BULL POINTS:
■ Experienced management ■ Top performer ■ Exposure to undervalued gold mining shares
BEAR POINTS:
■ Volatility ■ Currency risk
While investors and fund managers debate the merits of adding more risk to portfolios versus taking a defensive stance (see our ), there is one investment that continues to climb: Gold.
But, while the gold price has soared, racing past the $1,700 an ounce mark, shares in gold mining companies have been left behind, largely due to the sell-off in global equities. This has created a 'disconnect' between the gold price and the miners, with gold mining company shares significantly lagging the gold price's impressive rise. But analysts say this is a temporary phenomenon and it will just be a matter of time before a better balance is restored.
"We believe that gold shares currently discount a long-term price of about $1,000 an oz, which, given the strength of gold, cannot go on forever," says Angelos Damaskos, fund adviser on the Junior Gold Fund.
IC TIP RATING | |
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Tip style: | GROWTH |
Risk rating: | HIGH |
Timescale: | LONG TERM |
What do these mean? Find out in our |
The difference in value is opening up an attractive buying opportunity in gold mining equities with funds focused on this space likely to be direct beneficiaries. That's why we like Smith & Williamson Global Gold & Resources Fund the best. It offers investor participation, through a carefully selected portfolio of companies, in both the movement in the bullion price - the fund has up to 10 per cent exposure to gold bullion through exchange-traded funds (ETFs) and closed-end funds - and also the potentially strong growth of gold mining shares.
The fund is a UK mirror fund of the AGF Precious Metals Fund managed in Canada. The managers, Robert Lyon and Ani Markoa, are both based at AGF in Toronto (AGF is a minority shareholder in Smith & Williamson). The duo have been managing the fund for some time and it is unusual for such an experienced team to be running such a small amount of money. The fund only has about £62.4m in assets, markedly less than its better known competitors, (£2,832.3m) and Investec Global Gold Fund (£187.8m). But the small size acts to the fund's advantage, as it allows it to be nimble and move relatively quickly across the market spectrum to where the managers see value.
The fund's performance figures are testament to this. Launched in December 2004, it is the top performer in the IMA Specialist sector over both three and five years, and the best performing gold mining fund. Over one year, it is the third best performer in the specialist sector, which consists of over 100 funds.
The fund invests globally in around 120 companies of all sizes with typically 60 per cent in mid- and small-cap stocks - the managers believe greater value can be added through investing in companies of this size. This also includes some frontier and exploration companies that may have only recently discovered mineral deposits, but do not yet know the size of these discoveries.
Regular due diligence on investments is carried out by the investment management team, which includes on-site visits to mines worldwide, although the majority of the fund's holdings are based in Canada (76 per cent).
The managers are taking advantage of historically attractive valuations in the gold mining space, while the fund's exposure to mid- and small-caps means it is also likely to benefit from an expected pick-up in M&A activity in the sector. Simultaneously, it still has significant correlation to the gold price which looks likely to continue its upward trajectory as fears of inflation and economic uncertainty mount.
This is a high-risk fund, but it has the potential for great returns, and if you don't already hold gold it should offer good diversification for your portfolio. Buy.
Key fund data:
SMITH & WILLIAMSON GLOBAL GOLD AND RESOURCES A RETAIL INC NAV (WLGR) | |||
---|---|---|---|
PRICE | 408.500p | SHARPE RATIO | 0.13 |
SIZE OF FUND | £62.4mn | 1 YR PERFORMANCE | 27.78% |
No OF HOLDINGS | 134 | 3 YR PERFORMANCE | 140.72% |
SET UP DATE | 03-Dec-04 | 5 YR PERFORMANCE | 132.37% |
MANAGER START DATE | 03-Dec-04 | TOTAL EXPENSE RATIO | 1.87% |
BETA | 0.69 | YIELD | n/a |
VOLATILITY | 3.43 | MINIMUM INVESTMENT | £1,000 initial, £500 thereafter |
TRACKING ERROR | 3.15 | MORE DETAILS | sandwfunds.com |
Source: Investors Chronicle Funds Data, Smith & Williamson
Notes: Performance figures as at 15 August 2011
Top 10 holdings as at 30 June 2011
Holding | Percentage |
---|---|
Central Fund of Canada | 5.0 |
Goldcorp | 4.6 |
Eldorado Gold | 2.6 |
Tahoe Resources | 2.5 |
Osisko Mining | 2.2 |
Barrick Gold | 2.2 |
Great Western Minerals | 2.0 |
B2Gold | 2.0 |
First Quantum Minerals | 2.0 |
Semafo | 2.0 |
Geographic allocation
Country | Percentage |
---|---|
Canada | 76.8 |
Australia | 7.4 |
United States | 6.8 |
United Kingdom | 4.1 |
South Africa | 2.3 |
Mali | 0.6 |
Belgium | 0.5 |
France | 0.4 |
Cash | 1.1 |