Financial Mail - Investors Monthly
A golden opportunity?
The metal and the money market each has its place, writes Pedro van Gaalen
Investors leverage safehaven assets for various reasons during a crisis, but not all safe havens are created equal.
“Different assets protect you against different risks. No single asset can protect investors against all market risks,” explains Ashburton Investments head of fixed income Albert Botha.
“Therefore it is important to identify the risks to which investors are primarily exposed, and to determine which they are willing to assume and which they want to reduce or hedge against.”
FNB Wealth and Investments investment education head Nicholas Riemer says: “Cash instruments and certain commodities tend to provide investors with a potential shield against falling equity prices.
“These investments are useful tools that investors should consider to diversify portfolios and spread risk.
“This approach helps to construct a resilient portfolio that can withstand market shocks to preserve wealth.”
Two safe-haven assets commonly used by investors to reduce risk are gold and money market funds.
“Both have a long-established track record and are well understood and easy to obtain, but they hedge against different things,” says Botha.
According to Riemer, gold tends to play a safe-haven role in many market events. “Investors often turn to this physical commodity to spread portfolio risk when equity selloffs occur.”
1nvest executive director Johann Erasmus says: “Investors typically leverage gold investments as a countercyclical hedge to traditional assets during times of uncertainty. During the peak of the Covid crisis, investments into gold ETFs increased to a record high, as did the gold price, which reached nearly $1, 900 an ounce.”
However, during the pandemic market crash gold failed to provide the same level of relief as during the global financial crisis — when it returned more than 20% at the peak — in spite of the metal outperforming equity markets and other commodities.
Some market commentators suggest that gold lost its status as a true safe-haven asset after shedding 45% of its value between 2011 and 2015.
“Over the past 25 years, gold has delivered 6.15% a year, compared with 9.66% from the S&P 500 in US dollar terms,” says Botha.
Other commentators point to bitcoin’s emergence as an alternative safe haven as a further reason for the drop in demand for gold. “And gold does not pay interest or dividends,” Botha says.
Gold also fell victim to panicked investor selling during the Covid crisis, when margin calls on leveraged positions sparked a “dash to cash”.
And when cash is king, money market funds offer a suitable safe-haven option for prudent diversification within defensive portfolios.
While not immune to the pandemic sell-off, these investments proved their worth during the crisis, despite record low interest rates.
According to the European Fund & Asset Management Association’s second “Market Insights” report, European money market funds recorded a sharp increase in gross sales. Investors viewed these investments as “safe, diversified assets that would protect them from the disruptions and volatility in the capital markets”.
Erasmus says: “Investors leverage short-term cash or money market instruments to provide a safer investment with a higher degree of liquidity and predictable returns.”
Their structures allow fund managers to remain agile and adapt quickly to stresses in the market to ensure capital preservation. Botha adds: “Money market funds can reduce portfolio volatility or the liquidity risks of an individual or organisation, which minimises the likelihood of forced selling at the wrong time.”
They can also add an offensive element to an investor’s war chest during volatile periods, says Riemer. “Holding cash enables investors to take advantage of market opportunities when they arise.
“And cash in a portfolio can create an additional income stream in the form of interest.”
However, investors must consider the trade-offs when including money market investments in a portfolio.
“While the upside is greater certainty during periods of volatility, this asset class offers some of the lowest long-term return profiles,” says Botha.
Nevertheless, money market funds delivered robust yields during the volatile Covid market conditions, despite the aggressive rate-cutting cycle from reserve banks.
For many investors, this performance ensured that money market funds passed the pandemic’s “real-life” stress test and entrenched their standing as a prudent safe haven for investor capital, particularly during periods of uncertainty. And they will likely remain in diversified portfolios.
“With interest rates set to rise as the global recovery takes shape, money market funds will provide greater interest-based returns, with credit risk set to fall as the economy recovers and companies start performing better,” says Erasmus. ●