Best performing SIP in last 10 years was Gold ETF

Over the last 10 years, an SIP on gold ETFs would have been the best performer among asset classes.

Apr 29, 2020 10:04 IST India Infoline News Service

If you though that gold was the type off staid asset class that was good and solid enough to be locked away in the vault and saved for future generations, then just think again. Over the last 10 years, an SIP on gold ETFs would have been the best performer among asset classes. We are not even talking about a lump-sum investment where you can make money by getting your timing right. This is about a monthly systematic investment plan (SIP) over a 10-year time frame. Check the graph below.

Data Source: Value Research

Not only would have SIPs on gold ETFs done better than all classes of equity fund SIPs, but even an SIP on liquid funds would have done better than large cap funds and multi cap funds. Before arriving at conclusions, it would be useful to understand why this dichotomy has come about in the first place.

Inordinate impact of the last one year

One factor that probably explains this dichotomy is the relative performance of gold and equities in the last one year. For example, the Nifty is down (-21%) on a yoy basis while gold is up by +35% in the last one year. Of course, this divergence is largely attributed to the systematic rise in geopolitical risk on account of the trade war and subsequently, the disruption owing to COVID-19. The pandemic saw a huge compression in demand leading to a sharper correction in equities. Gold, being the safe haven asset it has always been, benefited for multiple reasons. Firstly, central bank demand for gold has been at a high as treasuries look to diversify away from the dollar. Secondly, gold ETFs have been driving the demand for gold. If you remove the impact of the last one year, it is equity SIPs that would have still outperformed gold ETFs. Of course, things could rapidly change for both the asset classes in the near future.

Gold cycle in last 10 years has favoured SIP performance

Even if we forget the inordinate impact of the last one year in highlighting the divergence between gold and equities, gold price movement has still been a lot more favorable to SIPs in the last one year. Here is why.

Gold (green) and Sensex (blue) relative movement over last 10 years
Data Source: Trading Economics

One of the key reasons for the outperformance of the Gold ETF SIP is explained by the above chart. Gold has fallen all the way from $1879/oz to $1050/oz and then bounced back sharply close to the previous highs at $1710/oz. That means the sharp fall would have ensured better rupee cost averaging for the gold ETF investor. Most of the accumulation would have happened at lower levels of gold and the recent rally is only accentuating that advantage. On the other hand, the Sensex has been on a structural bull rally and has just turned negative in 2020. That means; the SIP investor was never getting the best of rupee cost averaging while the recent crash has only accentuated that disadvantage. Incidentally, SIPs work best when asset classes consolidate for a long period of time before embarking on a rally. That is exactly what gold has done over the last 10 years.

Kurtosis played a role too

Kurtosis here refers to the predominance of a handful of companies in driving the indices. Unlike gold, which is a homogenous commodity, equity funds are a lot more dynamic and heterogeneous. The high levels of kurtosis meant that the indices were doing well but fund managers were finding it hard to balance alpha selection and diversification. That is where most equity funds had a major issue in the last few years. A handful of stocks like HDFC Bank, Reliance, ICICI Bank, HDFFC, TCS and Kotak Bank accounted for most of the outperformance in equities. Diversification actually worked against them and that also explains why mid-caps have done better, despite all the pain in the interim.

So, what is the critical takeaway?

For an investor, the key takeaway is not about asset classes but about asset allocation. What the data of the last 10 years highlights is that gold must be viewed as a distinct asset class. In fact, it is emerging as a distinct asset class. However, the purpose of gold allocation is not about returns but providing protection to your portfolio in tough market conditions. Gold has always done well when the economic going is bad and equities have always done well when the economic going is good and the irony is that you do not have control over either outcome. A flexible allocation of 10-15% to gold in your portfolio can make a whale of difference to your long term portfolio returns.

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