James McDaid, who runs Gam’s multi-asset portfolios with Charles Hepworth, said the pair had been forced to overhaul asset allocation on their lower-risk offerings because volatility levels were too high.
This involved raising cash levels, but the managers also reduced exposure to gold – viewed as a safe haven – because the metal falls into external profiler Distribution Technology’s commodity classification.
“Ironically, we had to trim our gold exposure because it’s deemed to be a commodity and commodity volatility is judged as being really high,” said Mr McDaid.
The shift comes at a time when asset allocators, who are nervous about geopolitical tensions and other headwinds, have been turning to the precious metal for its defensive qualities.
Last week, 7IM announced that it had upped gold exposure to a record high because of a “sea of negatives” that could sidetrack stocks.
Gold’s recent performance has differed significantly from the wider commodities market. The Bloomberg Gold Sub index has fallen by 4 per cent in US dollar terms over three years compared with a 33.7 per cent loss from the equivalent Commodity benchmark, according to FE.
The episode highlights the difficulty of conducting risk profiling in a way that aids client understanding and effective asset allocation, according to fund buyers. Some have started to expand the number of methods used to analyse portfolios because of the limitations involved in using broad classifications.
“Currently, our risk monitoring is based on asset class constraints. Going forward, we will be implementing an additional risk score for each security,” said Meena Lakshmanan, a partner at wealth management firm LGT Vestra.
“What you are missing with the classification [of a broad asset class or sector] is the client doesn’t get what it is. You can have 25 per cent in financials, but if they are all banks, that’s wrong.”
As asset allocators’ portfolios grow more complicated, it is not just gold that has proved problematic. Earlier this year, Investment Adviser reported that the categorisation of convertible bond vehicles as equities had created difficulties for fund of fund specialists adhering to preset allocation ranges.
Andrew Gilbert, an investment manager for Parmenion, described the gold classification as “scratching the surface”, and emphasised that definition problems were widespread.
Mr Gilbert said Parmenion used its own risk-profiling techniques, which look at factors including the historic volatility of an asset. He added that classification was not easy because of a “trade-off” between client understanding and effective asset allocation.