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Report: Gold Can Enhance Performance of Long-Term Funds That Include Alternative Assets

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Gold can serve as an important diversifier and increase returns for “buy-and-hold” investors such as pension funds, endowments, insurance companies and sovereign wealth funds.

According to a report released last week by the World Gold Council, there has been an increasing interest in alternative assets. In fact, alternatives such as private equity, hedge funds, real estate and commodities now make up about 23% of sovereign wealth fund portfolios and 24% of global pension funds. This is up from single digits in 2000.

Alternatives can increase portfolio returns and provide diversification, but they tend to be highly correlated to the stock market and often require long holding periods. According to the WGC, adding gold to the mix can compliment other alternatives by providing returns, improving diversification, adding liquidity and enhancing overall portfolio performance.

We believe that adding gold to a well-diversified portfolio allows investors to reap the benefits of alternative assets, while reducing the overall portfolio risk by providing additional liquidity and a negative correlation to stocks during periods of economic turmoil.”

Nevertheless, institutional buy-and-hold investors haven’t really embraced gold. Gold allocations in SWFs and pension funds are often minuscule, even though the gold market is larger than many alternative assets – as shown in this graph.

The WGC lists four attributes that make gold an attractive strategic investment.

  • It has been a source of positive return for investors’ portfolios
  • Its correlation to major asset classes has been low in both expansionary and recessionary periods
  • It is a mainstream asset that can be as liquid as financial securities
  • It has historically improved portfolio risk-adjusted returns

Of course, these attributes don’t just apply to institutional investors, They also make gold an excellent option for the individual investor.

Most people think of gold as a hedge against inflation, and historically it has been. Most people don’t tend to think of gold as providing positive returns. But as the WGC points out, gold has outperformed many traditional and alternative assets over the past 20 years. Gold has increased by 7.7% per annum over the past 20 years, in line with US REITs and higher than benchmark commodity, global REITs, and hedge fund indices.

The WGC found that adding gold to portfolios with other alternative assets ultimately tends to increase returns.

Our research suggests that a 4% allocation to gold in a 50/50 and 75/25 portfolio increased risk-adjusted returns in a portfolio that included alternatives like real estate, private equity, and hedge funds.”


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