Report Says Optimum Gold Allocation to Achieve Inflation Protection Totals 5%

(July 11, 2011) — Research by Oxford Economics shows that investors should allocate 5% to gold in their portfolios in order to overcome the effects of inflation and deflation.

“This research comes at a time when high inflation is an ongoing reality for many developing economies, while Western economies face the threat of protracted low growth, low inflation or even deflation,” Marcus Grubb, Managing Director of Investment, the World Gold Council, said. “In this context, we wanted to understand why gold is being reconsidered as a risk management asset, particularly if one of the many divergent inflation scenarios came to pass.”

The World Gold Council commissioned the study, entitled ‘The Impact of Inflation and Deflation on the Case for Gold’.

Highlights of the report include:

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Gold performs relatively well compared to other assets in a high inflation scenario as well as in a deflationary period. Due to its lack of correlation with other assets, gold has a useful part to play in stabilizing the value of a long-run portfolio even if a modest negative real annual return is assumed.

Gold’s optimum share of an investor’s portfolio is around 5% in a base long-term case for the UK featuring 2.25% growth and 2% annual inflation. This is a higher allocation than seen in typical mainstream portfolios, although the analysis does not include other assets such as index-linked bonds, foreign securities and other commodities.

Gold’s optimal share in an efficient portfolio rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.

Jens Tholstrup, Managing Director, UK of Oxford Economics, added: “Because of its lack of correlation with other financial assets, the report shows that gold has an important role to play in stabilizing the value of a portfolio, even where the conservative assumption of a modest negative real annual return is made.”

However, even though gold is often viewed as a safe-haven during periods of crisis, it is being increasingly scrutinized as an investment for pension funds. While many investors view gold as a good way to invest in expectations of higher inflation, via a modest allocation, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, told aiCIO in March that funds are not wise to invest in the volatile asset class. “A basket of commodities would be a much better hedge against inflation compared to purely investing in gold, which doesn’t give much of a return,” he said.

In February, a Netherlands-based $404 million (€300 million) pension fund for workers at several Dutch glassmaking plants owned by O-I International was ordered to rid itself of its gold holdings. The De Nederlandsche Bank (DNB), the Dutch pensions regulator, ruled the scheme’s exposure to the precious metal was too risky. The Stichting Pensioenfonds Vereenigde Glasfabrieken pension fund had wanted to maintain its gold allocation. Yet a Rotterdam court sided with the Dutch central bank — forcing the fund to sell its gold holdings, generally viewed as a safe harbor investment, to a percentage of 3% at most, compared with the current holding: 13% of assets. The regulator asserted that the average fund has just 2.7% in commodities, including gold.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The Commonfund Benchmarks Study of Healthcare Organizations Report revealed that nonprofit healthcare providers averaged 10.9% return on investable assets in FY2010, continuing a positive trend from 2009.

(July 11, 2001) – Nonprofit healthcare providers averaged 10.9% return on their investable assets during the 2010 fiscal year, according to the Commonfund Benchmarks Study of Healthcare Organizations Report.

The survey of 90 providers, who have a combined $102.6 billion in investable assets, continues a positive trend in the wake of the financial crisis. In spite of an 18.8% return in FY2009 and this year’s positive returns, the three-year average for the survey participants is merely 0.4% due to losses of over 20% in FY2008; the five-year average return is a modest 4.1%.

Though returns in the past two years have been positive, the current three- and five-year averages will not be enough to sustain providers’ spending. For the equivalent study conducted after FY2007, three-year average returns were 9.0% and five-year average returns were 11.1% on investable assets. In a news release, Commonfund Executive Director John Griswold said that “returns at levels such as these are essential to support the missions of the nonprofit healthcare organizations over the long term.”

Two other Commonfund Benchmarks Studies of independent foundations and charities reported returns of 12.5% and 11.6% on investable assets, respectively. According to Griswold, “Historically, healthcare organizations have higher allocations to fixed income securities than do foundations and operating charities, and in a good environment for equities that allocation likely served as a drag on relative return.” FY2010 saw an especially good year for equities, with domestic and international equities garnering the two highest returns of any asset class at 17.8% and 12.8%, respectively. Fixed-income, meanwhile, turned in 7.8% returns – good, but not on par with the equity returns.

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The Commonfund Benchmarks Study also provided asset allocation information, which revealed that 37% of investable assets of nonprofit healthcare providers are invested in fixed-income. According to Griswold, other organizations, such as foundations and charities, invest somewhere between 10-20% of their investable assets in fixed-income.

The defined benefit pension plans included in the investable assets, which represent $42.3 billion, performed slightly better than the investable assets as a whole by registering 12.3% return. Still, the DB plans have averaged just 0.2% return over the past 3 years and 4.3% over the past 5 years.

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