The uncertain outlook means many investors might be considering adding precious metals as a diversifier to their portfolios but Fidelity Personal Investing’s Daniel Lane says they need to consider exactly how this exposure is taken.
With heightened tension in the Middle East over the drone attack on Saudi Arabia, the continued trade war between the US and China, and concerns over the health of the global economy, investors have one eye on ways to reduce the risk of their portfolios.
“When the outlook seems uncertain and investors reach for the safe haven assets, precious metals are often the first port of call. However, it’s not all about going straight for the physical metal like gold bullion,” Lane said.
“Investors can access precious metals through investment trusts, open-ended funds and exchange-traded funds – all carrying their own specific features and benefits.”
Below, Lane highlights one investment trust, open-ended fund and exchange-traded fund (ETF) that can be used to add precious metals to a portfolio.
BlackRock World Mining
Starting with investment trusts, Lane pointed out that investing directly in one natural resource can be problematic as this essentially puts all of an investor’s eggs on one basket but claims his first pick – the £622.3m BlackRock World Mining Trust – can avoid this potential pitfall.
“Managers Evy Hambro and Olivia Markham address this problem by taking a multifaceted approach to commodity investing,” he said.
“In the knowledge that materials like gold do not pay an income, they harness the advantages of the investment trust structure to spread their portfolio across a variety of mining-related assets, many of which pay attractive dividends.”
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
This offers the prospect of some dividend growth, especially as companies that suspended payouts look to resume them on the back of stronger balance sheets. Lane also noted that many miners pay out dividends in US dollars, which means investors could still see their income grow if sterling continues to depreciate against the greenback.
In addition, the Fidelity commentator said the structure of an investment trust means Hambro and Markham have several “useful tools” to aid performance, such as borrowing money to enhance returns, using derivatives to manage risk, buying shares in non-public companies and owning physical commodities.
FE Analytics shows that BlackRock World Mining Trust has made a 34.80 per cent total return over the past three years, putting it in second place in the IT Commodities & Natural Resources sector.
The trust has ongoing charges of 0.93 per cent, is trading on a 15.2 per cent discount to net asset value and is yielding 5.9 per cent. It is 12 per cent geared.
Investec Global Gold
While the above trust invests in a number of commodities, Lane’s second pick concentrates on gold. The open-ended Investec Global Gold fund owns shares in gold mining stocks but also has some exposure to physical bullion through ETFs.
It is headed up by FE Alpha Manager George Cheveley, who has a steel and mining background. He worked in the sector from 1990 until 2007 and was a market analyst at BHP Billiton, the world's largest mining company, before he joined Investec.
Performance of fund vs sector and gold under Cheveley
Source: FE Analytics
Cheveley and his team – which took over the fund in April 2015 – believe that the shares of gold mining miners can outperform gold bullion over the long term because the companies can work on their costs and margins, thereby boosting profits by more than just the metal’s performance.
The chart above suggests this has been the case seen the team was appointed to the fund as it has made a total return of more than 100 per cent while gold is up 46.2 per cent. However, its volatility has been relatively high over this period, standing at 35.53 per cent compared with the FTSE 100’s 10.67 per cent.
Investec Global Gold has an ongoing charges figure (OCF) of 0.84 per cent.
ETFS Physical Gold
The final strategy highlighted by Lane is a passive offering for those investors who want to track the performance of the gold price: ETFS Physical Gold.
As its name suggests, the fund holds physical gold rather than synthetic instruments. The bullion backing the portfolio is kept in a London vault with HSBC Bank as custodian.
Performance of ETF over 3yrs
Source: FE Analytics
“Physical ETFs like ETFS Physical Gold (an exchange traded commodity, ETC) offer the advantage of investing in areas such as precious metals without owning the metal and investors can buy shares in smaller denominations than if they were to buy the physical asset itself,” Lane explained.
“What’s more, while transactions in physical assets can take time to finalise, adding to or withdrawing from an ETF can prove a lot simpler.”
ETFS Physical Gold has a total expense ratio of 0.39 per cent.