Gold Is No Cure-All But Should Be Embraced, NEPC Says

In times of elevated market volatility, investors cast their eyes to any asset category that rises as stock markets and other risky assets fall, a new paper by consulting firm NEPC notes.

(January 17, 2012) — Gold should not be used as a cure-all by institutional investors facing poor returns, consulting firm NEPC asserts in a newly released whitepaper.

“Using it will not solve all the other challenges investors face from hostile capital markets, political uncertainty, or evolving technological change,” NEPC notes, adding that gold can have a place in investors’ portfolios, but investors must do other things well in order to meet the obligations of their investment programs.

NEPC continues: “In times of elevated market volatility, investors cast their eyes to any asset category that rises as stock markets and other risky assets fall. Amid the turmoil of the last several years, only a few assets have risen consistently in price – prominently US Treasuries and gold. In fact, one cannot go very far without encountering the topic of gold.”

The firm concludes that gold has three potential roles in institutional investment programs:

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1) As a component of a broader real assets investment allocation to help hedge against in-ﬂation,

2) As a source of alpha for trading-oriented strategies such as global asset allocation and global macro,

3) As a component of a “tail-risk” hedge against extreme economic environments.

NEPC notes that it believes gold can be utilized as a hedge against inﬂation and/or the devaluation of ﬁat currencies, and as a source of alpha from dynamic trading by active investment managers. NEPC adds that gold may be a component in a commodities portfolio, a position in a dynamic global asset allocation program, a part of a global macro strategy, or, in the extreme, a dedicated long-term holding — as was showcased by the gold purchase by the University of Texas Investment Management Company (UTIMCO) last year. “Thus, any exposure to commodities should have a gold component,” NEPC says.

Commenting on the other side of the debate, NEPC notes that the other main argument against holding gold, especially in the later part of 2011, is tactical. “Gold has experienced a remarkable increase in price that has accelerated as the overall global financial situation has worsened. After such a run it is possible that we are at the top of a bubble which is about to burst. The vertiginous fall in gold’s price in September 2011 highlighted the possibility of further price declines and emphasized the high price volatility that gold can experience. Since there have been major price movements of gold in the past, some argue that its volatility is too high to justify having in any portfolio.”

Nevertheless, NEPC concludes that managers can add alpha on the long and short side from trading the price movements in gold as they can in other currencies, sovereign bonds, equity indices, and commodities.

The pros and cons of investing in gold as outlined in NEPC’s research paper follows news from Qatar Holdings — a unit of the Qatar Investment Authority that controls the wealth of the Middle East state’s royal family — regarding its investment of about $1 billion in European Goldfields.

Ahmad Mohamed Al-Sayed, Managing Director and Chief Executive Officer of Qatar Holding said in a statement: “This transaction…helps to further diversify our investment portfolio in the commodities sector, with a specific position in gold resources and another long-term partner secured for the future. We see the transaction as one that will create a lot of value for all shareholders, and represents our positive view on Greece in general.”

Qatar Holding had purchased 10% of European Goldfields from existing shareholders, entering into a call option agreement that allows it to buy another 9.3-million shares, which could take its total ownership up to nearly 15%.

Related article: “Paulson’s Big Short“

CalPERS Highlights Hybrid Pension Plans

Hybrid pension plans maintained by state retirement systems are a proven to deliver pension income security, retain essential staff, and provide important economic stability to every city, town, and state across the country, CalPERS says.

(January 17, 2012) — The California Public Employees’ Retirement System (CalPERS) has highlighted the National Association of State Retirement Administrators (NASRA)’s brief on hybrid plans maintained by state retirement systems.

“Findings from the brief maintain that diversity in plan designs are critical because a one-size-fits-all solution for public retirement systems may not meet different states’ human resource needs, fiscal conditions and frameworks,” CalPERS wrote on its website. Additionally, according to NASRA’s initial brief, critical elements of public pension plan design known to promote retirement security include: mandatory participation, shared financing, pooled investments, benefit adequacy, and lifetime benefit payouts.

CalPERS said: “These features are a proven means of delivering income security in retirement, retaining qualified workers who perform essential public services, and providing an important source of economic stability to every city, town, and state across the country.”

In November, NASRA issued the brief noting that hybrid plan designs have been receiving increased attention as states find that closing a traditional defined benefit pension plan to new employees could increase—rather than reduce—costs, and that providing only a 401(k)-type plan does not meet retirement security, human resource, or fiscal needs.

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NASRA’s brief examined two types of hybrid plans in use in the public sector:

1) A cash balance plan, which marries elements of traditional pensions and individual accounts into a single plan

2) A combination of a smaller traditional defined benefit (DB) pension with an individual defined contribution (DC) retirement savings account, referred to as a “DB+DC plan”

An example of the demise of defined benefit pension plans — perhaps portraying the future demand for a hybrid approach — came earlier this month when Shell revealed that it would launch a defined contribution scheme for new hires.

Shell, which offered one of the remaining open DB schemes on the FTSE100, cited ‘falling in line with ‘market trends’.

The statement, which was issued in December, said: “The Company announced today that it is proposing to develop a UK defined contribution pension plan for new hires to Shell to reflect market trends in the UK.”

The statement continued: “Active members of the Shell Contributory Pension Fund (SCPF) and the Shell Overseas Contributory Pension Fund (SOCPF) will continue to accrue pension benefits within those plans on the same basis as now. The Company has confirmed that its commitment to funding the SCPF and SOCPF remains unchanged. Further details of the proposed pension plan for new hires will be made available as the design is progressed.”

Increased longevity, poor investment returns, and a reluctance to shoulder the risk of holding onto DB pension schemes has meant the number of this type of fund has shrunk over the last decade in the UK and around the world.

Read the brief by NASRA here.