As major asset classes go, commodities don’t get much respect. But the established “big four” of stocks, bonds, cash and real estate all have their problems of late. Portfolio manager and author John Stephenson is making a big personal bet on commodities, with more than 50% of his personal portfolio devoted either to raw commodity exposure or to stocks of commodity producers.

He thinks investors should have 15 or 20% of their total portfolios exposed to commodities, placing him in the same camp as fellow authors Jim Rogers and Don Coxe. All believe the commodities bull market may only be halfway through its 18-year cycle.

The 2008 financial crisis interrupted this, as it did other types of investments, but in retrospect the pullback might have been the classic buying opportunity to acquire an asset class that doesn’t move in lockstep with stocks and bonds.

Stephenson, a vice-president with Toronto-based First Asset Investment Management Inc., originally crafted his thesis for a Canadian audience with a Wiley Canada book titled Shell Shocked, released a year ago. It argues the United States was falling behind in the world economic struggle, while Asian tigers and Canada were “rising.” It makes the case that emerging economies -- especially China -- need the commodities nations such as Canada and Australia produce.

Stephenson is the first Canadian to write for Wiley’s popular “Little Book” series of short (40,000 words) financial primers, with his just-published The Little Book of Commodity Investing. The 14th in the series, it shows every sign of outselling Shell Shocked, with an initial print run four times larger.

Since it’s aimed at U.S. readers, it’s less explicit than the “Canada Rising, America Falling” theme contained in the earlier book. Canadians with healthy exposure to domestic stocks may already have sufficient exposure, but he believes Americans need considerably more. A Canadian who “indexes” our market already has 13% in gold stocks, which may rise to 20 to 25% as gold moves higher and mergers occur. There are only two materials stocks in the S&P500 index: Newmont and Freeport McMoran.

Stephenson prefers picking individual commodity stocks but also looks to specialized “baskets” of securities focused directly on agricultural commodities such as coffee, corn, cotton, soybeans and sugar, or grain. He recognizes passive “asset class” investors may want only a single play or two to fill up their commodity quota, so in an interview, provides useful suggestions that aren’t in the book.

Exchange-traded funds or notes (ETFs or ETNs) can fulfill this function. He recommends either of two diversified baskets for investors who want broad but passive exposure to commodities. One is DJP, an iPath ETN linked to the Dow Jones-UBS Commodity Index. The other is GSG, an iShares ETF linked to the S&P GSCI Total Return Index.

Depending which you pick, sector exposure will vary. DJP has 32% exposure to energy (numbers rounded), 26% to agriculture, 25% to industrial metals, 12% to precious metals and 5% to livestock. GSG is skewed to energy, with 70%, 15% in agriculture, 8% in industrial metals, 4% in livestock and 3% in precious metals. Another ETN he likes is the iPath Dow Jones UBS Grains Total Return ETF (JJG/NYSE): linked to the Dow Jones-UBS Grains subindex and providing direct exposure to corn, wheat and soybeans.

These baskets could make up 40% of total commodity exposure but Stephenson suggests an equal proportion should go to 15 producer stocks such as BHP Billiton Ltd., Alcoa Inc., Suncor Energy Inc., Encana Corp., Canadian Natural Resources Ltd. and Agrium Inc. While his book doesn’t mention it, he agrees the Claymore S&P/TSX Global Mining ETF (CMW/TSX) is another way to get exposure to these names.

His list includes such local gold stocks as Barrick Gold Corp. and Goldcorp Inc., but for “insurance” he would put 20% (or 5% of an overall portfolio) into a pure gold bullion fund such as SPDR Gold Trust ETF (GLD/NYSE), the most liquid of many alternatives. “Gold is acting like a fourth currency in the world right now,” he said. It’s rising versus a weakening U.S. dollar as more investors conclude the only avenue left to the U.S. is to print money, which would add to inflationary pressures.

Risk-tolerant investors could also add small amounts of silver, platinum and palladium funds sold by ETF Securities Ltd. (a firm based in London, UK.), which also has funds focused on such industrial metals as copper, nickel and aluminum.

But before going whole hog (pun intended) on commodities, consider what another Canadian Wiley author -- Anthony Boeckh -- says in The Great Reflation. A chapter devoted to them says commodities have been a “disastrous long-term investment” and “conservative investors should tread carefully” investing in commodities as an asset class.

jchevreau@nationalpost.com