How Does Strategic Allocation to Gold Improve Performance?

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Robin Tsui, ETF Gold Specialist, State Street Global Advisors.

This is a sponsored article from State Street Global Advisors.

Gold has been one of the best investment stories in 2016. When markets are uncertain and volatile, investors turn to gold for diversification and as portfolio insurance.

“In fact, gold should be viewed as a long-term strategic asset in a multi-asset portfolio,” said Robin Tsui, ETF Gold Specialist at State Street Global Advisors. “Empirical research by the World Gold Council (WGC) shows that allocating 2% to 10% of gold can benefit investors seeking a well-balanced, diversified portfolio.”

To test out the WGC’s findings, SSGA examines the results of adding a 2%, 5% and 10% of gold into a multi-asset portfolio in its latest research.

“We found that the three portfolios with an allocation to gold, be it 2%, 5% or 10%, would have improved Sharpe ratio, lowered maximum drawdown and shortened the duration to fully recover maximum portfolio loss, compared to the portfolio without any exposure to gold, during the tested period,” said Robin.

He summarised three key reasons why a strategic allocation to gold may improve portfolio performance:

1. Low or Negative Correlation
The very low or negative correlation of gold relative to major equity and bond markets would potentially lower portfolio risk and therefore, all else being equal, enhance the overall risk-adjusted return of the portfolio.

2. Tail Risk Hedging
Gold has historically protected against tail risks due to its status as a safe haven asset. By delivering competitive returns during a number of challenging times, gold has provided investors with a potential means of mitigating market volatility.

Figure 1: Gold as a Tail Risk Hedge – Performance in Market Downturn

Figure 1: Gold as a Tail Risk Hedge — Performance in Market Downturn

Source: Bloomberg Finance L.P., SSGA, as at June 30, 2016. Asset classes represented by the following indices — Emerging Market Equities: MSCI EM; Global Equities: MSCI ACWI; US Equities: S&P 500; US Treasury: Barclays US Treasury TR.

3. Price Performance1
Over a 25-year period from 1 July 1991 to 30 June 2016, gold posted a cumulative return of 259%, beating the performance of global equities (233%), albeit underperforming global bonds (329%). Though, since the turn of the new century, growing investors’ interest in gold driven by the increase in availability of gold investment vehicles and changing market conditions as well as rising consumer demand for gold made the yellow metal into one of the best performing assets — between the period from 1 January 2000 to 30 June 2016, gold significantly outperformed both asset classes by posting a cumulative return of 359% versus 17% from global equities and 126% from global bonds.

Figure 2: Between 2000 and 2015, Gold Outperformed Both Global Equities and Global Bonds in 8 Out of 16 Years

ssga-figure-02-gold-outperformed-both-global-3

Source: Bloomberg Finance L.P., SSGA, data from January 1, 2000 to June 30, 2016. Asset classes represented by the following indices — Global Equities: MSCI ACWI; Global Bonds: Barclays Global Agg. Past performance is not a guarantee of future results.

“When building a multi-asset portfolio, asset classes with high forecasted risk-adjusted returns are obviously preferred, but investors are also looking for asset classes that move differently to each other,” Robin concluded. “As the size and the number of the investable asset classes continue to grow in the future, gold, a safe haven asset with low and negative correlation with other investable asset classes, ought to play a more predominant role in multi-asset portfolios.”

Click here to view the full research >>

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1 Source: Bloomberg Finance L.P., SSGA, data from 1 July 1991 to 30 June 2016. Asset classes are represented by the following indices – global equities: MSCI ACWI; global bonds: Barclays Global Aggregate. Past performance is not a guarantee of future results.

For investment professional use only. Not for use with the public.

All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.

The views expressed in this material are the views of Robin Tsui through the period ended 30 September 2016 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Investing in commodities entail significant risk and is not appropriate for all investors. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.

Asset allocation is a method of diversification which positions assets among major investment categories. Asset allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

Diversification does not ensure a profit or guarantee against loss.

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This is a sponsored article from State Street Global Advisors.

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