Diversification – not putting all of your eggs in one basket – is vital for long-term investment success. As well as shares and bonds, many investors favour gold for its perceived “safe haven” properties.
Tim West, managing director at Close Brothers Asset Management, examines whether this is really the case and considers what other alternative investments may have to offer.
Does gold still offer protection?
Gold polarizes opinion. Some argue that you need 10% to 15% of your portfolio in gold. Others argue that, as it produces no income, you needn’t own any. Whilst gold has always been perceived as a safe haven, investors should not forget that it is volatile. From 1980 to 2000, the price of gold fell dramatically. The then Chancellor of the Exchequer, former prime minister Gordon Brown famously sold the UK’s gold reserves right at the bottom of the market, from 1999 to 2002.
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However, if you look at the long-term performance of global equities versus gold, you’ll find that they are negatively correlated. In other words, gold has historically offered some protection, rising in value when shares have fallen. Furthermore, when interest rates fall and the opportunity cost of holding gold diminishes, the price will rally. The price of gold is up 14% year-to-date against a backdrop of falling shares. Conversely, 1980 to 2000 was a golden era for shares.
Inflationary fears
Our clients invest to protect their capital from inflation and we are currently in a short-term deflationary environment as a result of Covid-19. However, global governments and central banks have printed $20.4 trillion in monetary and fiscal stimulus and rising – 24% of global GDP. That’s much more than in 2008/9. Back then, the banks took the lion’s share to shore up their balance sheets and it did not reach corporates or employees. But this time, the government is putting money directly into businesses’ and workers’ hands.
Consumers might not be spending yet, but an increase in money supply of this magnitude must have consequences. Governments will struggle to increase interest rates given levels of corporate and personal debt, so inflationary pressures could build. Although shares have historically offered protection against inflation, they will be volatile should we see a sharp rise in inflation.
Gold, however, should thrive in such an environment. There’s a finite amount – it’s estimated the world’s gold fits into three and a half Olympic swimming pools – so as the value of money decreases, gold’s value rises, which is what happened in the 1970s.
How to buy gold
When I started working in investment management in 1997, the only option was to buy gold coins and ingots, which is an expensive way to gain exposure to gold, as to trade them you need a dealer (charges can be anything from 3% to 5%) and there are storage costs. Fortunately, today there are plenty of cheaper exchange-traded commodities (ETCs) backed by physical gold, which offer daily liquidity and accurately reflect the spot price. Another alternative is to buy shares in gold-mining companies, but these come with underlying corporate risk.
As a result if one thinks we are entering an inflationary environment, exposure to gold could prove worthwhile.
Three alternative alternatives
What do we mean by ‘alternatives’? They are essentially anything that doesn’t fall into the traditional investment categories of shares, bonds or cash. Finding alternative investment opportunities is not easy since there tends to be less information available and often less liquidity, not to mention higher fees. That’s where the importance of research comes in.
At Close Brothers, we have an in-house research capability which enables our team to quickly uncover what we believe are the very best investments in alternatives.
Infrastructure is one sector that has really taken off. Cash-strapped governments have outsourced the running of roads, schools, hospitals and prisons, which can provide investors with a secure income stream, backed by 30-year inflation-linked contracts.
Property investments also offer inflation-linked cash flows. Large warehouses acting as distribution centres have been a good investment but now smaller distribution units closer to town centres look particularly attractive. However, property is linked to corporate cash flows and is therefore closely correlated to shares, in any economic downturn.
A third alternative is absolute return funds, invariably hedge funds. These can seem a bit daunting for clients, but they are simply funds that aim to make a positive return, irrespective of the direction of markets. They may employ a variety of strategies, being long or short of many different asset classes. With a justifiable reputation for charging higher fees, it is essential to identify those managers who are capable of delivering what they promise.
If you are looking to diversify your portfolio by investing in alternative assets, it’s definitely worth speaking to a professional investment manager.
All figures as at June 2020.
Your capital is at risk. Investments can go down as well as up. Past performance is not a reliable indicator of future returns.
For a complimentary review of your investment portfolio, contact Sarah Keltie from the private client team at Close Brothers Asset Management.
sarah.keltie@closebrothers.com | +44 (0) 20 7426 4077
Telephone calls may be recorded. For more information regarding how we use your data, please see www.closebrothersam.com/legal-centre/privacy-policy/
