Commodity prices are important determinants of corporate profitability and hence of equity valuations. This relates to the fact that they are an input (i.e. raw material) to a wide range of production processes. Including commodities in an investment portfolio, in theory, should enable portfolio managers to hedge some of the risk that the profits of the companies they own are impacted unexpectedly by changes in the price of oil or wheat, for example. However, a recent paper from Marco Lombardi and Francesco Ravazzolo published by the BIS argues that “the popular view that commodities are to be included in one’s portfolio as a hedging device is not grounded”.
This led me to wonder whether any other inputs could reasonably be included in a portfolio instead. Most lack the desirable characteristics one might look for in an investment, such as the ability to offer a return. (You could argue that commodities do not fulfill this requirement – I have). I’m unlikely to convince you that you should invest in Post-it notes or red paint, but what about one of the most important inputs in almost all production processes: labour?
Unlike commodities, there is a dividend to labour in the form of wages. It is conceivable that wages could be securitised in much the same way as mortgages or car loans. Imagine offering a large number of people a lump sum for, say, 30% of all their wages for next 5 or 10 years. Pooling a large number of workers together means that statistical and actuarial methods could be used to price the risk of “default”.
From the point of view of the worker this could be a very good deal. The lump sum could help finance the purchase of a house, an alternative to a mortgage where the risk is partly transferred to investors. Of course, armies of smart lawyers and behavioural economists (like Dan Ariely or Richard Thaler) would need to be recruited to minimize the increased incentive for you to quit your job (or laze around looking at cat videos on YouTube all day) once the lump sum is paid. From the portfolio manager’s point of view investing in a securitised product like this would be a nice hedge against inflation that actually offers a return.
Admittedly, there are some potential social issues and governments might not like private firms muscling in on their monopoly over taking a chunk of people wages at source. But from an investment stand-point I think this idea has some merit. Can anyone convince me otherwise? And, at the very least, based on this line of reasoning, is labour less eligible to be called an “asset class” than commodities?