Investment Professionals

The conflicting challenges of retirement

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Feb 11, 2020

To access the 'No retirement for investments' white paper, please click the download now button above. Important notice: a previous version of this whitepaper incorrectly stated the ASFA comfortable retirement standards for a couple as $43,787/year and superannuation balance of $545,000. These figures relate to the comfortable retirement standards of a single not a couple. The standards for a couple are $61,786/year and $640,000 in superannuation balance. Managing a retirement portfolio for income and growth Retirement portfolios offer a particular challenge in advice, given their more complex needs. They need to generate a stable income, preserve capital and still offer some level of growth to allow investors to manage inflation and longevity risks, along with a reasonable standard of lifestyle. In the paper No retirement for investments, ETF Securities considers how assets, portfolio construction and product selection can be used to manage retirement in the current market environment. You can download the full paper above, or read the summary following. Part of the solution comes down to diversification of the assets used for income. Retired investors have traditionally relied on domestic fixed income to support their yield needs but are now forced to consider other options. Fixed income can still play a role, for example, diversifying to international sources such as US fixed income which currently offers a higher interest rate may be part of the answer. Commonly, investors are being forced into riskier income approaches, such as through dividend streams. High yield equities may work for some retired investors, pending their risk tolerance along with overall portfolio construction. For example, they may consider how to offset the higher risks of high yield shares in other parts of their portfolio. Using alternatives in the form of commodities like gold may assist with offering stability and diversification to manage the volatility which could occur in high yield shares. Alternatively, looking to investments in more stable, less cyclical industries may be more suitable. Infrastructure is one option. It includes many essential services areas like utilities, telecommunications, industrials and transport which tend to be less vulnerable to market movements and cycles. Finally, product choice can be part of the solution to market conditions. Flexibility is important in this environment, but retired investors also need to be conscious of costs, risks and quality. Bearing these in mind, ETFs may be a suitable option due to characteristics such as low costs, ease of use, liquidity and a wide range to assist in meeting specific portfolio needs or gaps. For more information on the solutions ETF Securities offers, please contact us on: Sales Trading Phone +61 2 8311 3488 Email: infoAU@etfsecurities.com.au Phone +61 2 8311 3483 Email: primarymarkets@etfsecurities.com.au

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Five reasons to hold gold at the core of your portfolio

