Rush to gold but not all asset managers convinced
Global investors are still playing it safe with the largest inflows last week going into gold, cash, and bonds, with commodity sector funds taking in over US$4 billion ($5.6 billion) but Northern Trust believes there are better asset classes than gold to use as a hedge.
Bank of America (BofA) data found gold experienced the second-largest inflows ever at US$3.8 billion, investment grade bonds had its third-largest inflow week ever at US$14.5 billion, and municipal bonds had its fourth-largest inflows at US$1.9 billion.
Since the start of the year, BofA found that gold was the top performer with an average return of 22.9%. Research house, EPFR Global noted that silver funds “enjoyed record-seeing inflows”.
“In addition to the broad desire for inflation hedges that has boosted appetite for all precious metals, hopes for increased demand from industrial users with ‘green’ applications have lifted silver prices which recently climbed to a seven-year high,” EPFR said.
However, Northern Trust executive vice president and chief investment strategist, Jim McDonald, has warned that gold is the “riskiest asset” over the long-term.
“We believe that investors should be compensated for the risks they take in individual investments, and that every asset should have a purpose. We do not have a strategic allocation to gold as, over the long term, gold doesn’t generate returns sufficient enough to justify its risk levels,” he said.
“Gold can, however, be more useful on a shorter-term basis and potentially as a hedge against risk. While many investors believe gold is a good inflation hedge, we show that both TIPS (Treasury Inflation-Protected Securities) and natural resource equities are superior hedges.
“We also show that gold can reduce portfolio downside risk during market downturns — as we have recently encountered. Because we are not overly bearish on the present risk-taking environment, we are not currently recommending a tactical position in gold in our global policy model.”
McDonald said the asset manager was not bearish enough on the overall risk taking environment to suggest a tactical gold hedge and inflation-protected securities and natural resource equities were superior hedges compared to gold.
“The price of gold is inherently unpredictable, as it lacks the traditional economic fundamentals for forecasting fair value,” he said.
“So, its course over the next year is anyone’s guess. But as we focus on being compensated for the risks we are taking during portfolio construction, we find other asset classes that more clearly fulfill a well-defined purpose in helping overall portfolio return and risk characteristics.”
In Australia, the top-performing gold fund was VanEck Vectors Gold Miners ETF at 27.4% since the start of 2020 to 30 June, 2020, according to FE Analytics within the Australian Core Strategies universe.
Gold funds performance since start of 2020 to 30 June 2020
Source: FE Analytics
VanEck portfolio manager and gold strategist, Joe Foster, said the gold mining industry was not affected by the COVID-19 restrictions as much as had been originally thought.
“As the political and economic uncertainties are likely to continue in the near future, especially due to the coronavirus crisis, from VanEck's point of view everything indicates that the outlook for gold mining companies will remain positive,” Foster said.
Over the three years to 30 June, 2020, Select Baker Steel Gold was the top performer at 91.1%.
Gold funds performance over the three years to 30 June 2020
Source: FE Analytics
Recommended for you
Amid a growing appetite for alternatives, investment executives have shared questions advisers should consider when selecting a private markets product compared to their listed counterparts.
Chief executive Maria Lykouras is set to exit JBWere as the bank confirms it is “evolving” its operations for high-net-worth clients.
Bennelong Funds Management chief executive John Burke has told Money Management that the firm is seeking to invest in boutiques in two specific asset classes as it identifies gaps in its product range.
Responsible investment performance concerns have lessened as the market hits $1.6 trillion in AUM, according to RIAA’s annual report, but greenwashing fears among asset managers are on the rise.
