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British investors continue to flee stock markets driven by Brexit uncertainty, with outflows from UK funds now totaling £2.1bn since the vote to leave on June 23 2016.
The Prime Minister’s humiliating withdrawal agreement defeat in the House of Commons this week will be doing little to arrest fears of a hastily put together departure from the European Union.
More and more people are turning to safe haven assets such as gold and cash in the hope that they will protect them in a market downturn – Brexit-related or otherwise.
Investors piled around $1.7bn (£1.3bn) into domestic gold-based funds last year, according to the World Gold Council. At the same time Rathbones, an investment firm, has said that 46pc of retail investors are currently keeping more than half of their wealth in cash savings.
The price of gold in pound sterling rose by 3.8pc last year, while British shares fell by more than 8pc. However, the price of the precious metal was boosted by a fall in the value of the pound, and in US dollar terms gold fell by more than 2pc last year.
While cash is not volatile, paltry savings rates mean your cash is eroded by inflation over time as the costs of goods goes up. Inflation may have dropped to its lowest point for two years this month to 2.1pc, but the average savings rate still languishes at around 0.6pc.
So what are the real safe havens that will protect you in a market sell-off and help to grow your money at the same time?
Gold mining stocks
Defensive manager Hamish Baillie, of the Ruffer Investment Company, said: “It has never been harder to find conventional safe haven assets because of the distorting effect of low interest rates, which have pushed up the price of all assets.
"Traditional safe havens like conventional government bonds, or ‘bond proxy’ stocks like utilities companies, have become so expensive that they have lost their ability to protect."
He said the best way to be exposed to gold is through gold mining stocks, which are trading at a discount to the metal itself but that offer similar protection.
He has recently bought into Randgold Resources, which recently merged with Barrick Gold Corporation.
Specialist investment companies
Another option is to buy into market-neutral specialist investment companies that are decorrelated from the ups and downs of other stocks due to their unique and targeted approaches.
This strategy is favoured by Niall O’Connor, who helps to manage the Brooks Macdonald Defensive Capital fund.
He owns Phoenix Spree Deutschland, which invests in residential properties in Berlin.
“Berlin property has a lot of the same problems that London does in that it is constrained by space and planning but has a growing population. We think the cost of property, which is currently very cheap compared to London property, will just go up and up over time,” he said.
The fund grew by 7.8pc in 2018.
Another he owns is Amadeo Air Four Plus, a fund that buys, leases and sells aircraft. It made over 8pc last year in spite of the market sell-off and is currently paying a dividend yield of around 8pc, Mr O’Connor said.
The Hipgnosis investment company is another “odd safe haven”, he said. Hipgnosis is a music royalties fund that was set up by the former manager of Elton John, Guns N’ Roses and the heavy metal legends Iron Maiden. It made 4.1pc last year.
"The downturn in CD sales coupled with the rise in illegal music downloads had made music rights cheap. With the growth in music streaming, specialists with a window into the music world now have a great opportunity to make money and are able to exploit that discount,” Mr O’Connor said.
Index-linked bonds
This asset would pay out a yield and would increase in value if interest rates were to increase following a market sell-off.
Like other bonds, index-linked gilts – "linkers" for short – are essentially an IOU from the government. In return for you lending it money, it agrees to pay you interest until it returns your money at a future specified date.
The difference between linkers and more conventional government debt is that both the interest payments on the debt and the repayment value rise and fall in line with inflation.
Linkers are exempt from capital gains tax and can be bought through fund shops.
“Linkers give you a little bit of protection though the crash, but, along with gold, are one of the only places to be in the aftermath of the crash,” Mr Baillie said.
Currencies
Holding money in different currencies has long been a way to hedge against a meltdown. Holding the Swiss franc through the financial crisis in 2008, for example, would have made you a tidy sum.
The US dollar and the Japanese yen are other currencies sometimes used as safe havens by professional investors. However, some have warned that in the current circumstances, where the prospect of the pound depends so heavily on the outcome of Brexit, putting money in overseas currencies for protection purposes is a big gamble.
“If Brexit turns out to go better than everyone had expected, the pound will rally,” Mr Baillie said. “Rather annoyingly we are finding it difficult to have conviction in currencies and have a high weighting to the pound for this reason.”
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