In April IC Top 100 Fund BlackRock Gold & General (GB0005852396) celebrated its 25th anniversary. Over its 25-year history the fund has enjoyed a successful run under the tenure of a number of high-profile managers: if you had invested £1,000 in the fund at launch it would now be worth £24,454 - 5.7 times more than the 326 per cent increase of the gold price over the same period. The fund's current benchmark, FTSE Gold Mines Index, didn't exist at the time of its launch, but over the past 20 years the BlackRock Gold & General Fund has returned 1,158 per cent versus only a 61 per cent return for the benchmark.
However, more recent times have been harder for gold mining shares and the funds that invest in them, with the gold price falling well below $1,400 an ounce in April. The fund has also not done so well, falling 28.5 per cent and 32 per cent over one and three years, albeit still ahead of its benchmark.
However, the fund's manager, Evy Hambro, is still confident on the long-term outlook. "Gold has already trended up after its fall in mid-April," he says. "This is because it appears the reason for the fall is trading activity in the futures market - we believe it is speculative in nature. Most recently there has been huge demand for physical gold in the form of jewellery and bars in Asian markets such as Hong Kong. This price fall has been caused by activity in the paper market."
Gold has also been supported by central bank buying over the past few years, a trend that Mr Hambro does not see reversing.
In any case, short-term moves are not a great concern for BlackRock Gold & General Fund. "We are investors rather than traders and our goal is a long-term return from gold equities," he says. "You have to be very lucky to be able to call something like the gold price in the short term, and managing risk over such a period is very hard."
That said, when the gold price hit its lowest price in over two years in mid-April, dipping to around $1,359 an ounce, knocking back the prices of gold miners, Mr Hambro and his team took the opportunity to buy shares and bullion anticipating a rebound - which came a week later. "We were trading round these moves, but ultimately we are long-term investors," he adds. "We try to build up a picture of the likely supply/demand for commodities over the long term because fundamentals win through over this kind of period. Trying to forecast short-term demand is very difficult, but over the medium to long term you can forecast supply. This is influenced by factors such as jewellery trends and new technologies. If you can get the directional view right over the medium to long-term, you should do very well."
But stock selection is also important - the main driver for the fund's significant outperformance since launch. Stock selection involves taking a view on metals' prices and evaluating companies individual merits, which includes assessing valuations - the primary consideration for stock selection - as well as quality of management. Assessment also includes visiting the mines.
"We then construct a portfolio of companies that together will deliver the best possible outcome," says Mr Hambro. "We need to own a range of companies with different characteristics to offset risks."
The portfolio is focused on growth opportunities with life-long reserves.
Mr Hambro and his investment team avoid companies that will require large amounts of capital expenditure or have high levels of debt. The portfolio has low exposure to pure exploration plays and producers with complex hedging. Risk mitigation is achieved by diversifying by country, asset and company.
The biggest risk for the fund is whether gold equities will give you exposure to the gold price. "Gold and gold mining equities had moved up and down together but over the last few years gold has gone up but gold mining shares have gone down. We feel gold mining managements have done a poor job of delivering value, and managers of mining companies not doing a good job of reinvesting capital is a big risk."
However going ahead things are looking better. "We need to see gold companies acting more responsibly and we are starting to see directors of those companies doing this," says Mr Hambro. "Yields are up which has enabled us to recently pay our first dividend in years. Dividend culture is something we look for in management teams."
And despite recent falls and negative returns, he argues there is still a strong argument for investment in gold mining shares. "Gold-related investments provide diversification, and when commodities are close to the marginal price of production, it is a good time to invest."
