As well as ‘safe’, high quality equities not providing the protection they once did, there are similar problems in the bond market.
Developed market government bonds have asymmetric risk, with little upside, but plenty of potential downside should interest rate and inflation expectations edge higher. However, Summers believes they still have a role in the group’s portfolios.
He says: “Certainly it used to be that government bonds provided good protection in risk-off events. If equities fell, government bonds rose. But with yields as low as they are, there is not huge scope for bonds to provide protection. The challenge is where do you get your insurance policy?
“For us, we believe it is necessary to widen the range of the insurance policy. That said, we have kept some duration in our portfolios. There is not much money to be made in government bonds, but if everything goes OK, we’ll be making money somewhere else. If everything goes wrong, there is a reasonable chance that yields could fall further.”
In widening the scope of this insurance policy, Summers has incorporated gold to hedge specific risks, such as inflation.
Gold, he believes, should have a permanent place in client portfolios. Notably, it defends against geopolitical risks and there is still some competitive currency devaluation between developed markets, which could see the dollar (an alternative option for hedging geopolitical risk) fall further.
He adds: “We are less concerned now that we were six months ago, when it wasn’t clear how unorthodox Trump was likely to be, but gold is still a good store of value.”
Summers also holds some cash, plus various alternatives, such as CTAs and some inflation-linked positions. The group will also hold alternatives for diversification. This includes infrastructure holdings through to hedge funds, all relatively uncorrelated to equities.
“If we can find something that is not correlated to equities or bonds, it helps portfolio construction,” he says. “As such, we hold a blend of equity long/short funds, infrastructure and property, plus a number of multi-asset vehicles.”
Preferred funds include the Boussard & Gavaudan Absolute Return fund.