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Nov 20, 2019

Published: 20 November 2019 Product in focus: ETFS Physical Gold Key Points: Gold has long been considered a safe-haven asset used by investors to hedge against event risk but is often not appreciated for the way in which it can aid portfolio returns in different market conditions. Over the long-term gold has close to zero correlation with share markets. This is good for investors. Uncorrelated assets provide diversification and help improve returns or reduce risk within a portfolio. ETFS Physical Gold (ASX: GOLD) is a simple and cost-effective and efficient way to access gold by providing a return equivalent to the movements in the gold spot price. At ETF Securities, as manager of Australia’s largest and the world’s oldest exchange traded gold product (ASX: GOLD), we spend a lot of time looking at how gold can work for our clients to improve outcomes across their portfolios. Gold is well-known as a hedge against event risk and as a way of preserving capital against inflation, but people often don’t appreciate how well a long-term holding can aid portfolio returns in different market conditions. When we talk about using gold in a portfolio, we tend to focus on its role as a core strategic holding, not an asset to trade in- and out- of on a regular basis. This article outlines five key reasons you should consider gold as a core holding. 1. Gold is an effective hedge against unpredictable events Gold has been one of best performing assets globally over the past year and has attracted a lot of attention. In Australian dollar terms gold has never been more valuable, having risen 32% over the 12-month period to the end of September. Not only has gold performed very well, but it has done so against a backdrop of rising geopolitical risk, periodic bouts of equity market volatility, global growth concerns and an abrupt shift in monetary policy, both domestically and abroad. The recent past is just one example in gold’s long history of performing well when markets are in turmoil or when risks are heightened. Other prominent examples include[1]; the 1987 stock market crash; gold rose 6% while the S&P 500 fell 33% the global financial crisis; gold rose 26% while the S&P 500 fell 56% the European sovereign debt crisis; gold rose 9% while the S&P 500 fell 19% It is not surprising, therefore, that many people use gold as a safe-haven asset in much the same way they would use insurance to protect their physical assets. Of course, you don’t just take out home insurance when you feel a flood or fire may be imminent, which is why we advocate holding gold long-term to protect against events that are inherently unpredictable. 2. The price of gold is driven by many factors and is difficult to predict Gold does not conform to traditional financial asset principles and there is no widely accepted model to determine a fair price for gold. While many different models exist, it is fair to say that the price of gold is driven by a wide range of variables and is difficult to predict. Gold is both a consumption and an investment asset, which often makes it both pro- and counter-cyclical at the same time. Levels of economic growth are positively related to demand for gold for use in jewellery and technology products, while expectations of lower growth may drive investment or safe haven buying. Gold is used as a store of wealth and as protection against inflation, while it is also in demand when interest rates and inflation are low and economic prospect look poor. Further, central banks are key investors and have massive reserves and a wide range of different motivations for owning gold, which can heavily influence demand. With such an array of competing factors for which to account, forecasting changes in the price of gold and the timing of changes is extremely difficult. We therefore rarely recommend gold as a trade-in/trade-out investment, where market timing is key. Instead we focus on how gold can be used as a core strategic holding. Depending on their circumstances, we often see investors using gold with a 2%, 5% or 10% allocation across their portfolios. 3. Gold’s long-term returns are better than many other asset classes Since gold became a freely traded commodity in 1971 its price has increased by an average of 11.7% per year in Australian dollar terms. Chart 1 shows how gold has performed relative to other major asset classes from the perspective of an Australian investor. While some investors worry that gold produces no regular income, its overall returns have out-stripped many more widely used investments. Gold has significantly outperformed both fixed income investments and diversified commodities. Its long-term returns are comparable with share market returns. Chart 1. Source: Bloomberg data as at 30 September 2019. Returns shown are compounded annual growth rates. Australian Equity is represented by the S&P/ASX 200 Total Return Index. Global Equity is represented by the MSCI World Total Return Index. Australian Fixed Income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global Fixed Income is represented by the Bloomberg Barclays Global Aggregate Total Return Index. Commodities are represented by the Bloomberg Commodity Total Return Index. 4. Gold helps diversify your portfolio when you need it most Over the long-term gold has close to zero correlation with share markets. This is good for investors. Uncorrelated assets provide diversification and help improve returns or reduce risk within a portfolio. Table 1 shows correlations between gold and other major asset classes over 20 years and you can see that gold generally has low correlations with other assets. It tends to be negatively correlated with equities, while being mildly positively correlated with bonds and commodities. Table 1. Source: Bloomberg data as at 30 September 2019. Correlations are calculated monthly over 20 years in Australian dollars. Australian Equity is represented by the S&P/ASX 200 Total Return Index. Global Equity is represented by the MSCI World Total Return Index. Australian Fixed Income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global Fixed Income is represented by the Bloomberg Barclays Global Aggregate Total Return Index. Commodities are represented by the Bloomberg Commodity Total Return Index. Not only has gold’s correlation with share markets been low, it has the nice property that it has tended to become more negative when stock markets are falling. Chart 2 shows the correlation between gold and global equities separately considering periods where the equity returns are positive, and then negative. This contrasts with other uncorrelated or “alternative” assets that became highly correlated with stock markets during the GFC. Not only does gold benefit from safe-haven buying during times of market stress, unlike most other financial assets, it has no element of credit risk, which immunises it from extreme market dislocations. Chart 2. Source: Bloomberg data as at 30 September 2019. 5. Gold can improve risk-adjusted returns over the long-term To demonstrate the impact that a core gold position can have in a portfolio, we have simulated adding a gold holding to a collection of typical asset allocation models that include Australian and international equity and fixed income assets with four different allocations representing Conservative, Balanced, Growth and High Growth profiles. Charts 3 - 6 below show the outright return, volatility or risk (measured by standard deviation), maximum drawdown or biggest loss and the risk-adjusted return (measured by the Sharpe ratio) for each asset allocation portfolio and for each portfolio with the addition of 2%, 5% and 10% gold. Source: Morningstar Direct data from 31 March 2003 to 30 September 2019. Conservative, Balanced, Growth and High Growth portfolios are represented by the Vanguard LifeStrategy funds, which have been live since February 2003 or longer. Gold is represented by ETFS Physical Gold (ASX: GOLD), which has been live since March 2003. Figures quoted are in Australian dollars and are net of fees. What we observe is that the addition of gold to an otherwise diversified portfolio has aided performance in every case. Outright returns are higher and increase as the gold allocation is increased. From a risk perspective, however, the impact of gold is even more important. The addition of gold reduces risk through gold’s ability to provide diversification. Risk-adjusted returns are higher and importantly drawdowns, or worst-case scenarios, are significantly improved. [1] Bloomberg data as at 30 November 2018

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The Case for Gold Keeps Growing

