Fuelled by the COVID-19 pandemic, Australia’s already declining cash target rate dropped to 0.1% in 2020, the lowest since 1990. This led to a reduction in Australian superannuation fund allocations to cash and bonds and an increase in risk-on assets, such as equities, in the hunt for returns (Chart 1). But will this move help achieve their desired returns at reasonable risk levels?
We analysed a hypothetical super fund average portfolio based on historical data over the past 20 years. Results show that as the weight of equities rose, the portfolio return saw only mild improvement whilst its volatility increased markedly, resulting in a lower risk-adjusted return. We also constructed a similar portfolio with a gold allocation: gold’s presence not only enhanced portfolio returns, but also lowered volatility.
Our analysis shows that gold’s diversification benefits, together with its ability to offer downside protection, generate returns and protect against inflation, could make gold a valuable strategic component in Australian super funds.