The most popular gold fund with investors is the BlackRock Gold and General fund, which has seen sizeable inflows since the start of August 2007. Its assets under management have increased from £995m to £1,710m by the 31 of July 2009, an increase of 71.87 per cent.
While this will be influenced by the fund’s performance, even taking into account the 21.23 per cent the fund returned over this period this still amounts to a sizeable inflow. The reason for the fund’s popularity is clear, over the last three years, from 25 of September 2009, the fund has returned 65.41 per cent compared to a three per cent loss for the FTSE All Share Index.
Even though the fund has offered positive returns at a time when equity markets have been tumbling, can it really be considered a safe investment in the same way as gold?
Gold funds such as this as well as the CF Ruffer Baker Steel Gold fund and the Investec Global Gold fund do not offer investors a share of a big pile of gold bullion safely tucked up in a vault somewhere. They invest primarily in equities, the BlackRock Gold and General fund held just 3.6 per cent physical gold on 1 June 2009 and a quick glance at its top ten holdings shows that the portfolio is dominated by mining companies. Over the last three years the funds correlation to the S&P GCSI Gold Spot Index has been 0.7, this is reasonable but it suggests that the price of gold is only responsible for half the fund’s performance.
Performance of funds over 3-yr
Source: Financial Express Analytics
This approach has many advantages. While still providing exposure to the gold price, focusing on companies involved in the mining and exploitation of gold resources allows a bottom up approach to picking stocks which allows for additional returns to be generated. Of the top five performing Unit Trusts and OEICs in the IMA universe for the month from 26 August 2009 to 26 September 2009 two are gold funds; the best performing fund being the CF Ruffer Baker Steel Gold fund which returned 24.34 per cent for the month, the BlackRock Gold and General fund is fifth returning 13.56 per cent.
The two funds in second and third, the Close Special Situations fund and the Close Beacon investment fund, both have a high allocation to gold stocks of around 11 per cent. The largest holding of the Close Beacon fund is Norseman Gold Plc which appreciated 12.73 per cent over the period.
While this approach has proved profitable, especially following a rally on the equity markets, it comes at a price. All the gold funds on the Financial Express database have considerably higher volatility than the S&P GCSI Gold Spot Index and anyone wanting the safety of a vault somewhere in Zurich should probably be considering a physical gold ETF such as the BGI iShares COMEX Gold Trust.
Gold funds are certainly a good alternative to a broad market equity fund and still offer excellent diversification prospects, however they are not perhaps the sanctuaries people expect.