven’t always been easy to access, such as commodities.

 

   

Broadened asset class opportunities that expand the range and depth of possible strategies that might be explored.

 

   

New flexibility with the liquidity provided by an exchange listing and a redemption feature.

 


11
An
investment
in
iPath
ETNs
involves
risks,
including
possible
loss
of
principal.
For
a
description
of
the
main
risks
see
“Risk
Factors”
in
the
applicable
prospectus.
Barclays
Bank
PLC
has
filed
a
registration
statement
(including
a
prospectus)
with
the
SEC
for
the
offering
to
which
this
communication
relates.
Before
you
invest,
you
should
read
the
prospectus
and
other
documents
Barclays
Bank
PLC
has
filed
with
the
SEC
for
more
complete
information
about
the
issuer
and
this
offering.
You
may
get
these
documents
for
free
by
visiting
www.iPathETN.com
or
EDGAR
on
the
SEC
website
at
www.sec.gov.
Alternatively,
Barclays
Bank
PLC
will
arrange
for
Barclays
Capital
Inc.
to
send
you
the
prospectus
if
you
request
it
by
calling
toll-free
1-877-76-iPATH,
or
you
may
request
a
copy
from
any
other
dealer
participating
in
the
offering.
Barclays
Global
Investors
Services,
a
subsidiary
of
Barclays
Global
Investors,
N.A.
(“BGINA”),
assists
in
the
promotion
of
the
Securities.
Barclays
Global
Investors,
N.A.
and
Barclays
Capital
Inc.
(“BCI”)
are
affiliates
of
Barclays
Bank
PLC.
iPath
ETNs
(the
“Securities”)
are
unsecured
obligations
of
Barclays
Bank
PLC
and
are
not
secured
debt.
The
Securities
are
riskier
than
ordinary
unsecured
debt
securities
and
have
no
principal
protection.
Risks
of
investing
in
the
Securities
include
limited
portfolio
diversification,
trade
price
fluctuations,
uncertain
principal
repayment,
and
illiquidity.
Investing
in
the
Securities
is
not
equivalent
to
direct
investment
in
index
or
index
components.
The
investor
fee
will
reduce
the
amount
of
your
return
at
maturity
or
on
redemption,
and
as
a
result
you
may
receive
less
than
the
principal
amount
of
your
investment
at
maturity
or
upon
redemption
of
your
Securities
even
if
the
value
of
the
relevant
index
has
increased.
An
investment
in
iPath
ETNs
may
not
be
suitable
for
all
investors.
The
Securities
may
be
sold
throughout
the
day
on
the
exchange
through
any
brokerage
account.
There
are
restrictions
on
the
minimum
number
of
Securities
you
may
redeem
directly
with
the
issuer
as
specified
in
the
applicable
prospectus.
Commissions
may
apply
and
there
are
tax
consequences
in
the
event
of
sale,
redemption
or
maturity
of
Securities.
Sales
in
the
secondary
market
may
result
in
significant
losses.


We realize this presentation only touches the surface of iPath ETNs linked to commodities indexes, so please visit our website at www.iPathETN.com to find more detailed product information, strategies, and investor materials.

If you have any questions or comments, please call 1-877-76-iPATH.

Thanks again for your time and for supporting iPath.


12
The index components for iPath ETNs linked to commodities indexes are concentrated in the
commodities sector.  The market value of the Securities may be influenced by many unpredictable
factors, including, where applicable, highly volatile commodities prices, changes in supply and
demand relationships; weather; agriculture; trade; pestilence; changes in interest rates; and
monetary and other governmental policies, action and inaction.  Index components that track the
performance of a single commodity, or index components concentrated in a single sector, are
speculative
and
may
typically
exhibit
higher
volatility.
The
current
or
“spot”
prices
of
the
underlying
physical commodities may also affect, in a volatile and inconsistent manner, the prices of futures
contracts in respect of the relevant commodity.  These factors may affect the value of the index and
the value of your Securities in varying ways.
In addition to factors affecting commodities generally, index components composed of futures
contracts on nickel or copper, which are industrial metals, may be subject to a number of additional
factors specific to industrial metals that might cause price volatility.  These include changes in the
level of industrial activity using industrial metals (including the availability of substitutes such as
man-made
or
synthetic
substitutes);
disruptions
in
the
supply
chain,
from
mining
to
storage
to
smelting or refining; adjustments to inventory; variations in production costs, including storage, labor
and energy costs; costs associated with regulatory compliance, including environmental regulations;
and changes in industrial, government and consumer demand, both in individual consuming nations
and internationally.  Index components concentrated in futures contracts on agricultural products,
including grains, may be subject to a number of additional factors specific to agricultural products
that might cause price volatility.  These include weather conditions, including floods, drought and
freezing conditions; changes in government policies; planting decisions; and changes in demand for
agricultural products, both with end users and as inputs into various industries.
iPath ETNs typically have lower investor fees than currently existing mutual funds that invest in
similar markets and are available to retail investors. Buying and selling iPath ETNs will result in
brokerage commissions.


