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TORONTO (GlobeinvestorGOLD) - Jim Rogers kicked off 2006 randomly asking women at Tokyo's Waseda University why they weren't having more babies. To the casual observer the question could have been construed as an elaborate pickup line but for those who know of Jim Rogers, it was strictly business.
The entrepreneur and author who co-founded the legendary Quantum fund with George Soros in 1970 was trying to get the facts behind the fact that Japan's birth rate is falling - and perhaps try to convince the Japanese to reverse the trend one woman at a time. In the end he resolved not to increase his Japanese holdings for fear there wouldn't be enough Japanese to pay off the nation's $7-trillion debt.
This grassroots thinking is typical of Jim Rogers. The 63 year old bow-tie wearing American has spent years travelling by car and even motorcycle to the furthest reaches of the globe looking for the most basic answers to the most basic questions. "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," he recently told a Report on Business Television audience.
That way of thinking is also what prompted Jim Rogers to establish the Rogers International Commodities Index fund in 1998. It's not a mutual fund because it is not actively managed and it's not exactly an index fund because the underlying index is his own creation. He found established commodities indices like Goldman Sachs and the Dow Jones-AIG too U.S. centric, inconsistent and illiquid.
To make his point he looks at Germany and Vietnam - two growing economies with similar populations but very different consumption habits. For industrialized Germany, oil is very important. Vietnam relies less on oil because it is less industrialized - but to Vietnam rice is more important. "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," he writes in his newsletter. He says rice would have an even greater weighting if it was more liquid. Although large amounts of rice are traded around the world every day most of the transactions are done over the counter instead of major exchanges.
The concept behind the Rogers International Commodities Index is one basic question: What does it cost to stay alive? He admits oil is the single most important commodity in the world because it is used in the production of other commodities like cotton. Other commodities include everything from natural gas and gold, to live cattle and hogs, to canola and Azuki Beans.
Crude oil has the highest weighting by far at 35 per cent. After oil, wheat is ranked second in the Rogers International Commodities Index at seven per cent and corn is third at 4.75 per cent. Jim Rogers considers soft commodities like corn, wheat, soybeans and cotton to have the most growth potential. While the price of energy is at its all time high, the price of sugar, coffee and cotton are trading well below their record highs. He expects sugar to at least triple over the next few years.
The RICI fund is structured like a commodities pool or basket, where money is invested in exchange-traded derivatives. The underlying index is based on monthly closing prices of the nearby futures and forwards contract month of international commodity markets. The selection and weighting is reviewed annually. The current weightings composition was last updated July 1, 2005.
Jim Rogers believes commodities are in the beginning of a multi-year bull market that comes every 25 to 30 years. He points to the lack of investments in productive capacity for commodities for the past 25 years, while demand has been steadily rising - especially in China. He compares the current commodities market to the great commodities bull run of the 1970s on the Chicago Mercantile Exchange.
As of mid-January the Rogers International Commodities Index returned 18 per cent compared with a 4.3 per cent return for the Dow Jones Industrial Average and a 9.2 per cent return for the S&P 500. Since its inception eight years ago the Index has more than doubled while the S&P 500 has returned roughly twenty per cent. A basket of commodities has a much lower investment risk than individual commodities but the fund can be extremely volatile. That's why it's important to do your research and speak with a financial advisor before investing.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.