
They’ve also lost money over a one, three and five year period.
While many have already been burnt by buying into the gold equity "recovery story", McDonald says valuations are now so cheap that there is “significant room for error”. He has added Evy Hambro’s £2.2bn BlackRock portfolio to his Cazenove Multi Manager Diversity fund as a result.
“We have been fortunate enough not to be in [gold equities], but have been tempted for a long time,” said McDonald (pictured). “When we saw the fall of 22 per cent back in April, we saw it as the right time. If we were ever going to do it, it had to be then.”
Performance of fund and index in 2013

Source: FE Analytics
While McDonald acknowledges that there are still a number of headwinds facing gold miners, he thinks that the general disillusionment with the asset class as a result of poor performance has put them on “historically low” valuations.
The fact that gold equities have underperformed gold bullion by a significant margin is another reason to be optimistic about the asset class.
“The bear case is, of course, well rehearsed,” he explained. “The gold price has been falling, costs have been high and many companies have no assets on their balance sheets.”
“The asset class is hated and has halved since the fourth quarter of 2011. As a basket they have underperformed the rest of the market by more than 80 [percentage points], which is huge.”
Performance of fund and indices since October 2011

Source: FE Analytics
“Relative to gold, gold shares are on a discount of 14.5 times, which is the highest on record. To put that into perspective, back in early 2011 they were on 6 times.”
“What that tells you is that people have become wholly disillusioned with the asset class. In my experience, when nobody has anything nice to say about an asset class, from a contrarian standpoint, it’s time to buy.”
“Even if gold falls to $1,000, the ratio to gold shares would still be much higher than the historical average. There is therefore a margin for error – one of the few areas where this is the case.”
McDonald and Brookes have been very effective at shifting their portfolio in recent years. Their defensive positioning enabled them to protect effectively against the downside in 2011. They then switched out of defensive funds and in to cheaper cyclicals throughout 2012 – which also worked wonders for performance.
Performance of fund versus sector and index over 5yrs

Source: FE Analytics
This strong performance has led to strong inflows in recent months; our data shows that their flagship Cazenove Multi Manager Diversity fund has more than doubled in size in the last two years, to £1.2bn.
To hear about how the fund is positioned currently, tune in to FE Trustnet tomorrow for an in depth interview with McDonald.
James Sullivan, who heads up the CF Miton Special Situations Portfolio, is also a fan of the BlackRock Gold & General fund.
He says co-manager Martin Gray has held the fund “pretty much since day one”. Gray started running the £858m fund in 1997.
McDonald says he rates Hambro as the strongest and most established gold equity manager available to him.
The FE Research team is also a fan of the fund, and include it in their FE Select 100. They see is as a good alternative play in an equity portfolio.
“BlackRock has a long track record of investing in natural resources and the group’s reputation in this area means the fund has excellent access to company directors,” they said.
“The team also has the background required to understand the different business models of mining companies.”
“The fund would be well suited in an equity portfolio, as performance patterns have shown little correlation over long periods of time,” they added.
The manager took over from industry legend Graham Birch in April 2009. His fund is down 17.46 per cent since then, making it the worst performing gold fund with a long enough track record. It has been the least volatile, though.
However, Hambro has a much stronger track record over the long-term. Thanks to his work on the BlackRock World Mining IT and BlackRock Global Funds World Mining fund – among others – he is well ahead of his peer group composite over the last decade, with returns of 193.09 per cent.
Performance of manager versus peer group composite over 10yrs

Source: FE Analytics
BlackRock Gold & General has a minimum investment of £500 and an ongoing charges figure (OFC) of 1.93 per cent.
FE Trustnet will be writing a series of articles on funds run by Cazenove tomorrow. Tune in to see in-depth interviews with the likes of Julie Dean, Paul Marriage and Robin McDonald.