13
BGINA and its affiliates, and BCI and its affiliates do not provide tax advice and nothing
contained herein should be construed to be tax advice.  Please be advised that any discussion of
U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be
used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii)
was written to support the promotion or marketing of the transactions or other matters addressed
herein.  Accordingly, you should seek advice based on your particular circumstances from an
independent tax advisor.
“Dow
Jones
®
”,
“AIG
®
”,
“Dow
Jones-AIG
Commodity
Index
SM
”,
“DJ-AIGCI
SM
”,
“Dow
Jones-AIG
Commodity
Index
Total
Return
SM
”,
“Dow
Jones-AIG
Agriculture
Total
Return
Sub-Index
SM
”,
“Dow
Jones-AIG
Copper
Total
Return
Sub-Index
SM
”,
“Dow
Jones-AIG
Energy
Total
Return
Sub-
Index
SM
”,
“Dow
Jones-AIG
Grains
Total
Return
Sub-Index
SM
”,
“Dow
Jones-AIG
Industrial
Metals
Total
Return
Sub-Index
SM
”,
“Dow
Jones-AIG
Livestock
Total
Return
Sub-Index
SM
”,
“Dow
Jones-
AIG
Natural
Gas
Total
Return
Sub-Index
SM
and
“Dow
Jones-AIG
Nickel
Total
Return
Sub-
Index
SM
are
registered
trademarks
or
servicemarks
of
Dow
Jones
&
Company,
Inc.
(“Dow
Jones”),
and
American
International
Group,
Inc.
(“AIG”),
as
the
case
may
be,
and
have
been
licensed
for
use
for
certain
purposes
by
Barclays
Bank
PLC
for
the
Securities.
The
Securities
based
on
the
Dow
Jones–AIG
Commodity
Index
Total
Return
SM
are
not
sponsored,
endorsed,
sold
or
promoted
by
Dow
Jones,
AIG
Financial
Products
Corp.
(“AIG-FP”),
AIG,
or
any
of
their
respective
subsidiaries
or
affiliates
and
none
of
Dow
Jones,
AIG-FP,
AIG,
or
any
of
their
respective
subsidiaries
or
affiliates
makes
any
representation
regarding
the
advisability
of
investing
in
such
Securities.


14
Not FDIC insured   •
Have no bank guarantee   •
May lose value
“Standard & Poor's
®
”, “S&P
®
”, “GSCI
®
”, “S&P GSCI”, “S&P GSCI
Index”, “S&P GSCI
Total
Return Index”, “S&P GSCI
Crude Oil Total Return Index”
and “S&P GSCI
Commodity Index”
are trademarks or service marks of The McGraw-Hill Companies, Inc. and have been licensed for
use by Barclays Bank PLC in connection with the Securities. The S&P GSCI
Index, the S&P
GSCI
Total Return Index, the S&P GSCI
Crude Oil Total Return Index, and S&P GSCI
Commodity Index are not owned, endorsed, or approved by or associated with Goldman Sachs &
Co. or its affiliated companies. The Securities are not sponsored, endorsed, sold or promoted by
Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. or any of its affiliates (“Standard
& Poor’s”). Standard & Poor’s does not make any representation or warranty, express or implied,
to the owners of the Securities or any member of the public regarding the advisability of investing
in
securities
generally
or
in
the
Securities
particularly
or
the
ability
of
the
S&P
GSCI
Index
or
any
of its subindexes to track general commodity market performance.
©
2008
BGINA.
All
rights
reserved.
iPath,
iPath
ETNs
and
the
iPath
logo
are
registered
trademarks of Barclays Bank PLC. All other trademarks, servicemarks or registered trademarks
are the property, and used with the permission, of their respective owners.


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