Membership in the club of AAA-rated countries is rapidly shrinking, and rising correlations mean that, at least in the short term, virtually all risky assets are moving together. While there are still a few places to hide, I believe the “safety” of the real safe-haven investments comes at a cost. For this reason, I’m advocating that investors consider a group of assets I’m calling the “semi-safe havens.”
The Real Safe Havens: For investors looking to avoid any capital losses, there’s a small list of arguably truly safe assets that are likely to hold their value, and even appreciate, in the event of another crisis. However, as I mention above, their safety comes at a price.
1.) Gold: The yellow metal qualifies as a safe haven on one level – it’s relatively uncorrelated with other risky assets, particularly stocks. However, while gold is a diversifying asset, it doesn’t satisfy the full definition of a safe haven because it can be as volatile as stocks.
2.) U.S. Dollar Cash: Cash will obviously hold its value and produces no volatility, but a long term position in cash will produce negative real yields.
3.) U.S. Treasuries: At today’s levels, Treasuries offer little better than cash in the way of yield and record-low coupons mean that duration risk is also at a record high. Currently, even a small back up in Treasury yields would lead to significant losses.
The “Semi-Safe” Havens: Instead of opting for traditional safe havens, investors looking to limit their downside but still generate some yield should consider the following list of potential “semi-safe-havens.”
1.) Traditional Low Beta Sectors: Even during the recent downturn, the traditional low beta (a measure of the tendency of securities to move with the market at large) sectors – consumer staples, healthcare, utilities and telecommunications – have provided some cushion. For instance, as of Monday’s close, the U.S. market was down roughly 8% from its peak. In contrast, at the same time, healthcare and consumer staples were down roughly 4% and 2% respectively, while utilities and telecom were posting new highs for 2012. I particularly like global telecommunications, which has a low beta, a relatively high yield and is accessible through the iShares S&P Global Telecommunications Sector Index Fund (IXP).
2.) High Dividend and Minimum Volatility Funds: As I’ve mentioned in the past, high dividend and minimum volatility investments tend to provide good downside protection. In particular, I like the iShares High Dividend Equity Fund (HDV), given its low beta and quality screen, and the iShares Emerging Markets Dividend Index Fund (DVYE).
3.) Municipal and Investment Grade Debt: On the fixed-income side, for investors looking for relative safety with some yield, municipal and investment grade debt may provide some protection, albeit less than a Treasury, while also providing positive real yield. Potential iShares solutions include the iShares S&P National AMT-Free Municipal Bond Fund (MUB) and the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD).
With Europe a lingering concern and the U.S. fiscal cliff unlikely to be resolved until after the election, I’m sympathetic with investors’ desire for safety. However, as traditional safe-haven investments come with considerable costs, “semi-safe havens” may be the new place to hide.