Precious metals, government bonds and certain currencies are often popular when macroeconomic and geopolitical concerns come to the fore, but the data suggests that these investments should not be considered “safe” and that their diversifying properties cannot be taken for granted.

Safe-haven deep dive

The three biggest peak-to-trough losses since 1990 for six investments typically considered to be safe havens are detailed in the table below. All six of these assets have delivered double-digit drawdowns to investors at some point over the past three decades, while five out of six have lost more than a fifth of their value on at least one occasion.

Precious metals are often considered the archetypal safe haven; but gold and silver fare particularly badly on this measure, given they have delivered stock market-like losses on multiple occasions.

The three biggest drawdowns since 1990 for a selection of safe havens

Source: Winton, Bloomberg, as at 25 October 2019. GBP spot prices are used for gold, silver, US dollar and Swiss franc. Assumes 3-month USD and CHF LIBOR is earned daily on US dollar and Swiss franc holdings, respectively, and is reinvested daily. The ICE BofAML UK Gilt Index is used for gilts and the ICE BofAML US Treasury Index converted to GBP is used for US Treasuries. US Treasuries are assumed to not be currency hedged. Days to recovery include only trading days.

Potential for gilt

Gilts – so-called because they were once issued as certificates with gilded edges – hold up comparatively well in the previous table, with only one double-digit loss since 1990. Denominated in sterling and backed by the British government, these bonds are considered to be low-risk investments for UK savers and are thought to offer diversification for equities.

A mostly negative correlation between gilts and UK equities over the past 20 years explains why gilts have earned the reputation of being a good complement for stock investments – when equities have gone down, bonds have tended to go up, and vice versa. But this has not always been the case: before the turn of the century, gilts and UK equities were mostly positively correlated, thus greatly reducing the value of holding these assets alongside one another.

Consider alternatives

As our drawdown analysis shows, typical safe-haven investments have often proved to be nothing of the kind. In fact, they have produced several large and sustained double-digit losses over the last three decades. Moreover, market behaviour changes over time, so while some of these investments have provided diversification in the past, there is no guarantee that they will continue to do so.

The Winton Absolute Return Futures Fund aims to avoid such rigid and flawed assumptions. Instead, the fund’s strategy takes long and short positions in all the safe havens discussed in this article, along with another 120 markets, to construct a diversified, dynamically risk-managed portfolio that aims to deliver returns in a range of market environments.