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Inflation fears a golden opportunity for hedging institutional portfolios: PGIM study

Are institutional investors joining the gold rush? While gold’s long-term performance is not strong compared to other assets, new PGIM research finds that under certain economic conditions—including a slowing growth environment—institutional investors are right to evaluate adding gold-related assets to a diversified portfolio. PGIM Inc. is the $1 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU).

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Harsh Parikh, Ph.D., Principal, Institutional Advisory & Solutions (Photo: Business Wire)

In a new white paper, "Institutional Gold!," Harsh Parikh, principal and a senior analyst in PGIM’s Institutional Advisory & Solutions group, uses statistical analysis based on more than 45 years of returns to understand the role gold-related assets might play in a portfolio for clients seeking protection from high inflation or low-growth economic environments.

"In the current low interest rate environment, institutional clients have specifically inquired about investing in gold," Parikh says. "We find that gold has a clear role to play in a stagflation or stagnation economic scenario. In addition, we find that gold’s hedging effectiveness with other asset classes and with inflation and growth vary with an investor’s horizon."

The paper addresses four common questions from institutional investors:

How can institutions invest in gold? Investors can invest directly in physical bullion or ETFs, or indirectly by investing in futures, gold miner equities or royalty agreements. A rolling gold futures strategy may improve performance for long-term gold exposure, while equity in high quality gold miners also offers investors a way to construct a portfolio that may outperform the sector.

Over the long term, how has gold correlated to other institutional assets and macroeconomic variables? Gold’s correlations are sensitive to the time period and the investor’s horizon. For example, gold has a negative correlation to equity returns, even at the 90th percentile, over 5-year investment horizons. Gold was diversifying to Treasuries due to its negative correlation, which became more negative as the investor’s investment horizon increased. Additionally, gold-related assets have a positive correlation to CPI, increasing over the time horizon, and a negative correlation to economic activity, which further decreased over the time horizon.

What should the allocation to gold-related assets be in hedging portfolios? This allocation depends on both the investor’s objective (e.g., protection against inflation or slow growth) and investment horizon. There is likely a role for gold-related assets separate from commodities and energy equities. While we illustrate gold’s role in add-on hedging portfolios, there may be more efficient alternatives to achieve a desired portfolio-level macroeconomic sensitivity.

What are the difficulties of estimating correlations, especially for long horizons? We highlight the importance of measuring estimation uncertainty and show how this uncertainty can be incorporated into the portfolio construction process. Long-horizon investors can alternatively employ dynamic allocation strategies.

For more details, read the white paper, "Institutional Gold!" the latest in a series about the role of real assets in institutional investing.

For media interviews with subject matter experts, please contact Julia O’Brien.

PGIM’s Institutional Advisory & Solutions group delivers portfolio-level advisory services to institutional clients worldwide. Their expert research professionals offer customized asset allocation, portfolio construction, benchmark selection and other portfolio management solutions to help clients achieve desired outcomes. IAS also works closely with the PGIM Institutional Relationship Group which provides access to expertise across PGIM’s eight asset managers.

About PGIM and Prudential Financial, Inc.
With 16 consecutive years of positive third-party institutional net flows, PGIM, the global asset management business of Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10 largest asset managers in the world* with more than $1.3 trillion in assets under management as of Sept. 30, 2019. With offices in 15 countries, PGIM’s businesses offer a range of investment solutions for retail and institutional investors around the world across a broad range of asset classes, including public fixed income, private fixed income, fundamental equity, quantitative equity, real estate and alternatives. For more information about PGIM, visit pgim.com.

Prudential’s additional businesses offer a variety of products and services, including life insurance, annuities and retirement-related services. For more information about Prudential, please visit news.prudential.com.

Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.

*Pensions & Investments’ Top Money Managers list, May 27, 2019; based on Prudential Financial total worldwide institutional assets under management as of Dec. 31, 2018. Assets under management (AUM) are based on company estimates and are subject to change.

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Contacts

Julia O’Brien
973-367-7098
julia.obrien@pgim.com