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Jul 09, 2019

Published: 9th July 2019 Product in Focus: ETFS Physical Gold (ASX Code: Gold) Key Points Gold has been on a run in 2019 reaching a new all time high in AUD terms of over A$2000/ounce. Gold price is influenced by economic uncertainty and momentum Demand is high, driven by central bank and ETF purchasing Gold has been on a great run in 2019. US$ spot gold is up 9.1% since the start of the year and has recently been trading above US $1,400 for the first time since 2013 (as at 8th July 2019). In Australian dollar terms gold is hitting new all-time highs above A$2,000 an ounce. Fuelled by equity market volatility in late 2018 and recent heightened expectations of easing monetary policy, gold has performed precisely as would have been predicated by anyone anticipating the broader macro forces at work over the past year. Equity market volatility in early 2018 triggered a rally, which subsided as markets regrouped and set sail for new highs in the third quarter. Volatility returned the fourth quarter of 2018, driving gold higher again. All of this occurred with the backdrop of an abrupt shift in monetary policy from major central banks. To put gold’s price activity into context, it is worth looking at the historic drivers of the gold price. Research by the World Gold Council highlights the four broad categories of factors that influence the price of gold; This article looks at these four key factors in the context of the current market from a global perspective. Factor 1: Economic Expansion Despite much talk about the uncorrelated and counter-cyclical aspects of gold, like most assets, demand for gold is at least somewhat driven by the overall level activity and wealth in the global economy. Where savings and investment levels are high, demand for gold is high. Recent years have seen growing demand for gold from both India and China as levels of disposable wealth have grown. These two countries now account for more than 50% of global demand for gold. Conversely, a slowdown in the technology sector in late 2018 saw industrial demand fall by 3% in Q1 2019. While a broader economic slowdown seems to be in progress, the diversity of demand for gold and its traditional role as a strategic investment asset makes it unlikely that a reduction in economic activity will have a significant negative price impact on gold in the short-term. Factor 2: Risk and Uncertainty As an investment asset gold is commonly deployed as a portfolio diversifier, inflation hedge and quasi-insurance policy. Gold has shown persistently low levels of correlation with stocks and bonds over the long term, which means that the addition of gold to a portfolio is often able to improve risk-adjusted returns by adding diversification. Figure 3, below, shows the impact of adding gold to a typical balanced portfolio invested across Australian and international equities and fixed income (as represented by Vanguard’s LifeStrategy Balanced Fund). The conclusion here is that over the long-run a relatively small allocation to gold in a portfolio can have a consistent impact on the risk/return profile of the portfolio. In addition, gold can also have a substantial impact when other asset returns are stressed. This is evidenced in Figure 3(b) by the lower drawdowns, or losses experienced during the largest negative events. This leads us to gold’s commonly cited role as an “event risk” hedge. When major, unexpected events occur gold has, time and again, had a better outcome than equity markets. Figure 4, below, shows how gold fared versus the S&P 500 and ASX 200 through a selection of major financial events over the past four decades. When negative market events occur, gold’s correlation with mainstream asset classes tends to reduce and even become negative. This is in stark contrast to many other “alternative” assets, such as hedge fund strategies. During the global financial crisis, these were seen to be highly correlated to equity markets as investors simultaneously rushed to the exit of anything but the safest stores of value. Not only is gold highly liquid, its other important feature is that it has no credit risk. Unlike other asset classes, during times of financial stress when risk premiums are raised correlations between other assets rise as investors simultaneously look to sell, while gold often moves the other way on safe-haven buying. While such major events are unpredictable by nature, there is a growing case to be made that equity market valuations are currently stretched and that the volatility seen in early and late 2018 could well return in the near-term. Even if the monetary authorities are ahead of the curve and manage to engineer a soft landing, late-phase bull-markets are synonymous with bouts of volatility. As with any insurance policy, premiums are paid in the hope you never need to make a claim. Factor 3: Opportunity Cost The most common argument made against investing in gold is that gold has no intrinsic value because it produces no income and in fact produces negative income if you account for storage and security costs. This is certainly true in a literal sense. As has already been demonstrated, however, this should not detract from the role gold can play in a portfolio and the potential value it adds. The opportunity cost associated with holding gold is driven by the income and gains forgone by investing in gold over other asset classes. This is clearest in relation to bonds - when interest rates are high the relative cost of owning gold is high. Bonds may provide the necessary diversification, while also providing attractive levels of income. When yields are low, however, that cost of owning gold is reduced, making gold a more attractive play. In cases where yields are negative, as we currently see across Japan and the eurozone, gold effectively provides a positive yield. In the current market, not only are interest rates at the low end of the historic range, but monetary authorities, most importantly in the U.S., but also in Australia and Europe, have recently shifted from a normalisation/tightening bias, to a stimulatory/easing bias. Figure 5, below, demonstrates the very close relationship between gold and the U.S. 2-year Treasury yield over the past 18 months. Furthermore, over the past two easing cycles in the U.S. between 2001-03 and between 2007-08 gold appreciated by 31% and 17% respectively. Research by the World Gold Council also suggests that not only do lower interest rates raise demand for gold, but that interest rates have a greater impact on gold in periods where there is a shift in stance, which is exactly what we have seen over the past few months. Markets are now pricing a 100% probability of a Fed cut at the end of July. The likelihood of this was less than 20% as recently as late-May. Factor 4: Momentum Like most assets, gold is susceptible to trends and changes in momentum as it moves in and out of favour and the current trend is overwhelmingly positive. A key area of investment demand is from exchange traded funds (ETFs). Figure 6 shows that global ETF holdings have been steadily rising since early 2016. There are now over 74 million troy ounces of gold supporting physically-backed ETFs, which provide investors with access to gold on most global stock exchanges. ETF users range from larger institutional to small retail investors. Central bank demand is also growing and has been doing so since 2010. Net purchases are at historic highs and diversified across a wide range of nations. According to the World Gold Council 9 central banks added more than a tonne of gold to their reserves in Q1 2019. Conclusion In summary, gold has picked-up a strong tail-wind in recent months. Demand for gold continues to grow on multiple fronts. The case for using gold as a portfolio diversifier is also becoming clearer as interest rates decline and future growth prospects of global economies are questioned. For investors who are concerned with the risk of drastic, unexpected events it is hard to go past the track record of gold in helping to reduce losses in such scenarios. How to invest? Investors looking to add gold exposure to their portfolios can do so via ETFS Physical Gold (ASX: GOLD). GOLD is the oldest and largest gold ETF traded on the ASX. It is fully-backed by physical gold bullion vaulted on behalf of investors in the fund. GOLD charges a management fee of 0.40% per annum.

