It’s been a bumpy ride for world stockmarkets this week – and it looks set to remain even more volatile than usual for a while yet. AJ Bell’s Laith Khalaf has been looking at diversification within investment portfolios and the contribution made by a range of ‘safe haven’ alternatives.
Laith Khalaf, head of investment analysis at AJ Bell, shares his latest analysis as follows:
“The mighty S&P 500 has taken a tumble and it’s the actions of the US president which look like the main cause. The US index dipped briefly into correction territory this week, defined as a 10% fall from a previous peak. Markets have taken fright at the global trade war which seems to be erupting, because that can be expected to dampen global growth while pushing up inflation. US stocks already looked vulnerable to correction unless everything turned out peachy, and the market is now looking at US trade policy and thinking peaches may turn out to be quite thin on the ground.
“Donald Trump also appears to have spooked the market by failing to rule out a recession at the weekend. This probably isn’t because markets rate his economic forecasting ability, but rather his comments implied a recession was something he was willing to tolerate in pursuit of his wider policy goals. Markets had probably got used to the idea that Donald Trump marks his own score card with reference to economic growth and a rising stock market, so this felt like a significant withdrawal of a backstop everyone had assumed was there. Investors had also been weighing up whether higher interest rates in the US would result in a soft landing or even no landing, in other words business as usual. Put simply, the idea that a hard landing may be on the cards again came as a bit of a shock. The US president has at least boosted the economy by buying a Tesla, so there’s that.
“In the current market environment investors may well be wondering if it’s time to turn to safe havens to add some ballast to their portfolios. We ran some numbers to see how five key safe havens available to UK investors had performed over the last 10 years, though of course, that doesn’t guarantee the same returns will be delivered going forward. As the tables below show, there’s been a wide dispersion of returns and protection provided by safe haven investments over the last decade.
“These assets are used by investors seeking a more cautious approach to investing and are usually paired with an equity portfolio to provide some ballast. You would normally expect the equity component of a portfolio to perform better over the long term, and true to form, the global stock market has left most safe havens for dust in the last 10 years. A global index tracker has returned 225.1%, compared with the average Cash ISA which has delivered 14.2%, or the typical gilt fund which has produced a return of -5.0%.
“It has been a terrific decade to be invested in the global stock market, in large part thanks to the meteoric rise of the titans of the US technology sector. It’s entirely possible that the next 10 years won’t be as kind to stock market investors, though history still suggests that returns will be superior to less risky asset classes. Looking at 10 year periods going back to 1899, Barclays reckons the UK stock market has beaten cash over 90% of the time.
“While seeking out safe havens in times of turmoil is perfectly reasonable, it’s important not to throw the baby out with the bathwater and jettison the stock market altogether. Indeed, as the figures below show, even safe havens come with risks attached, and it’s actually by diversifying across asset classes that you can take some of the rough edges off each of them.”
Safe haven performance
| Total return | £10,000 invested over 10 years | |||
| 1 Year | 10 Year | Nominal | Inflation adjusted | |
| Safe havens | ||||
| Gold ETF | 28.6% | 161.2% | £26,119 | £19,283 |
| 60/40 strategy | 9.7% | 84.8% | £18,477 | £13,641 |
| Absolute return funds | 6.0% | 27.0% | £12,700 | £9,376 |
| Cash ISA | 3.7% | 14.2% | £11,423 | £8,433 |
| UK gilts | -3.7% | -5.0% | £9,504 | £7,017 |
| Comparators | ||||
| Global index tracker | 21.0% | 225.1% | £32,510 | £24,000 |
| CPI inflation | 2.50% | 35.5% | £13,545 | £10,000 |
Sources: AJ Bell, Bank of England, ONS, FE, Morningstar, total return in GBP to 31/12/2024. Gold ETF = average of iShares Physical Gold ETC/ Invesco Physical Gold ETC/ WisdomTree Physical Gold; 60/40 strategy = Vanguard LifeStrategy 60% Equity; absolute return funds = IA Targeted Absolute Return sector average; Cash ISA = average Cash ISA returns from the Bank of England database; UK gilts = IA UK gilts sector average; Global index tracker = Fidelity Index World.
Gold comes out as the top performer
“Gold has been on a rampant charge, despite rising interest rates which in theory lessen the appeal of the precious metal because it pays no income. In practice, demand has been plentiful. An investment in a gold ETF would have turned £10,000 into £26,119 in the last 10 years, and even factoring in inflation has almost doubled investors’ buying power. Geopolitical friction is no doubt one of the big factors elevating the gold price, and much of the buying in recent years has been by central banks seeking to mitigate the risk of their assets being frozen, should some kind of conflict flare up. Nonetheless, retail investors have enjoyed piggybacking along for the ride. Those who had the foresight to hold their gold ETF in an ISA will also have no tax to pay on their profits.
“Gold is trading near its record high, at almost $3,000 an ounce. After such a tremendous ascent, there may well be some profit taking and reallocations which cause the price to fall. But many of the underlying factors which have driven the gold price higher remain in place, in particular simmering geopolitical tensions. Goldman Sachs reckons that following the freezing of Russian central bank assets in 2022, central bank demand for gold increased fivefold.
“Even if the Ukraine conflict is eventually settled, nervousness over the freezing of assets isn’t going to go away anytime soon. Gold has the benefit that you can bury it deep in the ground in your own territory, so in a fracturing world order, the appeal for central banks is clear as day. Add in global economic fears stemming from Trump’s trade war, plus high levels of government borrowing in many developed nations, most notably the US, and you can see why gold could still make progress from here.”
