these COGs (Copper, Oil and Gold) are helping your portfolio resilience

How to ensure portfolio resilience
We explored this topic in our recent CPD webinar - within and across each asset class.  But given recent geopolitical events, it makes sense to look under the bonnet of the VT Avastra Global Diversified Assets fund (which we consult to), to consider what alternative asset class exposures can act as the best shock-absorbers to 1) structural change from AI, 2) rising geopolitical tensions in the Gulf and 3) the debasement trade.  For these, we turn to what we have named the "COGs" for a portfolio - Copper, Oil and Gold.

Watch the explainer video about COGs

The COGs of Portfolio Resilience: Copper, Oil, and Gold

What steps can investment committees take

For asset allocators, the question is how to have created portfolio resilience going into this shock. We took the view earlier this year that to mitigate the risk of a broadening conflict in the Gulf, we would revisit the traditional “geopolitical shock absorbers”.  In our Investment Committee discussions with our adviser clients, we have been focusing on:

1. Sizing the Equity allocation to adapt to changing risk posture
2. Build in resilience by using a global diversified assets fund which includes allocations to Copper, Oil and Gold (or "COGs" - see below)
3. Reappraising outlook for inflation and global growth depending on how long the conflict lasts

Introducing the “COGs” within diversified assets

The risk of a protracted conflict in the Gulf is that sustained energy prices lead to a reacceleration of US/UK inflation which could negatively impact growth.  How best to protect against that?  The best way to ensure portfolio resilience in our view is to include diversified assets in a portfolio allocation.  Diversified assets are those alternative assets that are not equities, bonds or cash.
Of particular interest within the diversified assets space are what we have determined the “COGs” of a portfolio:

• Copper: long-term structural demand from the AI revolution for chip and electronics manufacturing as well as broader infrastructure formation.
• Oil: short-term protection against geopolitical risks in the Middle East in an increasingly fragmented world, for inflation-hedging purposes
• Gold: medium-term protection against the so-called “debasement trade,” with growing concerns around the value of fiat money given 1) debt affordability and 2) persistent, moderating but vulnerable inflation measures.

These COGs can be readily bought and sold using Exchange Traded Commodities (ETCs).  Whilst platforms cannot easily trade ETCs, a diversified asset funds can do so easily and rapidly if needs be.

By introducing diversified assets in general, and “COGs” in particular into a traditional equity/bond portfolio, it is possible to increase portfolio resilience with assets that can act as shock absorbers whilst also being diversifiers owing to their uncorrelated behaviour.

For advisers and DFMs looking to add "COGs" and other diversifiers into their portfolios, please contact us for a portfolio review.