Davis says he isn’t prepared to hold direct exposure to gold and gold miners via a specialised fund, instead preferring to gain access to it via a multi-asset manager.
“It’s still an important tool. We currently have exposure to it via one of our multi-asset funds – Troy Trojan, managed by Sebastian Lyon,” he said.
Performance of fund, sector and index over 1yr
Source: FE Analytics
“He’s been heavily criticised for holding it for some time, and whether he’s proved right in this instance remains to be seen. However, it’s worked for him in the past and it’s key to have someone willing to go against the grain. If you don’t have someone like him, we’re essentially all lemmings waiting to fall off a cliff.”
“I would never hold a specialised fund like BlackRock Gold & General. There’s no way I would want that much direct exposure. However, a manager prepared to invest in it if they see an opportunity is a good thing.” Davis sees gold as an insurance policy against unforeseen downside risks, whether it be a sudden setback in earnings growth or a black swan event such as the ongoing Ukrainian crisis. He says that having some exposure to gold at all times, therefore, has its benefits.
Lyon’s exposure to gold and gold equities – which is currently at 14 per cent – has contributed to the recent underperformance of his £2.2bn Trojan portfolio. FE data shows the S&P GSCI Gold Spot index is down more than 23 per cent over three years, while the Trojan fund has also lost money. Over the same period, Lyon’s peer group has made 4.54 per cent.
Although Lyon (pictured) has had a tough time of it of late, he is still highly rated among multi-asset managers.
His exposure to gold and other uncorrelated assets led to particularly strong performance in the down years of 2008 and 2011, which has contributed to his strong relative and absolute performance since Trojan’s launch in May 2001 – even compared with equities.
Performance of fund and sector since launch
Source: FE Analytics
Trojan is closed to new money but remains available on certain platforms, including Trustnet Direct. It has clean share class ongoing charges of 1.09 per cent.
Lyon isn’t the only multi-asset manager who is staying patient with gold. Like Lyon, Investec’s Alastair Mundy is wary of valuations across equity markets and is using the previous metal to hedge against a possible correction.
Mundy’s £2.8bn Investec Cautious Managed fund currently has 9 per cent in gold and gold equities. He added to his exposure following the metal’s significant falls at the back end of last year, which has so far worked out well for him. FE data shows the gold spot index is up 11.59 per cent year-to-date.
Like Lyon, Mundy also has a hefty portion of his portfolio in cash, although he has more in equities and less in index linked bonds. His higher appetite for risk has led him to outperform Lyon over one- and three-year periods, although he is still behind his composite benchmark – split 50/50 between the All Share and the ML Global Broad Market Index – over one and three years.
Mundy is ahead of his IMA Mixed Investment 20%-60% Shares sector average over three years, though.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Mundy is the only manager featured in this article who lost money in 2008, but with losses of 10.84 per cent, still protected much better against the downside than his benchmark and peer group.
Investec Cautious Managed has clean share class ongoing charges of 0.84 per cent.
FE Alpha Manager Iain Stewart is another multi-asset manager who still sees value in holding gold. His £8.6bn Newton Real Return portfolio has around 5 per cent in gold and gold miners.
Although he’s wary of the optimism surrounding the global recovery, citing the huge levels of sovereign debt as a reason to be particularly cautious, he has 53 per cent in equities. He has a 15 per cent short position on the S&P 500 to help hedge this long position, alongside his gold, bond and cash positions.
“What January showed was that defensive assets can still act as a hedge. While equity markets were falling, gold and gold miners did well and bond yields also dropped,” he said.
Newton Real Return, which sits in the IMA Targeted Absolute Return sector, has delivered a positive return in nine of the past 10 calendar years. The only year it lost money was in 2011, when it lost 0.75 per cent.
It has clean share class ongoing charges of 1.11 per cent.
Another FE Alpha Manager – Steve Russell – has 6 per cent in gold and gold equities in his £2.9bn CF Ruffer Total Return fund. The manager’s base case over the next decade is a high inflationary environment as a result of quantitative easing – even though the western world has gone through a period of disinflation in recent years. He sees gold and inflation-linked bonds as the natural hedge against this.
Russell and fellow FE Alpha Manager David Ballance, who co-manages the fund, are shining examples of investors who are willing to go against the grain, using currencies and other alternative asset classes to protect investors against the downside.
This was illustrated best in 2008, when the pair managed positive returns of more than 20 per cent, compared with losses of 15.84 per cent from the IMA Mixed Investment 20%-60% Shares sector average.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund has struggled against its peers over the last five years of rising markets, but over a decade remains a top decile performer in its sector.
FE Research analyst Charles Younes holds Russell and Ballance in high regard, rating them as among the best absolute return managers in the business – even though their fund sits in the 20%-60% Shares sector.
“Ruffer’s management board actively changes the fund’s allocation between 'greed' and 'fear' assets depending on the prevailing economic conditions,” he said.
“Greed assets are typically equities, which it uses to capture growth in favourable market conditions; and fear assets include bonds or commodities such as gold, which appreciate in falling markets and protect investors’ capital.”
“This task is becoming more complicated as the current economic challenges are having an equally negative effect on most types of investment. Nevertheless, we are confident the team have enough experience to maintain the fund’s strong performance,” he added.
CF Ruffer Total Return has ongoing charges of 1.53 per cent.
