Gold, US treasury bonds offer short-term protection for pension funds
GLOBAL - Gold and US treasury bonds can provide pension funds with short-term protection at a time when the sovereign debt crisis rocks Europe and the US downgrade sparks more market volatility, according to Barnett Waddingham.
Alex Pocock, an associate at the consultancy, said the current turmoil in sovereign debt markets had led investors "quite rightly" to review their holdings of government debt.
"The nature of bond and equity markets is such that it is not easy to devise categorisations that will be robust in all circumstances," he said.
"Even if pension funds do not wish to hold gold or US treasury bonds in their portfolio as strategic assets over the long term, these products can be a good protection on a short-term basis, as they will still offer a broadly flat return."
Pocock added that, in this market context, any holdings will be tactical and not necessarily be made by the trustees or pension funds' board themselves, but by asset managers working on their behalf as part of a capital preservation strategy.
Last month, Ronald-Peter Stöferle, analyst at Erste Bank, said institutional investors around the world were set to ramp up their investment in gold in the coming months and would do well to increase their exposure to as much as 5-10% of their portfolios.
However, some European pension funds interested in investing in gold or US treasury bonds are still unable to do so due to internal regulations.
Jean-Michel Horrenberger, deputy chief executive officer at Etablissement de Retraite Additionnelle de la Fonction Publique (ERAFP), told IPE: "The rules implemented by our board do not allow us to invest in such assets.
"Therefore, our investment allocation in fixed income products is mainly directed toward euro-denominated bonds, while investments in commodities such as gold have never been part of our strategy."