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 31 December 2019. USD spot prices are used for gold, silver, Japanese yen and Swiss franc. The ICE BofAML US Treasury Index is used for US Treasuries and the ICE BofAML Japan Government Index converted to USD is used for Japanese government bonds. Japanese government bonds are assumed to not be currency hedged. Days to recovery include only trading days.

Rerating Treasuries

US Treasuries hold up comparatively well in the previous table, with no double-digit losses since 1990. Denominated in US dollars and backed by the US government, these bonds are considered to be low-risk investments for US savers and are thought to offer diversification for equities.

A mostly negative correlation between Treasuries and the S&P 500 over the past 20 years explains why Treasuries 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, bonds and 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 Diversified Macro Strategy aims to avoid such rigid and flawed assumptions. Instead, the strategy takes long and short positions in all the safe havens discussed in this article, along with another 130 markets, to construct a diversified, dynamically risk-managed portfolio that aims to deliver returns in a range of market environments.