Top 100 Funds Update: S&W Global Gold & Resources

The fund's longer-term numbers also remain intact: we included it in the IC Top 100 Funds last year for reasons including its impressive performance record. Since inception, the fund has beaten its index by 4.8 per cent and beats it over one, three and five years cumulatively. However, while it was the best-performing gold fund in the Investment Management Association (IMA) Specialist sector over five years, it did not do so well over one.

The fund is fairly volatile, making impressive annual returns of 73.77 per cent and 65.79 per cent in 2009 and 2010, but double-digit losses in other recent years.

But part of the reason for its volatility is one of its attractions - it has a significant allocation to smaller companies, currently 46 per cent of assets. "The fund invests in companies with strong growth ideas and significant potential that exchange traded funds (ETFs) and generalist funds tend not to invest in as they are mostly invested in larger, slow-growing majors," says Ani Markova, co-manager of Smith & Williamson Global Gold and Resources. "New discoveries provide us with the option of holding equity, and cash flow can reward long-term shareholders through dividends."

As discoveries become smaller and lower grades limit production, larger mining companies may look to acquisitions to replenish reserves, especially while valuations are cheap. "We are finding gems in the smaller-cap area, with quality assets operating in various parts of the world, and these may be acquired by larger-cap companies," says Ms Markova.

We tipped the fund in 2011 because, while the gold price had soared, shares in gold mining companies had been left behind, largely due to the sell-off in global equities. We said the difference in value opening up was an attractive buying opportunity in gold mining equities, with funds focused on this space likely to be direct beneficiaries (read the tip)

And this still seems to be the case. Although the gold price has slipped back a bit (currently it's around ($1,650 an ounce), shares in gold miners have also suffered recently. Ms Markova says that valuation multiples are at their lowest in more than a decade, while a wide dispersion of price estimates and disparities in consensus views indicate opportunities for valuation. "There are not many industries where we have seen such a compression of multiples," she says. "But there is a long-term secular bull trend for gold relative to other commodities and currencies."

Reasons for this include the devaluation of currencies via quantitative easing, meaning gold could increase its appeal, especially due to inflation concerns. Demand from central banks also remains strong, while generating the necessary supply is difficult, for reasons such as slow production growth.

"A gap has opened between the price of gold bullion and the valuations of gold mining companies," says Richard Troue, investment analyst at broker Hargreaves Lansdown. "We believe Smith & Williamson Global Gold and Resources could be well placed to capitalise on this anomaly and other opportunities across the sector."

A number of risks remain, though, including a rise in real interest rates (which could increase the opportunity cost of holding gold), a fall in commodity demand due to a Chinese recession and an increase in central bank sales of gold.

However, while valuations are low even if the gold price goes down, equities may provide some protection by not falling as much because their price does not reflect the current level of the gold price.

Source: Morningstar, *Smith & Williamson.

Morningstar as at 8 February 2013

Top 10 holdings as at 31 December 2012

Asset allocation