Abstract
The look through principle was introduced in Regulation 28 with the aim of limiting the possible circumvention of prudential investment limits. Post its introduction, certain assets are interpreted based on what drives their returns. This means that the regulator looks through the face value asset and interprets the underlying asset as the main asset to which an investor is exposed. This application suggests that the look through principle can be extended to other assets that exhibits such returns dependency. Studies have highlighted that equity returns of gold mining companies are driven by gold. Therefore, by application of the look through principle, equity of gold mining companies should be seen as gold in Regulation 28 compliant portfolios.
This study therefore examines whether there are potential benefits of incorporating gold into Regulation 28’s look-through principle. This is done by comparing portfolios that invested directly in gold as a commodity with those that invested in gold mining company equities.
The results of this study indicates that portfolios that invested in gold as a commodity generally performed better than those that invested in equity of gold mining companies. Based on the findings of this study, there is no benefit in amending the look through principle to include gold.