Amidst a recent escalation in geopolitical tensions in the Middle East and following a year of positive returns across most asset classes, investors are increasingly looking for safe havens to hedge against downside and upside risks.
In this interview, Miguel Roqueiro, managing director and CIO at Bilbao-based investment firm Acacia Inversión, speaks to Eugenia Jiménez about the hedges he uses against risks such as market uncertainty and increased volatility.
Are you like to seek out gold or other hedges against risk more in 2020 than you did in 2019?
Given that we are asset allocators and our main portfolio is half equities, half fixed income, we have been looking for new hedges since the rates in Europe crossed to the negative side.
In fact we've been talking about the demise of the "classic mixed mutual funds" so we're seeking out to substitutes of bonds as their margin to cushion a crash in equities has disappeared.
As most professionals we are searching for El Dorado, and I don't mean just gold, but what some players call non-fragile assets or convex assets, which are those that don't penalise you in an uptrend market and would work in a crisis environment. In that space we are invested in commodities (gold, silver, oil and others); real assets (REITs, infrastructures, MLPs, Yieldcos); Breakeven and Inflation-Linked Bonds (in case the black swan is the one nobody is expecting for, since we're living in an accepted narrative of lower for longer) and what we call, "strong currency" government bonds (Canada, Australia, Sweden, and so on).
Do you advise on or have exposure to gold yourself?
We took a 2,5% position in gold in the summer of 2017 and we doubled it in February 2018. We believe that gold is a great all-in-one hedge for multiple negative outcomes: inflationist environment, trade wars, dollar weakness, monetary policy fail, global overindebtedness and equity crash. And last but not least is great proxy to emerging markets growth, the last ones standing in a low growth environment.
In 2019, we got exposure to gold miners but we sold it after an explosive rally. In the precious metals space we also have a 1% exposure to silver given the gap opened between the gold and silver prices last year.
Given the performance of most asset classes through 2019, would you expect any to give up gains made, and if so, what does that imply for allocation?
We don't have a crystal ball, so we firmly believe in a good strategic allocation, but of course we fine tune our portfolios to however the current environment is. We believe that just a strong rally is not a good reason to sell, if there's one, it would be the stretched valuations that are left after it and thus the low return perspectives, but we could have made that statement almost the last 5 years .
After a year without meaningful corrections we could wait for one, but when or why, no one knows. We have sold the assets that we believe don't have a good risk/return profile: almost all credit (in order to have corporate risk, we prefer equities), we have negative duration (because we believe that negative rates are unnatural, as a debt becomes an asset!).
We have plenty of cash (dry powder) and we have purchased an ATM put that expires on March (10% nominal) given the low prices due to the abnormally low volatility.
What other ways can investors increase their ability to withstand market downturns from short term risk associated with the Middle East and other geopolitical challenges?
The best thing to do in order to compensate the geopolitical risk in our portfolio is nothing. There are lot of studies that demonstrate that things like impeachments or Middle East conflicts, haven't changed the long term course of equities, they just cause short term volatility. But volatility is not risk is just noise.
However, if you want to mitigate these short term corrections arising from US and Iran tensions, the best hedge is oil. But besides that, we don't have a camera in the Oval Office in order to know how those conflicts will evolve. Maybe we could open instead a twitter account and that surely would be more effective.