Gold alternative to Blackrock

It's difficult to write anything about gold without mentioning the Blackrock Gold and General fund. Investors are piling into this in droves, making it the most popular fund choice among stockbroker TD Waterhouse's Isa investors.

Gold is attracting attention for its safe haven status and because it offers diversification for a portfolio - but there is also potential long-term opportunity.

Mark Dampier, investment director at Hargreaves Lansdown, points out that gold mining shares have collapsed recently, relative to gold. He says: "Gold shares appear to offer plenty of upside at today's gold price." He also recommends the aforementioned Blackrock fund.

A lower profile alternative to Blackrock is City Natural Resources High Yield trust. It doesn't have gold in its title, but does hold a strong position in gold mining shares. Note that it's an investment trust that uses gearing, meaning it carries higher risk than the Blackrock fund.

Mick Gilligan of Killik & Co recently recommended City Natural Resources to clients. He says: "The fund has a meaningful position in gold mining stocks, as the apparent bias in the top ten holdings illustrates, which should benefit from an upward trend in gold prices, given the increased risk of monetary expansion from the world's central banks."

He thinks most of the valuations of the top ten holdings do not look particularly cheap at first glance. However, he notes that most of them have healthy balance sheets with net cash (in particular, the gold mining stocks), which should help them to weather a prolonged downturn in commodity prices.

Big discount

Mr Gilligan also points out that the fund is trading close to the wider end of its 52-week discount range (5.1 per cent discount to 34.4 per cent discount). "The current level of discount serves as an attractive entry point for investors looking to gain exposure to some interesting resource plays in the hands of an experienced management team."

The fund aims to provide capital growth and income from a portfolio of mining and resource equities, resources and industrial fixed interest securities. It focuses on small and medium sized resource stocks, aiming to outperform a benchmark weighted two-thirds to the HSBC World Mining Index and one third to the Credit Suisse High Yield Bond Index.

Gold has been at the heart of the fund since launch. In his interim report on 31 December, fund manager Richard Lockwood said: "We believe that given the low level of interest rates around the world, the argument that gold will fail to perform because of opportunity costs, no longer applies. The internal problems and tensions within the EEC means there is not much left apart from the US dollar. These might yet be early days for gold. We have certainly taken that view and gold shares account for over a third of our portfolio, with our biggest holdings, Goldcorp, Randgold, Kinross, Lihir and Avoca."

Mr Lockwood intends to keep his overweight position in gold, backed up by his recent purchase of the 8 per cent convertible in St Barbara, one of Australia's larger emerging gold producers. However, the trust is also diversified among other resources such as oil, uranium and palm oil.

Mr Lockwood is aware that investors have become more yield conscious and increased his final dividend by 17 per cent last year. "It is very much our ambition to produce a significant increase for the current year," he says.

Key fund data:

Source: New City Investment Managers, Datastream and *Morningstar

TOP 10 HOLDINGS

GEOGRAPHIC BREAKDOWN