Robeco logo

Disclaimer

BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.

What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License

  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)

  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993

  • that is a body registered under the Financial Corporations Act 1974.

  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.

  • that is a listed entity or a related body corporate of a listed entity

  • that is an exempt public authority

  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.

  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.


I Disagree

05-04-2023 · Insight

The golden rule of investing

Conventional wisdom has it that long-term outperformance is often a matter of limiting losses in down markets. One way conservative investors seek to mitigate losses in down markets is to keep a part of their portfolio in gold. But is this really the most effective strategy? Our research shows there are alternative options available.

    Authors

  • Pim van Vliet - Head of Conservative Equities and Chief Quant Strategist

    Pim van Vliet

    Head of Conservative Equities and Chief Quant Strategist

  • Harald Lohre - Head of Quant Equity Research

    Harald Lohre

    Head of Quant Equity Research

Summary

  1. Government bonds are a key equity risk diversifier but did not prove a safe haven in 2022

  2. Modest allocations to gold can help reducing downside risk, but come at the cost of return

  3. Low volatility stocks are highly effective in reducing downside risk without giving up return

Warren Buffet’s first rule of investing is to never lose money; his second is to never forget the first rule. This golden rule is key for long-term capital protection and growth. One oft-used strategy to limit losses in turbulent markets is an allocation to gold. Gold investing is widely regarded as a safe haven during extreme macroeconomic downturns in periods of war, hyperinflation, or major recessions.

But do such allocations to gold really provide the expected protection in practice? And even if so, are there any better ways to mitigate risks? To answer these questions, we revisited the strategic role of gold in investment portfolios and focused on its marginal downside risk reduction benefits relative to bonds and equities.

Our analysis, featured in a new research paper, focuses on annual real returns starting in 1975, when gold became truly tradeable. We took the perspective of a US investor who could strategically invest in equities, bonds, and gold and would care about a wide range of downside risk measures, including downside volatility, loss probability and expected loss.

The key findings of our empirical study are that a modest gold allocation in a traditional mix of equities and bonds reduces the risk of capital losses by around 10% across a wide range of equity-bond allocations. Still, this also reduces the return, leading to a small increase in the return/risk ratio as shown in Figure 1 summarizing the main findings of this study.

Figure 1: Four defensive portfolios

Figure 1: Four defensive portfolios

Source: Lohre, H., and Van Vliet, P. (2023) “The golden rule of investing”, working paper.

Get the latest insights

Subscribe to our newsletter for investment updates and expert analysis.

Read more

Importantly, however, our simulations show that the downside volatility can be reduced further by adopting a low volatility style in the equity investment and letting this defensive equity allocation replace part of the bond allocation. The portfolio with the lowest downside volatility on a one-year horizon consists of 45% bonds, 45% low-volatility stocks and 10% gold.

Our simulations show that the downside volatility can be reduced further by adopting a low volatility style

As a result, this defensive mix has significantly lower downside risk than a traditional equities/bonds portfolio, with higher returns leading to a large increase in the Sortino ratio. This defensive strategy therefore proves to be an effective way for investors to adhere to Buffet’s golden rule, while still delivering long-term capital growth.

Moreover, additional simulations and robustness checks show that these key findings hold not just for the one-year returns initially considered, but also for a wide range of investment horizons, ranging from one month up to 36 months. While these results are robust when gold futures are used instead of a direct gold investment, adding gold mining stocks is less effective in reducing the downside risk of a low-volatility equity portfolio. Lastly, we document that, while the risk mitigation role of gold is muted in a mean-variance setup, low volatility investing is considered just as relevant as when evaluated through a downside risk lens.

Read the full paper on SSRN


What the 2023 Global Climate Survey means for investors

Recorded webinar


Watch on demand
Robeco

Robeco aims to enable its clients to achieve their financial and sustainability goals by providing superior investment returns and solutions.

Important information: This website is prepared and issued in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (‘Robeco’) which is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission under the laws of Hong Kong and those laws may differ from Australian laws. The information on this web page is provided to you because Robeco reasonably believes that you are a "wholesale client" within the meaning of that term under section 761G(4) of the Corporations Act 2001 (Cth) ("Corporations Act") and not any other class of persons. This information is not an advertisement and is not intended to induce retail clients to acquire Robeco products. Retail clients who are interested in Robeco products should contact their financial adviser.