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Gold 2019 Outlook

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Jan 21, 2019

Gold 2019 Outlook Gold had a positive return of 9.4% in 2018 2019 is looking to experience further geopolitical instability, particularly: US/China trade tension Continued uncertainty around Brexit Gold net non-commercial long contracts have been on the rise since October 2018 Does it take a market correction to see the value in gold? 2018 wrapped up in a storm of volatility. Markets up for the first three quarters and down thereafter through to late December. Consequently, leaving investors wary of what may be on the horizon. Though we have entered a fresh year, many of these volatility drivers still exist as they remain unresolved. Looking at the geopolitical landscape, 2019 is likely to present events that will continue to affect market sentiment. Trade tensions between the US and China remain, Brexit is fast approaching the original deadline and elections are upcoming in India, the EU and Australia, with all expected to play a role in shaping the year ahead. With this continued uncertainty, defensive strategies and diversification shall continue to be on the mind of many. How did Gold weather the storm? The tail of 2018 saw gold perform as a good hedge against equities. Whilst the S&P/ASX 200 dropped 7.8% from October to December end, gold netted a 9.6% gain in this same period (Figure 1), which indicates inclusion of gold into a portfolio for the period could have reduced volatility and downside risk Examining several major indices across 2018, ETFS Physical GOLD had a positive return of 9.4% whilst all major equities were in the red (Figure 2). Gold outlook for 2019 The outlook for 2019 performance will likely be impacted by a continuation of the global themes that dictated the close of 2018. In the World Gold Council’s “Outlook 2019: Economic trends and their impact on gold”, it has outlined three important drivers of gold demand: financial market instability, the impact of rates and the dollar and structural economic reforms The political instability that has enveloped the leading economies of the US and the UK is set to continue with markets responding to ongoing turmoil. The protectionist attitude of the US has encouraged inflation, with gold used by many to hedge against this. These movements have heralded a renewed interest in gold which can be seen on multiple fronts. Net positive flows into ETFs have occurred for the previous three months, though Asian markets (including Australia) have lagged Europe and America on this front. Futures have also pointed to change in sentiment towards gold. Net non-commercial long contracts have been on the rise since October 2018, reversing the downward trend seen throughout 2017 and most of 2018 (Figure 3). The bearish view of gold suggests that performance could be constrained by a strong US dollar and rising interest rates. Addressing these points; the significant price movements of the dollar in recent weeks makes the price outlook of the dollar particularly tricky to predict. Examining the relationship between gold and interest rates, these have seen a degree of positive correlation in the past although not to a particularly significant degree. Finally, economic reform is expected to continue across China and India in 2019. As the greatest consumers of physical gold (through both investment and jewellery), economic growth in these regions will likely impact the precious metal. Further economic development and particularly the increase of wealth in India and it’s growing middle class is likely to continue to drive demand. On balance key indicators that have dictated the previous performance of gold suggest that we are likely to see a continuation in the upward trend of both investment flows and price of gold. Investors wanting to access gold may be interested in the benefits of exposure through investing in gold miners’ equities. Whilst this strategy gives the potential to receive dividends it does not offer the same exposure of a physical gold ETF such as GOLD as the price changes in gold miners can be quite different from the movement of gold price. The mining industry has recently garnered attention due to large M&A movements. Significantly Goldcorp will be acquired by Newmont Mining in a US$10bn deal. Subsequent to this announcement Newmont’s share price dropped 11% overnight. For investors who are utilising gold as an event risk hedge, other factors such as M&A activity can have unexpected effects on gold miner’s share prices. Therefore, a direct exposure to physical gold will eliminate exposure to stock specific risks.

