How the Safe Havens Stack Up

by on January 30, 2014 | Updated January 31, 2014

Given stocks’ stellar rise over the last year, investors worried about a correction are asking me where they can park their money.

While I still believe that stocks aren’t yet in bubble territory and can still push ahead this year, there’s always the risk that an unknown exogenous shock could send markets stack

So to help investors who are concerned about such a scenario and want to allocate to safe havens to prepare, here’s a look at how various traditional safe-haven investments stack up in terms of post-market shock performance.

Contrary to popular belief, gold may not be the best performing safe-haven option, at least based on an analysis by David Wang, a researcher on my Investment Strategy Group team.

David looked at how a number of safe havens performed in comparison to the broad equity market during periods of high financial-markets stress over the last two decades.

He identified the periods of uncertainty, including the 2008 financial crisis and the collapse of Long-Term Capital Management in 1998, using the Cleveland Financial Stress Index. He also compared the assets’ monthly average risk-adjusted returns in order to gauge which safe havens delivered more stable outperformance.

Based on David’s analysis, though all of the safe havens examined outperformed the broad equity market during the high stress periods, they didn’t outperform equally. The 10-year U.S. Treasury was the best performing safe haven on a risk-adjusted basis, followed by 10-year German Bunds, 10-year U.K. Gilts, yen and gold, as the chart below shows.


In regards to gold in particular, although the precious metal ranked highest in terms of average outperformance when risk didn’t come into the equation, it actually was the least attractive safe haven on a risk-adjusted basis. This is thanks to its status as the most risky safe haven examined (as measured by return volatility).

In addition, David found that U.S. Treasuries tended to outperform even when the source of uncertainty happened to be the U.S. government. In other words, investors who are worried about U.S. fiscal policy or a government shutdown might still want to opt for U.S. Treasuries as a safe haven. This may have to do with investors’ perception that the U.S. Treasury is the closest thing we’ve got to a risk-free asset, and their faith that the U.S. government will always solve its problems, even if the solutions come at the last minute.

To be sure, David’s analysis didn’t include an exhaustive list of safe-haven assets. Still, it’s a helpful start for setting a safe-haven allocation. In addition, safe haven assets aren’t risk-free investments. Still, it’s worth noting that even the least attractive safe haven (i.e. gold) in the analysis still outperformed the equity market during the stressful periods examined in the analysis.

Finally, these safe havens are probably not the best options for investors who, like me, don’t see a correction looming on the horizon. During periods of normal market performance when uncertainty isn’t high, safe havens tend to underperform the equity market.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog.

Source: BlackRock Investment Strategy Group Research, Bloomberg