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Tap into rising demand via BlackRock Gold & General

Gold miners can be a good way to benefit from demand for this asset
January 8, 2019

In volatile markets, such as those we saw in 2018 and are likely in 2019, it is useful to build some diversification into portfolios. One way to do this is to have exposure to precious metals, in particular gold, because its price tends to rise as markets become more jittery.

IC TIP: Buy at 921.4p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Portfolio diversifier

Gold price expected to rise

Exposure to mining shares

Consistent investment approach

Experienced managers

Bear points

Mining sector risk

Equity volatility

The price of gold has been volatile over the past few years: in February 2016 it started to rise sharply due to the end of the general commodities slump. But after levelling out in 2017 the gold price struggled in the face of buoyant equity markets before rising again in October 2018 as nerves settled in – a trajectory set to continue. And a downside to holding physical gold directly is that it does not yield any income.

However, you can benefit from higher demand for gold and obtain potentially higher returns by taking on more risk and investing in gold mining stocks. Gold miners’ share prices have a strong correlation to the price of gold and can offer similar characteristics to the metal within an investment portfolio, while also providing dividends.

The FTSE Gold Mines index, which is composed of gold mining companies, and the Bloomberg Gold Sub index, which tracks the price of gold, have a correlation coefficient of 0.82. On a scale of -1 to 1, the closer this figure is to 1 the more two assets are correlated.

However, when the gold price is expected to rise such as this year miners’ share prices generally rise further than the price of gold. In the year following February 2016, a gold bull period, FTSE Gold Mines index rose 85 per cent versus 21 per cent for Bloomberg Gold Sub index.

BlackRock Gold & General Fund (GB00B99BDY18) invests in global gold and precious metal miners. Its managers choose holdings according to their view on the commodity price, and following fundamental and valuation analysis of mining stocks. They aim to hold miners at the right time for the right price.

They invest in companies of various sizes and the fund has 25 per cent of its assets in large listed miners with market capitalisations of $10bn (£7.85bn) plus, with 62 per cent in mid-sized companies with a market capitalisation between $1bn and $10bn. BlackRock Gold & General has a more risk-conscious strategy than passive funds, but is still aligned with the momentum of gold and precious metal prices.

The fund is run by Evy Hambro, BlackRock’s chief investment officer for natural resource equities, and since 2015 Tom Holl, who has been covering gold miners since 2006. Their focus is on miners with quality assets that can grow production in a low-cost manner, whose stock valuation underestimates earnings potential. The fund predominantly invests in gold miners, which accounted for about 85 per cent of its assets at the end of last year, but also has exposure to other precious materials companies in areas such as silver and diamonds.

The fund’s performance over the past five years is not stellar: it returned 30 per cent, versus 31 per cent for Bloomberg Gold Sub index and 35 per cent for FTSE Gold Mines index. However, this is partly due to several stock-specific issues in 2017. And before 2018 the fund had a lower correlation to the gold mining sector, which the managers have since increased. Research company Morningstar likes the fund because of its experienced management and consistent approach.

Although gold mining shares have a close correlation with the gold price, they are exposed to a number of other risks. These include labour, cost inflation, environmental and political issues which can detract from returns. BlackRock Gold & General invests in equities so can deliver a higher return in bull periods for gold miners, but also make substantial losses when these types of shares are falling. If the gold price turns south this fund is likely to fall further.

However, the outlook for gold and gold miners is positive in the near term and BlackRock Gold & General's managers have a good record of finding strong returns and the right protection. So if you have a high risk appetite and long-term investment horizon, meaning you can sit through periods of volatility, this fund looks like a good way to get exposure to the benefits of gold. Buy. TL

 

BlackRock Gold & General Fund (GB00B99BDY18)

PRICE921.40p*MEAN RETURN10.32%*
IA SECTORSpecialistSHARPE RATIO0.42*
FUND TYPE Unit TrustSTANDARD DEVIATION31.82%*
FUND SIZE£873mONGOING CHARGE1.17%
No OF HOLDINGS55YIELD0%
SET-UP DATE7/04/88MORE DETAILSblackrock.co.uk
MANAGER START DATEEvy Hambro 1/04/09, Tom Holl 1/07/15   

Source: BlackRock as at 30/11/18, *Morningstar as at 8/01/19

 

Performance

Fund/Index1-year total return (%)3-year cumulative return (%)5-year cumulative return (%)
    
BlackRock Gold & General-9.454.3129.89
FTSE Gold Mines index-5.8267.8434.78
Bloomberg Gold Sub index2.9429.9030.83

Source: FE Analytics as at 07/01/2019

 

Top ten holdings as at 30/11/2018 (%)

Agnico Eagle Mines8.8
Newcrest Mining8.7
Randgold Resources8.6
Newmont Mining 6.3
Northern Star Resources4.5
Franco Nevada4.2
B2Gold 4.0
Fresnillo4.0
Wheaton Precious Metals3.7
Kinross Gold3.4

Source: BlackRock

 

Geographic breakdown as at 30/11/2018 (%)

Canada

46.99

United States

19.31

Australia

14.37

United Kingdom

13.97

Russian Federation

2.52

Other

2.43

Source: BlackRock