One of the reasons commodities feature as a core part of many multi-asset portfolios is because of how they behave alongside more traditional asset classes, such as equities and fixed income.
Steve Waddington, portfolio manager at Insight Investment, says any multi-asset strategy should take into account how different assets perform in relation to each other through various market environments.
He explains: “Equity markets and commodities tend to be positively correlated when commodities are driven by concerns over demand, and negatively correlated [amid] concerns over supply – most notably as a result of geopolitical events.
“Although supply overhangs are an issue at present, concerns over demand are a greater swing factor.”
However, government bonds tend to be negatively correlated to commodities most of the time, Mr Waddington adds.
It has been a mixed year for commodities as the price of oil has continued to fluctuate between $40 and $50 a barrel, while gold and silver have outperformed as investors flock to these safe havens, particularly in light of the Brexit vote.
| Expert View: Gold |
Adrian Ash, head of research at BullionVault, explains the investment properties of gold that make it a safe haven: “Gold tends to do well when other assets fail to perform, but it does best when people lose faith in central banks. Die-hard gold investors never trust the fiat money system. “Central bankers make gold bugs of us all when they try desperate experiments to claim some pretence of control over the economy or markets. “Gold pays no interest, but it cannot be destroyed. That makes it very different from bank deposits or debt instruments. “Gold’s opportunity cost is the interest, yield or capital gain you could be earning elsewhere, so it can be highly sensitive to changes in interest rates – not the nominal but the real inflation-adjusted rate, and not the absolute level but the direction of travel.” |
Nitesh Shah, director and commodities strategist at ETF Securities, says: “Since equities have had a fairly long period of recovery and the bond market is somewhat distorted by global quantitative easing, there is an investor desire to diversify their portfolios to include assets such as commodities.
“[The asset class] has probably been underperforming, not because the fundamentals have been bad in the past few years, but more because sentiment has been poor.
“It’s something that a lot of investors are looking at, especially when it comes to the precious metals and industrial metals space.”
As for why precious metals act as a hedge in a multi-asset strategy, Christopher Meurice, associate director at Signia Wealth explains: “Gold is foremost a store of value, doubly so in extreme situations where confidence in the value of fiat currencies or credit, previously thought of as essentially risk-free, reaches its nadir.
“Its sensitivity to political and economic uncertainty has allowed it to rise in value during both inflationary and deflationary periods, as long as fear is high.”