Gilts
“At the other end of the spectrum, gilts have delivered a negative nominal return in the last decade. Taking inflation into account the typical gilt fund has turned a £10,000 investment into just £7,017 in real terms. Much of the damage was done in 2022 as interest rates rose from historic lows, producing once-in-a-generation losses for gilt investors. The poor performance of UK government bonds is largely a function of how high prices traded before the inflationary crisis, and the speed and magnitude of the U-turn in monetary policy.
“Gilts are now offering much higher yields, and though interest rates could of course rise, we’re unlikely to see anything like the price falls witnessed in 2022 as the market adjusted to a step-change in inflation and interest rate policy. As a result gilts now look like a much better investment than they did five years ago, and some investors have been taking advantage of the fact UK government bonds aren’t subject to capital gains tax to load up on low coupon gilts as a tax-efficient cash alternative.”
Cash ISAs
“The average Cash ISA has also delivered a negative return over the last decade in real terms. However for much of that time interest rates were languishing near rock bottom and we now live in a much more lucrative time for cash savers. That said, latest figures show the average Cash ISA is currently yielding 3.5%, which is only just above the CPI level of 3%, and below the ONS’ preferred measure of inflation, CPIH (which includes housing costs), which currently stands at 3.9%.
“With the Bank of England expecting CPI to head up towards 4% later this year, we could soon be seeing the average Cash ISA providing returns below the most widely used measure of inflation. As this is the average return, half the money held in Cash ISAs is actually receiving less than this rate, and some of this may therefore already be falling behind CPI.”
Absolute return funds
“The average absolute return fund has delivered lacklustre returns over the last 10 years, actually posting negative returns once inflation is taken into account. The sector is heterogenous, and there is a wide variation in the strategies and the performance of funds within it. Some funds within the sector also operate in the bond market, where rising interest rates have made healthy returns difficult to come by. However, the fact the average absolute return fund has failed to match inflation over a 10 year period will still be disappointing for many investors. Especially in a sector where annual fund charges can be quite lofty, and accompanied by performance fees to boot.”
60/40 funds
“A 60/40 strategy invests 60% in equities and 40% in bonds. Probably the most widely used incarnation of this approach is the Vanguard LifeStrategy 60% Equity fund, which we have used as a proxy in our analysis. Over the last decade returns from a 60/40 strategy have been solid, if not spectacular when set against the global stock market. Providing a 36% real return in 10 years is a perfectly respectable innings, but like other popular safe havens, a 60/40 strategy has failed to protect investors from large drawdowns. That is partly a result of the bear market in bonds stemming from tighter monetary policy. These bonds have now repriced downwards, and so a 60/40 portfolio, or indeed a broader multi-asset approach, now looks like a safer way for investors to access the stock market while also having a bit of ballast in their portfolio.”
Downside protection under the microscope
“While generating real returns is of course important, investors also turn to safe havens to protect them from losses. On that front, cash has been the king, because it will never take a backward step in nominal terms. Of course, when inflation is factored in, it can go into reverse, as can be seen from the fact that it’s posted a 16% negative return over 10 years in real terms. Absolute return funds have also managed to generate a maximum loss of 8.5% on average, which compares favourably to the global stock market, where a tracker fund has witnessed a loss of 26.2%. However, that does mask some variation in individual funds within an assorted sector.
| Safe haven | Maximum loss (since 01/01/2015) |
| Cash ISA | 0% |
| Absolute return funds | -8.5% |
| 60/40 Strategy | -17.8% |
| Gold ETF | -22.4% |
| UK gilts | -36.8% |
| Comparator: Global index tracker | -26.2% |
Sources: AJ Bell, FE, Morningstar, total return in GBP to 31/12/2024. Gold ETF = Invesco Physical Gold ETC; 60/40 strategy = Vanguard LifeStrategy 60% Equity; absolute return funds = IA Targeted Absolute Return sector average; Cash ISA = average Cash ISA returns from the Bank of England database; UK gilts = IA UK gilts sector average; Global index tracker = Fidelity Index World.
“Despite being the best performing of the safe havens, gold investors had to withstand a 22.4% fall in the value of their investment at the back end of 2020 and into 2021. Actually, if you look a little further back, gold bugs saw a 37.5% fall in the value of their investments between 2011 and 2015. This is the oddity of gold. It’s famous for being a safe haven, but it’s pretty volatile. Gold’s safe haven status derives from its historic role as a store of value, and its tendency to perform when risk assets are hitting the skids. But that doesn’t mean large losses can’t be sustained. Consequently, gold is best viewed as a diversifier of other assets and shouldn’t make up any more than 5% to 10% of a portfolio.
“Gilts provided extremely poor downside protection in the last decade, registering a loss of 36.8% between 2020 and 2023. Almost everyone saw this coming, with gilts being widely derided as ‘return-free risk’ while interest rates sat at almost zero. The UK gilts fund sector is far from popular, but there was at least one group of investors who didn’t get out of the way of the train as it was clearly hurtling towards them. These were savers in older pension schemes which employ a default lifestyling strategy, moving them out of shares and into long dated bonds as they approach retirement. A 60/40 strategy which automatically allocates £4 out of every £10 invested into bonds also suffered from the bond market sell-off. The good news, such as it is, is that from today’s starting yields, a downdraft of a similar magnitude is extremely unlikely, making gilts a much safer place to invest than they were five years ago.”
