These are certainly challenging times for investors. Coming into 2020, investors were faced with low interest rates, geopolitical tensions and the prospect of recession. The subsequent COVID-19 pandemic, and its potential long-term economic impact, has only led to further uncertainty. In light of these issues, many family offices have reassessed their long-term investment strategies to mitigate risk and preserve wealth.
The impact of COVID-19
The global response to COVID-19 has been unprecedented monetary and fiscal stimuli, far in excess of that seen after the Global Financial Crisis. The impact of these actions could lead to unintended consequences on asset performance and distort asset allocations for years to come.
Global equities markets have rallied since their sharp correction
in March, primarily due to the outperformance of technology stocks. But some are questioning the resilience of this rise, with broad valuations arguably appearing frothy compared to the current state and outlook of economies around the world. This could pose a particular risk, given that 29 per cent of family office assets were held in equities in 2019.
Bonds too have seen an impact. The low interest rate environment has depressed yields. This has reduced the return investors hope to achieve, potentially pushing them towards higher yielding but riskier assets and thus reducing their effectiveness as a hedge. Additionally, widespread fiscal stimuli and ballooning government debt are raising concerns about a long-term run up of inflation.
A case for gold
This is where gold might play an instrumental role. And according to the UBS Global Family Office Report 2020, many family offices agree, with 21 per cent significantly or moderately increasing their allocation to gold/precious metals between March and May 2020.
Gold historically benefits from flight-to-quality inflows during periods of heightened risk. Year-to-date, gold has increased by almost 26 per cent, making it one of the best performing asset classes. By generating positive returns and reducing portfolio losses, gold has been an effective diversifier during times of crisis. Gold is a deep and liquid market, meaning it can be sold to meet liabilities while the values of less liquid assets correct. Moreover, the greater a downturn in stocks and other risk assets, the more negative gold’s correlation to these assets becomes.
But gold’s correlation profile does not only work in investors’ favour during periods of turmoil. Given its dual nature as an adornment and investment, gold’s long-term price trend is supported by income growth when economies expand. Its price in pound sterling has increased by an average 12 per cent per year since 1971, following the end of Bretton Woods. And it has outperformed many stock, bond and commodity indices over multiple periods since. This is even more significant given gold does not pay a coupon or dividend because, as a hard currency, it carries no credit risk.
Gold and ESG
Sustainable and impact investing is a growing trend; 73 per cent of family offices already invest some assets sustainably and 39 per cent intend to allocate most of their portfolios sustainably during the next five years. Environmental, social and governance (ESG) issues are now decisive in shaping asset selection strategies. A move towards an increased understanding of this wider set of risks, and actions to mitigate their negative impacts, have been key in shaping the evolution of the gold supply chain, as well as gold’s developing role as a portfolio and risk mitigation asset. sustainably and responsibly, key market participants across the supply chain have evolved a range of industry initiatives and standards to give investors greater confidence in the provenance of gold as a responsibly sourced asset. In 2019 the World Gold Council introduced the Responsible Gold Mining Principles, a comprehensive framework that sets out clear expectations for consumers, investors and the downstream gold supply chain, as to what constitutes responsible gold mining. Independent validation of company conformance will provide further evidence for investors that the gold production process adheres to high ESG standards, reinforced by external assurance on performance, and this should help minimise the risk of ‘greenwashing’.
But of all ESG risks, perhaps the most substantial and urgent are those relating to climate change. There is strong evidence that gold can play a constructive role in contributing to the mitigation of climate-related risks. Gold has a comparatively low emissions profile and immaterial downstream impacts, potentially reducing the overall carbon footprint for an investment portfolio.
Gold is owned by investors worldwide to protect and enhance wealth over the long-term. It is a sought-after consumer good, valued by jewellery buyers, and a key component in electronics. These diverse sources of demand, combined with its relative scarcity, give gold resilience: the potential to deliver returns in good times and bad.
