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Proving it’s metal

23rd June 2022

It has been the worst start to a year for a classic 60/40 equity/bond* portfolio since 1937 (yes, nineteen-thirty-seven). Bonds have not been an effective diversifier of equity risk as government and corporate bonds have suffered their worst start to a year in history alongside sharply falling equity markets. Inflation has made a mockery of the notion that bonds are always an effective diversifier of equity risk – investors need more tools in their armoury.

Using a tracked universe of over 500 open-ended funds and investment trusts spanning equities, private equity, government bonds, corporate bonds, asset backed debt, private debt, property, battery storage, music royalties, shipping, gold, commodities, absolute return, hedge funds and managed futures, there are only a handful of funds that have managed to deliver positive returns in sterling terms (that’s what matters to our underlying investors) both during the covid drawdown (from 19/02/2020 to 23/03/2020) and the recent valuation driven sell off (from 04/11/2021, the day that Scottish Mortgage peaked, to today). These funds are Odey Swan, NB Uncorrelated Strategies, Garraway Financial Trends, Winton Trend, US Solar and WisdomTree Physical Gold.

We rule out owning the first four on the list as we seek to own assets that offer a margin of safety and bring diversification benefits to our funds. They fail the ‘own assets’ test as these are all strategies where it is hard (impossible) to identify a margin of safety. You are relying purely on either manager skill, or the quality of trading algorithms to succeed. They tend to be very volatile beasts and cost a lot to hold when they are not needed – ie Odey Swan was down 54% (!) in the 5 years leading up to the covid sell off. That is a very expensive portfolio hedge.

US Solar is a bit of a special situation on the list. It is dollar quoted and the strength of the dollar against sterling was enough to offset the decline in the share price during the covid sell off and during the recent market drawdown.

The only asset that has achieved a positive return in sterling during both sell offs is gold. The precious metal continues to act as a genuine diversifier of equity and bond risk during risk off environments. WisdomTree Physical Gold rose 7.4% during the covid sell off and is up 12.1% since the 4th November. Looking back further, during the sharp decline in equity markets at the end of 2018 (remember that?!) it rose 8.8%. During the sharp fall in UK equity markets in 2016 on the Brexit vote gold rose 18.2% in 4 days from 23-27th June 2016.  When markets fell on the China growth scare (28/05/2015 to 11/02/2016) WisdomTree Physical Gold rose 15.2%. When the Eurozone crisis was in full swing in 2011 (drawdown from 05/07/2011 to 22/09/2011) it rose 20%.

Gold has consistently proven its mettle as a defensive asset and a safe haven when times get tough. It has 5,000+ years acting as a store of value for investors. It is a defence against loss of confidence in central banks and governments and fiat currency debasement. We own physical gold (either directly through WisdomTree Physical Gold or indirectly through Jupiter Gold & Silver which has c.10% of its portfolio in physical gold) across all three of our funds.

It has been a more frustrating period for gold miners of late. Valuations have gone from very cheap to extremely cheap. Gold miner valuations are pricing in gold at around $1500/oz, compared to the current level of $1832. It is two and a half years since gold was last priced at $1500. Gold developer valuations are close to all time troughs. It is a similar story for silver miners. They are too cheap, and we continue to have exposure to precious metals miners across all three funds.

*Using the S&P 500 and the US 10-Year Treasury to get historic data

Dan Cartridge – Assistant Fund Manager

For professional advisers only. This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC362.

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