More than 80 per cent of AMP’s MySuper portfolios have a greater allocation to gold than to government bonds, the Investment Magazine Fiduciary Investors Symposium has heard.

Stuart Eliot, AMP Super’s general manager of investments, said that this was a deliberate response to an environment in which government bonds may no longer provide the protection investors have historically expected from them.

“In my team, we’ve been producing this series of research reports published on the North platform for about the last six or nine months about store-of-value assets,” Eliot said.

“The first one of those we wrote was about gold. And in that we noticed that the last time the US had 120 per cent debt-to-GDP [ratio], as it does now, roughly, if you’d invested in US government bonds at that time it would have taken you four decades to break even after inflation. That’s an entire investing career. It’s crazy. Could be worse this time.”

Eliot said there’s “probably not a single government on the planet who is both willing and able to rein in their fiscal excess”, which makes him worry about currency debasement and the prospect of a secular bond bear market.

“And so because of that, I think we really need to rethink the way that we construct the defensive sleeves in our portfolios, or the diversifying sleeves in the portfolios, and for me, gold is a really important part of that.”

“You need multiple things there that are going to respond to a different range of equity market and economic crises than just fixed income, which may not help if we actually are in that secular bond bear market. And just finish with a fun fact: in over 80 per cent of our MySuper portfolios, we have a larger allocation to gold than we do in government bonds.”

It’s not the first time AMP has diverged from its peer group: in June last year it became the first APRA-regulated super fund to add cryptocurrency to its portfolios through its DAA program. Eliot said a proposed shift to a CPI-plus benchmark as part of the Your Future Your Super performance test could make gold easier to include.

“If gold is eligible for that part of the portfolio, then I think it becomes much easier to introduce gold, since it does have those explicit inflation links.”

Hedging into gold

Andreas Dänzer, chief investment officer of Record Currency Management, said a growing number of clients are talking to the firm about hedging equity portfolios into gold.

“This is interesting thinking about the base currency, and their thing is gold. At least, we are having discussions in that direction.

“The other aspect is diversification, especially countries… like Canada [and] Switzerland, currency diversification is now a big topic and it even goes in the direction of maybe less liquid currencies, even down to frontier markets, because they’re not linked to those global big themes.”

The shift to a “multipolar world”, as new players such as China and Europe enter the chat alongside the US, is already producing the conditions for structurally higher currency volatility, and the risk distribution for the US dollar is skewed to the downside. 

Dänzer said the globalisation of the 1980s and 1990s reduced the dispersion of GDP growth across economies, and with it, currency volatility declined. Central banks coordinated their actions so that when crises came they were met with collective responses. However, a multipolar world reverses those conditions. 

“If you go into a multipolar world, we believe we go now in the other direction,” he said. 

“Potentially we will see higher volatility, higher interest rate differentials, and different central bank policy going forward.”

Dänzer said one of the scenarios he is watching most closely is “fiscal dominance”, or the subordination of monetary policy to fiscal imperatives. 

“I think if the US goes too far on that question, that could be a trigger for a larger currency devaluation,” he said. “This is one of the catalysts I’m monitoring very, very closely.”

Significant equity drawdowns

Stuart Simmons, director and head of multi-asset solutions at QIC, said that he had been tracking the US dollar’s behaviour across the five significant equity drawdowns since Covid: the pandemic itself, the inflation spike, the tightening cycle, Liberation Day and the Iran conflict. The dollar rallied in four of them, but in the fifth, Liberation Day, it sold off hard.

“You had US equities selling off, you had US bonds selling off, and you had the US currency selling off,” Simmons said. 

“And if you see that, you probably say, okay, I need to get out of dollars, and I need to get into something else.”

Simmons said investors could no longer assume which factors would drive the dollar in the next episode of stress. The question of whether to hold it or diversify into Swiss francs, euros, sterling or yen depended on identifying those drivers before the next drawdown, not after. 

“There’s no rule that says your foreign currency basket has to match the MSCI weights,” he said.

Kim Bowater, director of consulting at Frontier Advisors, said the more immediate problem was the industry’s accumulated concentration. Over the past decade, the average foreign currency exposure in default super funds had risen from around 15 per cent to 20 to 25 per cent, and the composition had also shifted. 

Where international exposure once included a significant emerging markets component, largely unhedged given the cost, it was now predominantly US dollar. 

“We’re peak US dollar at a time of US uncertainty,” she said.

Bowater said hedging back to Australian dollars was available as an option, but it was not straightforward. The liquidity and counterparty risks associated with large hedge books were real constraints, particularly for bigger funds. 

Memories of the GFC

“I particularly have memories in the GFC of currency hedging being problematic,” she said. “As the industry is experiencing less positive cash flows, I don’t think we want to exacerbate that.

“[There’s] a balance of different things coming together to make a liquidity judgment that’s really important to get right, and to be forward looking on. Also, just how you do the hedging, being alive to what you’re hedging, what your actual exposures are… all of those things can really feed into a good, you know, more robust liquidity management construct. 

“That’s something our team’s been involved in reviewing more so over time, because it is, it’s become larger as funds have got bigger and gone offshore and is a really important risk management aspect to get right.”

Simmons said the industry was approaching a structural inflection point. 

“When we talk about the size of the industry and the size of hedge books in aggregate, and also across some individual funds, there are some costs imposed in more hedging,” he said. 

“There is now an asymmetry around whether you lift your hedge ratio or drop your hedge ratio. There is a cost imposed in lifting your hedge ratio, because there’s counterparty risks, there’s operational risks, there’s liquidity risks… and you actually alleviate those when you drop your hedge ratio a little bit.

“One of the issues that may not be as prominent today, but in this conference in 10 years’ time, or five years’ time that we’ll be talking about is collateral for deliverable FX forwards. For the really big end of town, I am pretty confident that there’s going to be margining on FX forwards in the not too distant future.”