Instead of heading for the exits as commodity prices plummet, the world's largest pension funds are being more selective in their investments and more active in managing their portfolios.

Commodity prices already are trading at multimonth lows amid a deteriorating global economic backdrop, and the indexes that many pension-fund investments are benchmarked against are suffering badly.

That has prompted pension-fund managers to make investments to take advantage of price swings, reducing their reliance on tracking commodity indexes, which worked in funds' favor when prices were heading up.

That the world's largest pension funds are still investing -- even if cautiously -- in commodities could ease fears that they were moving out of the asset class, which would have triggered a further collapse in prices. In fact, the pension funds may form a kind of a cushion in the commodities market against the worst shocks of the global economic slowdown.

Still, commodity prices could become more volatile. Since even a single pension fund can move huge amounts of money -- around a billion dollars at a time, for example -- into different commodity trades, pension funds' new approach could influence entire indexes and send prices soaring or plunging.

The California Public Employees' Retirement System, the U.S.'s largest public pension fund by assets, could make one of the biggest splashes. Calpers, as the pension fund is known, has a total portfolio valued at around $236 billion and it has about $1.3 billion in commodity investments with its allocation currently under 1%.

Calpers currently invests in commodities through fully collateralized swaps that track the Standard & Poor's Goldman Sachs Commodity Index, meaning contracts under which one or both counterparties post collateral to ensure performance.

The Calpers board revisits its allocations at least every three years, and plans to review them in December "in view of the market turmoil that's affecting asset class allocations -- principally private equity and real estate," said Clark

McKinley, a Calpers spokesman. "The board always has the power to set and revise investment policy, but any change in commodities investment in the near future would be unusual."

Still, Calpers plans to increase its target allocation of commodities to 1.5% by the end of 2010 from a discretionary investment range for commodities of 0.5% to 3%.

Meanwhile, with the global financial crisis upending asset values from stocks to bonds to real estate, pension funds say a diverse portfolio is all the more important. So, though the robust gains of the past several years in commodities like energy and metals have turned negative, such assets remain a focus of pension funds.

"Diversification is the main driver of our commodities investments," Mr. McKinley said. "We wanted to expand our portfolio to get fairly consistent returns generally between what we had been getting from public equity and from bonds and other fixed income, mainly as a hedge against inflation."

At U.K. fund manager Hermes, whose largest client is BT Group's pension fund, head of pension-fund management Nigel Labram said: "We're far more active in our commodities portfolio risk management than previously."

The £34 billion ($50.3 billion) BT pension fund allocates 3%, or £1 billion, to commodities that are indexed to the Standard & Poor's Goldman Sachs Commodities Index Light Energy Index.

Fund PGGM, which manages pensions for the health-care and social-work sectors in the Netherlands, last year raised its commodity allocation to 7% from 5%.

"We make long-term calculations. One bad quarter isn't going to change our view," said Frans De Wit, senior investment manager at PGGM, which has about €88 billion ($112 billion) under management, of which roughly €5 billion is devoted to commodities.

"The selloff in commodities could potentially be a nice level for participants to enter the market."