Advisers mustn’t panic and push their clients into traditional safe haven assets as the UK faces Brexit, fund house Gam has warned.
Doug Branson, head of UK distribution for Gam, said in the current climate investors are looking for acceptable levels of volatility, smooth returns and capital preservation from safe havens.
Speaking at the FTAdviser Redefining Safe Havens roadshow, in association with Gam, Mr Branson said typically investors saw gold, currencies and government bonds as safe havens in turbulent times.
But advisers gathered at the event at Durham County Cricket Club heard from Mr Branson that they should be challenging their clients’ conventional views on these so-called safe haven assets.
He said investors who ploughed cash into UK 10 year gilts over the last decade were way behind where they would have been if they had put cash into equity markets.
Turning to gold, Mr Branson said there were no significant losses to look at over the last decade.
During the global financial crisis, he pointed out you didn’t lose money on gold but standard deviation during that period was 26 so despite the commonly held perception of this being a safe haven metal it was in fact volatile.
Even in times such as this, when investors buy gold to be low volatility, Mr Branson warned it is still pretty volatile.
For the third perceived safe haven – currencies – Mr Branson said money had safe haven-like qualities during periods of perceived volatility but if you held the dollar during 2008 and 2009 this trade became volatile.
Reflecting on the reality of what has happened post the UK’s decision to vote to exit the European Union, Mr Branson said if you looked at the three traditional safe haven assets currency trading has worked but gold hasn’t if you held it in dollars and you will have made virtually nothing from UK gilts.
However he said equity markets are doing well post the UK’s decision to head for Brexit.
Mr Branson said: “People often rush to perceived safe havens when they have a knee jerk reaction to what is going on in the markets. If you get the timing wrong then this can be quite painful for clients.
“Do we invest in safe havens now? For many investors equities are the asset class of choice at the moment.
“We have a lot of clients asking ‘why aren’t you overweight in US equities?’ But we have had all time highs that carry with it a subtle warning.
“There are areas in US equities we can be overweight in but [past performance] isn’t a reason to be overweight in all US equities.
Mr Branson said advisers need to get their clients thinking in a slightly different way about safe havens.
He pointed out the highest returns in the last 10 years were delivered by emerging market equities – which has also been the most volatile asset class.
Mr Branson said advisers need to grasp the safe nature of having meaningful diversification – and the fact this means you aren’t necessarily going to be getting the highest returns available at any given time
He said: “Meaningful diversification should allow your clients to sit somewhere in the middle in terms of performance and volatility.
“There is little point in turning to traditional safe havens in the short term. Trust in diversification in the long term.”
On what investors could expect from bonds, Anthony Smouha, chief executive of investment manager at Atlanticomnium, said he had managed to maintain an income in his funds similar to what was generated 10 years ago.
He said he did this by looking at the different features of a bond – for example the yield - to form a strategy.
Coupon income is important, he said, as it is the main driver of performance over time.
He said prices can go up and down but investors should look at bonds where the coupon comes in every month.
In terms of bonds he was interested in, Mr Smouha pointed to the strength of the financial services sector over time.
He said some banks would struggle but Mr Smouha said this was a profitability issue with these organisations not a solvency one.
Mr Smouha said we are coming to the end of the tightening of financial regulation which means we now have banks with strengthened capital.
His top holding is Lloyds, which trades very high and gets close to 6 per cent, then Old Mutual, which gives close to 5 per cent, followed by HSBC, Hiscox, Legal & General, Prudential, British Insurance and Bank of Ireland.
Mr Smouha said: “We get high income from quality companies. Investment grade companies rarely default. By extension if they rarely default, their high yielding junior debt rarely defaults.”
emma.hughes@ft.com
