Posted inProfile & FeaturesUnited KingdomUnited States

Time to forget about ‘safe havens’?

The idea of being able to stash money away in safe havens when markets get choppy or a bull run appears to be reaching its final stages looks increasingly like a thing of the past. While the financial crisis of 2008 did much to tear down the notion that money can be invested in a way so as to mitigate against loss in virtually all circumstances, people have persisted to look for and refer to so-called safe havens.

 Sovereign bonds issued by the world’s major developed economies, particularly the United States, United Kingdom and Germany have long been considered the nailed-on safe haven options, but in the age of virtually zero interest rates every word uttered by central bank chiefs shakes the sovereign bond market.  

Each time Janet Yellen, Mark Carney or Mario Draghi holds a news conference, their comments are used to readjust interest rate expectations, and result in corresponding movements in yields.

 Take German bunds as a case in point. Yields have rocketed over recent weeks, going from near on nothing to over 1%. US treasuries have also seen steep rises. Private bank Coutts addressed this in a note produced by its investment office yesterday. “These days, bond markets seem to be acutely sensitive to any signs that the Fed is inching closer to its first hike since the global financial crisis took interest rates to record lows across the world,” Coutts said.

 “Last week we noted that we were turning more negative on safe-haven government bonds in general, which we have long felt were a poor long-term investment. That’s even more the case now that the US economic recovery is progressing towards an inevitable rate rise and the global economic recovery is also gaining traction,” it added.

Absolute return

Another favourite route to assuring investors that when markets go bad they will still make money, or at least not lose it, is hedge funds or their more transparent, better regulated cousins, absolute return funds.

 Some wealth managers have upped their allocations to these funds during the first half of the year, perhaps more in hope than expectation that they will shield investors from a bond market tantrum. These funds spectacularly failed in most cases during the 2008 crisis and there is nothing so far to suggest that they would fare much better generally in the event of a future market crash, although there will no doubt be honourable exceptions.

 So what does that leave- throwing most of your pot into cash? This limits the potential for loss of course but makes you virtually nothing, and can lose investors’ money in real terms if inflation gets a bit punchier than the central bankers can manage. Or gold perhaps?  You would need a strong nerve to put a lot of your money into gold at the moment with the price up and down like a yo-yo over the past year.

 Instead of spending time and effort trying to convince investors they can offer safe havens for their money, wealth managers may do a greater service to their clients by managing expectations so they are comfortable with the reality that sometimes short term paper losses will happen.  The key for investors is not to find some kind of magic trick to shield investment pots from choppy markets, but to be calm and show patience so that losses are largely confined to paper and are recovered over time. 

Part of the Bonhill Group.