Given the prevailing inflation and interest rate environment, some traditional ‘store of value’ investments like cash deposits no longer serve their purpose of preserving purchasing power. Remaining invested is the best antidote against the gradual erosion of the value of money. Market neutral and capital-preservation strategies have built-in downside protection for investors wishing to mitigate downside risks.
A ‘store of value’ is traditionally defined as an asset that retains its purchasing power into the future. This would include cash (in home currency), gold, high quality government bonds in credible currencies, real estate and even fine art. All these assets share the feature that they offer a real value to investors at any time. For many investors, though, cash and/or gold are the chosen ‘store of value’-investments, especially in a portfolio context. However, the widespread policy of financial repression, introduced after the ‘Great Financial Crisis’ ten years ago, i.e. the (forced) transfer of wealth from private investors to governments, has put the use of cash as a ‘store of value’ in portfolios in serious question. Given the current low, or in some countries even negative interest rate environment, many believe that the definition of cash as a ‘store of value’ for investment purposes does not hold anymore. Cash is no longer king; over time it will be worth less and less.
Apart from ‘artificially’ suppressed interest rates, which do their part to eat up capital, inflation is the other negative factor affecting investors holding piles of cash. Inflation can erode the value of cash positions significantly over time. Looking back, the Swiss franc has lost 60% of its purchasing power in the last 45 years, which means that 100 CHF in 1974 have a purchasing power of 40 CHF today. For the currencies of the countries that make up the Organisation for Economic Co-operation and Development (OECD), the average decline in purchasing power has been even more severe – a staggering 90%.
The need for a paradigm shift
Due to the prevailing low interest rate environment, conventional fixed-income investments no longer provide sufficiently high yields to make them rewarding investments. Consequently, when seeking ‘stores of value’, investors now need to look beyond investments like money market instruments and government bonds. We believe that capital preservation strategies could serve their cause in that respect.
Think beyond traditional investments
‘Capital-preservation strategy’ is an umbrella term for different investment approaches. Their common goal is to preserve the invested capital while outpacing inflation too. Capital-preservation strategies aim to achieve a positive return after inflation in the longer term and a low correlation to the movements of financial markets. Some strategies take long and short positions to create portfolios that are market neutral or take limited directional exposure on underlying markets to generate returns. Other capital-protection strategies offer the assurance of the return of the minimum amount after the agreed term, with a participation in the upside of a financial asset. In the current ‘late cycle’ environment with plenty of ‘known unknowns’ in terms of potentially market-moving parameters, more conservative investors who are still underinvested or have limited risk-taking capabilities may find capital-preservation strategies a good fit for the ‘store of value’ portion of their portfolio.
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