One of the assets that are offering the best profitability during 2020 is gold. So far this year, the yellow metal has produced high returns (+18.20% EUR as of 10/23/2020) that contrast with the low returns obtained by much of the stock market, especially the European one (-10 .95%).
All of our indexed pension plans offer exposure to physical gold, a differentiating element of our passive management compared to competitors, and the reason, among other things, why Morningstar rates our portfolios as the best pension plans in their categories.
Finizens pension plans offer access to physical gold through 2 prestigious indexed products such as the Amundi Physical Gold ETC C and Invesco Physical Gold ETC.
But why is gold giving such good returns during 2020? And why does it make sense to include it in a long-term portfolio? Next, we review the most relevant characteristics of this asset:
• Refuge asset: historically it is the quintessential refuge asset in situations of great uncertainty. It has proven to be especially effective in the face of pronounced crises of a financial or economic nature.
• Low correlation with traditional assets: it has a low correlation with traditional assets, even becoming negative in moments of great uncertainty or stock market instability. This means that the evolution of gold does not follow that of traditional assets (fixed and variable income) and vice versa, which improves the return-risk ratio of the portfolio.
• Hedging against inflation: metallic commodities such as gold tend to experience a price increase during inflationary periods.
• Real asset: Gold is a tangible investment that in the case of Finizensis backed by gold bars. It acts as an alternative asset to traditional financial assets, providing the portfolio with greater diversification and reduced risk.
• Finite good: there are limited reserves of this good along with a growing trend demand, especially from emerging countries.
To be able to visualize in a simple way how gold acts as a refuge asset during bearish stock markets, we show you below a graph where we compare the profitability of gold (EUR) and European equities during the 5 worst annual results of the European stock market of the last 20 years.
As we can see in the graph, gold tends to produce positive returns every time the European equity market experiences significant falls.
The long-term physical gold asset produces similar returns and risk (measured in terms of volatility) to equities, but with a low correlation; therefore, the inclusion of this asset improves the efficiency of the return-risk binomial of a company. investment portfolio.
We can appreciate how in the long term (20 years to the present), by including gold in the portfolio we produce not only an additional accumulated return of +7.94%, but also reduce the portfolio risk (volatility). by -0.54%. By producing greater profitability with less volatility thanks to the inclusion of the gold asset, the Finizens pension plan achieves a significant improvement in the risk-return ratio, increasing the Sharpe ratio by +22.22%.
That is why at Finizens we consider it essential to diversify not only in different economies but also between different asset classes, combining real assets such as gold with traditional fixed-income and variable-income financial assets. This extensive diversification improves the behavior of your portfolio in the long term and also protects your portfolio in times of big falls like those experienced during the first half of 2020.