Though they regularly topped the performance tables over the first 10 years of this century, they have seemingly done nothing but lose money since 2011. However, while investors will be well aware that gold mining funds have had a tough few years, it is worth recapping just how extraordinary the numbers are.
According to FE Analytics, with the exception of Evy Hambro’s BlackRock Gold & General fund in 2014, all of the seven gold funds in the IA universe have delivered negative returns in each of the last four calendar years.
Performance of funds
| Name | 2014 | 2013 | 2012 | 2011 |
|---|---|---|---|---|
| BlackRock Gold & General | 2.19 | -47.89 | -11.57 | -18.47 |
| CF Ruffer Baker Steel Gold | -10.51 | -60.71 | -17.97 | -32.48 |
| Investec Global Gold | -3.43 | -44.6 | -12.89 | -20.83 |
| MFM Junior Gold | -18.2 | -65.85 | -32.01 | -27.97 |
| SF Webb Capital Smaller Companies Gold | -26.05 | -49.34 | -42.98 | -38.97 |
| Smith & Williamson Global Gold & Resources | -1.99 | -45.38 | -13.48 | -27.04 |
| WAY Charteris Gold & Precious Metals | -13.11 | -54.23 | -22.54 | -28.51 |
Source: FE Analytics
As the table shows, most of those losses have been in the double-digit territory and, more often than not, have been over 20 per cent.
The reasons why gold mining funds have been so poor has been well-documented. The fact that they were in a bubble prior to 2011, a significant fall in the underlying gold price, a lack of inflation, a growing appetite for risk among investors and poor company management have all been given as explanations.
Whatever the reason is, our data shows an equally weighted portfolio of gold funds in the IA universe is down an eye-watering 74.96 per cent since January 2011, compared to a 15.01 per cent fall in the gold price. As a point of comparison, the FTSE All Share has returned 32.21 per cent over that time.
Performance of composite portfolio versus indices since Jan 2011
Source: FE Analytics
As a result of those losses, a huge amount of money has poured out of the sector.
Clearly, assets which are cheap can always become cheaper but as gold mining funds have fallen by such a long way over recent years, is now a good time for investors to take another look at the sector?
Richard Scott, manager of the PFS Hawksmoor Distribution and Vanbrugh funds, thinks so as he says gold mining companies are now extremely cheap.
“We’ve got a small position in our Vanbrugh fund in Investec Global Gold and we added to it quite recently by selling out of a physical gold ETF. As people say, gold miners are a leveraged play on the gold price but the level of underperformance relative to the gold price has become extreme,” Scott (pictured) said.
“We recognise that it is a really difficult call to predict what will happen to the gold price, but the valuation discrepancy is just too large now.”
Scott notes that gold’s price is one of the biggest drivers of the performance of gold mining funds and concedes that there are a number of reasons why the precious metal could continue to fall from its current level of $1,190.
One such reason is if the oil price – which was down 40 per cent in 2014 – continues to fall, as gold has historically been tightly correlated to other commodities. However, Scott says a weaker oil price could also be a positive for gold funds.
“The biggest input cost for mining companies is energy and therefore the falling oil price could be positive for margins,” Scott said.
However, the manager is by no means getting carried away.
“The reason we hold gold miners is for the purposes of portfolio risk management. The reason why we have them is the risk of an unhappy ending to the end of quantitative easing and ultra-low interest rates.”
While inflation has been low in the western world over recent years, Scott is of the view that it will rise in the future as governments attempt to, somehow, pay back the huge amount of debt that has built up.
That being said, Scott isn’t hugely bullish on gold mining funds and is quick to point out that FE Alpha Manager Bradley George’s Investec Global Gold only makes up a very small percentage of his AUM.
“As you can tell, we don’t have huge amounts of confidence on gold mining funds and they only represent a small proportion of our portfolio. However, there have been times – like at the start of last year – where they did well when others did badly and I think that there will be more of that pattern from here.”
At the start of 2014, the gold price and gold mining funds witnessed a mini-renaissance as macroeconomic risks mounted.
According to FE Analytics, the portfolio of IA gold funds returned more than 25 per cent in the first three months of last year while the S&P GSCI Gold Spot index made 13.64 per cent and the FTSE All Share lost 1.04 per cent.
Performance of composite portfolio versus indices between Jan and Mar 2014
Source: FE Analytics
However, over the following nine months of the year gold funds lost 25 per cent.
While Scott has upped his exposure, Simon Evan-Cook – senior investment manager at Premier – is still steering clear of the asset class.
Though Evan-Cook’s approach is centred around contrarian investing, meaning he keeps a close eye on fund flows and valuations, and while he agrees that gold miners are very out of favour and extremely lowly valued, he is avoiding them as he is not confident about the direction of the gold price as demand is weak.
“To be honest, gold mining funds have never really dropped off our radar because there has always been a valuation argument associated with them over recent years as they have looked cheap relative to the gold price,” Evan-Cook (pictured) said.
“However, we have avoided them and that has been down to not knowing where the gold price is going to go and when it might start going up. There could still be a situation where it falls to $800, doing the equivalent of what the oil price did in 2014 – that’s what is keeping us out.”
He added: “We will keep examining them and one day we might buy in, but we have no real inclination to do it. I can understand why people may want to take a bit of a bet on them, but it is just not for us at the moment.”