It’s the 1% of the time where volatility spikes and panic ensues when people sell what they can sell despite the fundamentals, says Sal Bruno, chief investment officer at ETF sponsor IndexIQ.
“When we talk about safe havens, are we talking about the 1% of the panic times or an environment marked by high risk, but not panic risk?” he asks. “We think when you look at high risk, alternatives generally do a pretty good job of diversifying versus equity and fixed income. And they go down a lot less than equities during a panic period.”
IndexIQ offers various ETFs with absolute-return strategies. Its largest product is the $764 million IQ Hedge Multi-Strategy Tracker ETF (QAI), which follows an index that tracks the returns of distinct hedge fund investment styles via a portfolio that includes both long and short positions in ETFs and exchange-traded products. This fund dropped nearly 14% during the worst month of the downturn. But that was 20 percentage points better than the S&P 500.
Long-Term, Holistic Approach
The second approach to safe havens entails a long-term, comprehensive investment strategy that’s as much about offense as it is defense.
“A safe haven is an asset that retains its value over time,” says Kelly. “And it should generate sufficient returns to keep up with inflation so that you don’t have an asset with deteriorating buying power. By definition, it keeps you neutral, and then you add risk to that as you hope to accumulate wealth.”
As Kelly points out, “time” is the operative word when thinking about safe havens.
“A safe haven in the short term is cash, it’s short-term Treasurys,” he says, adding they’re not a long-term safe haven because their purchasing power is eroded by inflation.
Kimball Brooker, deputy head of the global value team at First Eagle Investment Management, agrees with that principle. His take is that a diversified basket of equities is a form of safe haven in that it protects your long-term purchasing power.
“Diversification and selection are key features of that,” he says. “That comes with some volatility, but that gets to how you want to think of safe havens. If you want zero volatility, cash is your best bet. If you incorporate other dimensions of safe haven that we believe in, which includes protecting and even growing the real value of your portfolio, you probably want to think about adding equities into the mix. That will bring some market volatility which you can’t control. What you can control is you get to pick the equities.”
Through the end of March, the firm’s First Eagle Overseas Fund’s top three sectors were precious metals (mainly gold), consumer staples and industrials. The fund was down 17.7% in the first quarter, or 5 percentage points better than its bogey, the MSCI EAFE Index.
Brooker notes that Covid-19 is a black swan moment. “From a financial perspective, it’s a lesson in trying to pick companies and investment strategies that are built to survive the problems that definitely will come,” he says. “You can’t predict what type of problem it will be.”