The increasing tendency of gold mining companies to pay a dividend bodes well for investors seeking income, according to Evy Hambro (pictured)
, manager of the £2.5bn BlackRock Gold & General
The lack of income opportunities in gold funds is seen as a big drawback by many investors, but Hambro, a recently appointed FE Alpha Manager, says the increase in yield in the sector shows mining companies are starting to listen to the demands of shareholders.
"We’re starting to see something different from the recent past, but it is going to take a while for gold mining companies to entirely change the way they do things," he said.
"It’s really encouraging to see the increase in yield. The fund paid out its first distribution in 11 years this year," he added.
Hambro also says there are reasons to be optimistic from a capital growth point of view.
When the gold spot price shot up to record high levels in September 2011, he says the lag in performance of gold mining shares was partially due to an increased cost of production as companies began to mine resources they could sell for more.
Performance of fund vs gold price over 2-yrs
Source: FE Analytics
"If companies had stuck to mining profitable [metals], we wouldn’t have had the derating of shares," Hambro continued.
"There is a disappointing track record for the management of gold companies, but the seeds are planted to see change."
BlackRock Gold & General
has a bias towards mid cap companies as Hambro does not generally like the business models of the larger producers. This gives the fund greater flexibility.
The manager says that while there are some risks to the recent realignment of gold mining shares to the spot price, he expects the trend to continue.
"A dramatically higher gold spot price could also offset a rally in gold mining stocks, as companies would likely delay important decisions which contribute to growth in the sector," he said.
"However, I think miners are back on the trend line. I expect to see prices gradually increasing from here."
Since the FE Alpha Manager began running the flagship gold fund about three years ago, he has delivered 23.04 per cent, which is about average for a gold-focused IMA fund over the period.
Performance of funds since Oct 2009
Source: FE Analytics
"It is a pity the absolute return is not greater, but we’re pleased to be so far ahead of the benchmark in 2012," Hambro said.
The fund has the lowest annualised volatility over the period, something Hambro said was one of its main objectives.
He points out the fund is running a significant underweight in South African miners, because he feels the political issues in the region are going to come to a head in the future. South Africa made up half the portfolio a decade ago.
"Right now with all the social unrest and potential for leadership change, it’s making life very difficult," he commented.
However, Hambro says the team has been more patient in areas where other investors have exited, such as Randgold – a gold mining company operating primarily in Mali, which has been hit by a political coup this year.
"We decided to ride out the storm there and that has been a good decision," he continued.
Hambro has also significantly increased his weighting in Canadian gold producer Eldorado and multi-national gold mining company New Gold, which last month slipped into the fund’s top-10 holdings for the first time.
Darius McDermott, managing director of Chelsea Financial Services, says BlackRock Gold & General has a very good long-term track record and a well-resourced management team that has aided performance.
"Historically, most of our clients have used BlackRock for gold exposure," he commented.
"Gold miners have been suffering but it looks like they may be turning a corner and outperforming the spot price."
The fund has a minimum investment of £500 and a TER of 1.94 per cent, slightly higher than comparable gold funds.
Hambro also runs the £1.2bn BlackRock World Mining IT
, which has a 9 per cent weighting in gold.
According to FE data, the trust is currently yielding 3.62 per cent and is on a discount to NAV of 12.54 per cent.