Gold is one of the assets mentioned in this roundup of views from fund selectors on prognosis, price, volatility and tail risk.
Title: Head of investments and CIO
Company: Rothschild Wealth Management & Trust
How do you protect for tail risk?
To hedge tail risks you can allocate a portion of a portfolio to gold. Historically, it has tended to rally during a crisis, providing useful protection against turbulence in equity markets, rising inflation or a weak US dollar.
However, gold is unlikely to perform well in all types of crisis. You could buy derivatives linked to performance of equity markets.
Owning a put option on the S&P 500 index could help boost returns in difficult markets, yet this is not cost-efficient at all points in the market cycle; during times of high volatility, these derivatives will be particularly expensive.
Other indirect tail risk strategies include investing in trend-following funds and traditional ‘safe haven’ currencies.
Specialist funds that focus solely on hedging tail risks can play a useful role in a diversified investment portfolio.
We use a combination of these approaches. The nature of these hedges, and how we blend them, will depend largely on the prevailing market environment.
Name: Hans Peterson
Title: Global head of investment strategy
How do you view current pricing of equity markets?
Looking at valuations in relation to both price/earnings ratios – while fully aware that earnings will be revised downward – and price/book ratios, we find that the current pricing relationships are close to ten-year historical lows.
This is in strong contrast to the pricing scenario of the previous two major equity market downturns in 2001 and 2008.
We therefore believe there is good value in current equity market pricing. Attractive valuations alone may not lure investors back to the marketplace, but they have certainly proved a good factor in attempting to identify underlying risk throughout history.
Uncertainty has definitely increased since early August. It is very challenging to analyse the current market situation, but no matter how much intraday volatility we continue to face, our approach will always be fundamentally based on valuations.
It is not the time for big, sudden moves – rather, cautious observations are warranted during the coming weeks and months.
Name: Antti Vesa
Title: Head of Research
Company: Aktia Invest
How should we live with volatility?
We will always have volatility and, as before, it will change through time.
I would personally assume that the average volatility will be close to the historical average.
However, in the short term it is difficult to say where the volatility is heading. There is too much politics at play.
The most basic thing that you can do is shift from risky assets to less risky ones. For example, decreasing the equity weight and increasing the weight of fixed income instruments.
If you are restricted to equities, for example, you can always try to pick the managers you know to be concentrating on less risky stocks.
You will always have to put up with volatility, it is part of the game. Timing the market is not an easy task.
What you can do is include investments in your portfolio that are more likely to perform when the markets turn sour.
Nevertheless, you will have to face volatility, so hopefully the returns will justify it in the end.