Safe Haven Assets

2020 has been a year which makes investors focus once again on how to insulate portfolios in times of market stress. In fact, this has always been a consideration for our client portfolios, as this latest crisis illustrates the role of such assets in providing protection against the worst of a sudden sell off in risk assets.

What are safe haven assets and why do we need them in a diversified portfolio strategy?

In periods of economic / political turmoil or in the wake of other destabilising global events, as we have seen with the emergence of the COVID 19 pandemic, investors will typically seek out assets that they believe will provide a degree of safety or protection against the ensuing market volatility. These assets might include certain government bonds, gold and other precious metals, certain currencies and even some areas of the equity market.

In such environments, “safe haven” assets tend to do a better job of holding their value than broader markets and can in some cases appreciate whilst other risk assets fall.

Government Bonds

Developed market government issued bonds typically exhibit lower volatility than equities and offer investors the high level of security associated with the creditworthiness of select developed market governments.

Gold

Gold and other precious metals have long been considered a safe haven and store of value in times of global crisis or instability. It offers diversification benefits within client portfolios with a low correlation to equities.

Currencies

When we refer to safe haven currencies, there are several prominent names that come to mind. Firstly, the U.S. dollar which is perceived as the primary global reserve currency, but also the Japanese Yen and the Swiss Franc. The safe haven status reflects investor confidence in the creditworthiness of the originating country.

Defensive areas of Equity markets.

These are certain sectors that are typically more resilient in a market sell off because they are not subject to the same swings in cyclical demand. Historically, this might have included consumer staples, and pharmaceuticals.

Do all safe haven assets behave in the same way?

No, these assets hold differing characteristics and will not necessarily react to a specific crisis in the same way. This can make it difficult to position a portfolio in advance of an unforeseen period of volatility. It is also important to recognise that safe haven status by no means guarantees protection in a market downturn.

What worked in the recent COVID 19 driven market sell off?

For this purpose, we might consider the sharpest equity market downturn in the period between February and March.

During this period, the benchmark 10-year government bonds issued by the UK government proved resilient. 10-year US government bonds (treasuries) also held up, as yields dropped when central banks cut interest rates.

Following a strong run for gold prior to the onset of the crisis, performance was more volatile during the period, but it was insulated from the worst of the equity drawdowns. Proof that safe havens are not to be perceived as a guarantee of protection. In this case, there may have been an element of profit taking, in favour of the ultimate liquidity asset, cash.

Which leads us to the performance of currencies. At the start of the COVID market crisis, the U.S. dollar weakened relative to other currencies. However, the USD was stronger in March, ultimately strengthening over the period as demand for liquidity strengthened.

Lastly, we might consider some of the perceived defensive areas of the market. Whilst we would not expect these sectors to defy gravity, they can potentially outperform on a relative basis (i.e. not fall as much as the broader market). If we consider the two sectors mentioned earlier, we can see that both consumer staples and healthcare sectors outperformed in the period. In the COVID pandemic, it has also been the growth orientated technology sector that has emerged as a new safe haven equity. The soaring performance of a sector that is typically associated with higher volatility is evidence of how difficult it is to call the areas that will provide protection in a particular macro backdrop.

However, the idea of “defensive equities” has been curtailed somewhat during the pandemic, as many of the reliable dividend paying stocks which have historically fit the characterisation of defensive equity, have displayed weaker performance, precipitated by a swathe of dividend cuts. Another reminder that the concept of defensive stocks is certainly not fixed.

The Five Wealth view of safe haven assets?

At Five Wealth we recognise that different safe haven assets play differing roles in a portfolio depending on the prevailing macro environment. We believe that choosing the right level of exposure to such assets at the right time requires a high degree of investment management experience, skill, and knowledge. We also believe that it is necessary for there to be sufficient flexibility within a strategy to enable a fund manager to move in and out of these assets in a timely fashion.

For our clients, we believe that this is best achieved through a high conviction, unconstrained, multi asset fund and therefore it will typically form the bedrock of a client portfolio. We seek to combine multi asset funds that can act to lower overall portfolio volatility, diversify from higher risk equity investments, and provide some level of capital preservation depending on the risk profile of the strategy.

Our expertise is in finding strategies and managers with the right skills and experience to navigating what can be a complex web of asset class correlations to ensure that our clients have exposure to the right assets, at the right time.

To this end, we can recommend a blend of multi asset funds within a client portfolio, with the flexibility to offer exposure to all of the discussed asset classes and this has proved a valuable strategy to insulate client portfolios from the worst of the drawdowns during this latest crisis.

If you have any questions or would like to discuss this in more detail, please do contact your adviser.

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Find out more about the author

October 13, 2020 Post by Roisin Duffy
Back to news and insights