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Why aren't you looking at Gold?

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Jan 08, 2019

GOLD 100% physically backed Highly recommended by Lonsec Recommended by Zenith Key features of Gold: Can materially reduce risk in portfolios The best-known hedge against the business cycle Outperformed cash since the 1800s Hedge against geopolitical events Global trends around Gold investment: Global Gold ETF investment flows have moved to positive for the first time since May 2018 Central banks have increased buying of gold to the highest level since the end of 2015 Gold is the world’s oldest financial asset and has been used for centuries in transactions and as a store of value. However, many Australian investors are hesitant to allocate assets to gold, with the lack of yield being a common concern. We believe investors should consider the role of gold in a portfolio, particularly with the recent volatility being experienced across the globe. Key features of gold 1. Gold can reduce the risk of a portfolio The most efficient portfolio is one that takes the least risk while making the highest return. Risk can be reduced by diversifying across and within asset classes based on low or negative correlations. Gold has low or negative correlations with traditional asset classes making it ideal as a risk reduction tool. 2. Gold has outperformed cash since the 1800s In a review of every major US asset class, Jeremy Siegel, a professor of finance at the University of Pennsylvania, found that gold provided investors with a real return of 0.5% from 1802 to 2016. He found that while gold was beaten by bonds and equities, gold outperformed cash, with cash delivering a negative real return of -1.4%. 3. Gold acts as a hedge against geopolitical events Gold has had an historical tendency to rise during times of crisis and turbulence. This means gold can provide something like an ‘event hedge’ – or the chance to reduce the impact of ‘black swan’ type events which, while relatively uncommon, can have a strongly negative impact on a portfolio. Taking the well-known example of the GFC (below) it can be seen that the difference between gold and the equity markets one year on from the credit crisis was 35% in favour of gold. Global trends of Gold investment Recent global movements have shown many investors are reallocating to gold. On this front Australia is lagging behind global trends with other regions showing a greater propensity for an allocation to gold. We have seen this increased appetite for gold emerging on multiple fronts: Gold ETF investment flows have moved to positive for three consecutive months (October-December) with 3% growth in ETF holdings in 2018 The total value of global gold backed ETF holdings in now over $100bn for the first time since 2012 Central banks have increased their buying of gold to the highest level since the end of 2015 What does gold look like in a portfolio? To demonstrate the effect of gold in a portfolio we have simulated the past performance of a series of Vanguard “LifeStrategy” funds with and without a 10% allocation to gold. Simulations were run over a 15-year period (since inception of ETFS GOLD). These funds provide an all-in-one portfolio made of globally diversified blends of equity and bonds (proportion equities & bonds indicated in charts below). In every case, the portfolio including a 10% allocation to GOLD outperforms and has lower beta and standard deviation indicating a lower risk. Based on this it’s clear gold does exactly what it’s meant to do from an investment perspective and we believe that many Australian investors are ignoring these risk reduction properties. Conclusion Gold is the oldest known store of value and has been continuously used for this function for centuries. We have demonstrated above the key features of gold that make it an appealing option for some investors. Gold’s low and negative correlations with other asset classes have seen it perform as an effective hedge in previous bear cycles and during global geopolitical events that have negatively affected other asset classes. Simulated data also demonstrates how this diversification can function in a hypothetical portfolio to reduce risk and increase returns.

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