According to the fund manager of the Teacher Retirement System of Texas that the yellow metal's lack of correlation to other assets makes it a key component of a fund portfolio

Author: Jan Harvey (Reuters)
Posted: Wednesday , 29 Sep 2010

BERLIN (Reuters) -

Investing in gold is likely to be a winning strategy for pension funds whether spot prices of the precious metal rise or fall, the gold fund manager of the Teacher Retirement System of Texas told Reuters on Sunday.

Speaking on the sidelines of the London Bullion Market Association's annual conference here, Shayne McGuire, director of global research at the TRS, said a lack of correlation with other assets made the metal a key portfolio diversifier.

"From a portfolio manager's vantage point, it doesn't matter what gold does, if it goes up or down," he said. "What matters is what happens to your whole portfolio, and that is really the key about gold from a pension fund perspective."

"Since gold has been trading freely, from 1971 to the present, every time the stock market has been down by more than 10 percent, gold has risen, most of the time substantially, with the evident portfolio effects."

"Let's say you hold 3 percent of your assets in gold. If gold falls sharply, you are probably going to be in a good mood, because it very likely means many of your other much larger asset classes -- most notably stocks -- are doing well. The rise in your 97 percent will more than compensate for the loss in your 3 percent," he said.

"However, if we are going to have some more bad times, you will be really happy you had that 3 percent."

Overall, he expects prices to trend higher, however, with the current limited exposure of major funds to gold meaning the precious metal had substantial potential for growth.

Even a relatively small redistribution of assets into bullion could have a disproportionate effect on price, he said.

"There are a variety of drivers for gold that... (in) a small asset class with a fixed supply could potentially make gold surge much, much higher than it has already," he said.

The TRS was created in 1937 to provide retirement benefits for employees of Texas' public schools, colleges, and universities, and is the largest public retirement system in Texas in terms of both membership and assets.

The scheme has nearly 1.3 million participants, and as of the end of June had assets totalling $92.3 billion.

Its Gold Fund has approximately $300 million in assets distributed among gold via exchange-traded funds and gold-related equities. Gold is also held via other instruments in its multiple funds, managed both externally and internally.

RECORD HIGHS

Investment in gold has risen sharply since the financial crisis shook markets in 2008, attracting a new wave of risk averse buyers to the precious metal as a safe store of value.

Spot prices have rallied more than 25 percent in the last 12 months, reaching a record high of $1,299.95 an ounce on Friday after the U.S. Federal Reserve hinted it may move towards further quantitative easing.

This fuelled expectations other governments may follow suit, undermining the stability of paper currencies.

"The fact that you have these instances of massive quantitative easing causes a reaction around the world," said McGuire. "Quantitative easing by itself implies that gold is likely to rise, as the quantity of gold stays the same but the quantity of printed money rises."

Quantitative easing is likely to be an inflationary force in the longer term, which McGuire says is also likely to help gold prices.

"People who say that gold hasn't been a proper hedge against inflation focus intensely only on the short term, chiefly the period between 1980 and 2000, when gold declined and certainly there was some degree of inflation," said McGuire.

"But over the long term, every single currency in world history has fallen against gold, which has preserved its value."

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