While the falling price of gold bullion has been the major reason for their recent underperformance, concerns over poor management and high levels of capital expenditure have also dogged the sector.
FE Analytics data shows that while global equity markets performed well last year, gold bullion lost close to 30 per cent as inflation remained subdued and investors felt more comfortable taking higher amounts of risk.
Four of out of the five worst-performing funds in the entire IMA universe in 2013 were focused on gold miners: MFM Junior Gold, CF Ruffer Baker Steel Gold, WAY Charteris Gold and BlackRock Gold & General, which together lost a staggering 56.57 per cent.
Performance of composite portfolio vs indices in 2013
Source: FE Analytics
Gold miners have, however, had a dramatic reversal in fortunes in the early weeks of 2014.
Gold bullion has bounced back 4 per cent in the New Year and though equity markets have had a tough time, gold mining funds have spiked, with the same four funds now among the top six performers in the IMA universe in 2014.
On average, they have returned more than 20 per cent over the last month and a half.
Performance of composite portfolio vs indices in 2014
Source: FE Analytics
However, despite the recent spike, an equally weighted portfolio of these funds is still down by more than 40 per cent over 12 months.
Is this sort of performance likely to continue? And more importantly, should investors be buying back into the bombed out sector?
Angelos Damaskos (pictured), manager of the MFM Junior Gold fund, recently told FE Trustnet that the reasons for that spike were the rebounding gold price, the bottoming out of gold miners and the restructuring process many of these businesses have undergone.
However, he points out that while gold miners can continue to perform well, there will be winners and losers in the current environment and therefore he urges investors to be selective within in the sector.
ETFS Securities’ Simona Gambarini says that there are a number of reasons why gold mining funds can continue to rebound.
“With gold mining stocks trading at the lowest level since 2008, we believe they have reached a point where upside potential now far outweighs downside risks, making this a good entry point for investors with a medium-term time horizon,” she said.
“Although we estimate gold miners still may have a further $113bn of reserves to write down, with gold miners’ share prices down 52 per cent over the past year and 66 per cent over the past three years, we believe much of this expected write-down is already in the price.”
Gambarini expects gold miners to outperform the price of bullion over the coming years as the sector benefits from an improving macroeconomic background.
“With the gold price now appearing to have stabilised at around the $1,250 level, if general equity market sentiment remains positive, we expect mining shares to return to trade above book value.”
“Historically, gold miners have tended to outperform the gold price when global business activity has been high and rising.”
“With global growth finally starting to gain momentum, we expect the correlation between miners’ shares and gold to reduce and gold miners to start to outperform gold,” she added.
She also points out that management teams have been successfully containing expenses and closing down loss-making mines.
While this could cause problems in the short-term, it will make these companies more profitable in the future.
A number of leading fund managers have started to dip their toes back into the sector.
One of the most high profile of these is the Ruffer Investment Company team. Hamish Baillie and Steve Russell have added to their gold mining exposure in the trust over the past month.
They have also held on to a significant weighting to gold during the metal’s slump, and note that it has benefited from the turmoil in emerging markets.
There are still plenty of experts who are sceptical of the sector, however.
Justin Oliver (pictured), investment director at Canaccord Genuity, isn’t a fan of gold mining funds and warns that investors who are contemplating buying back into them could well be making a big mistake.“We haven’t got any gold miners in our funds,” he said.
“We did have a little bit last year but I couldn’t invest in the sector with confidence anymore.”
“Yes there is the valuation support, but I can’t really see a catalyst for those valuations to be realised.”
“We have seen poor management in the sector, price overruns and the cost of commodities is likely to remain weak going forward because the dollar should stay strong. While they have bounced back recently, they will have to bounce a lot more to make up for the last year or so,” he added.
According to FE Analytics, the FTSE Gold Mines Index has lost more than 30 per cent over rolling one-, three- and five-year periods.
This means that the index has made just 2 per cent over 10 years.
Performance of indices over 10yrs
Source: FE Analytics
Charles Hepworth, investment director at GAM, agrees with Oliver.
He sees no value in specialist gold mining funds, but wouldn’t be averse to having exposure to the sector via his wider equity managers.
“We don’t have any gold mining funds,” Hepworth said.
“Investing in gold mining funds is basically playing the gold price, which at the moment isn’t an investment, it is speculation.”
Given the recent performance of gold mining equities, it isn’t too surprising to see that there are only a few non-gold mining specialist funds that have decent exposure to the sector.
One that does is FE Alpha Manager Angus Tulloch’s five crown-rated First State Asia Pacific fund.
Its ninth largest holding is Australian gold mining giant Newcrest, which is one of the world’s biggest producers of the precious metal.
