I bought the Smith & Williamson Global Gold & Resources fund back in April last year, believing that the disconnect between the gold price and gold equities – which had already suffered significant underperformance in the months prior – presented an interesting buying opportunity.
The fund had fared very well against its benchmark and peers since launch and I liked the fact that it concentrated on small and mid caps, which are well known for being under-researched in this area in particular.
I was very familiar with the inherent volatility in the asset class, and being relatively cautious I opted for a fairly small holding in the fund – around 10 per cent of my ISA portfolio. At the same time I bought bigger stakes in the likes of First State Asia Pacific Leaders, M&G Global Dividend, Trojan Income and Newton Asian Income.
All I can say is thank goodness I wasn’t more bullish on gold equities. Since the beginning of April, all of my holdings have made money to a varying degree, with the one very big exception of Smith & Williamson Global Gold & Resources, which is down 45.89 per cent.
Performance of funds in my 2012 ISA since April 2012
| Name | Returns (%) |
|---|---|
| M&G Global Dividend | 20.06 |
| Trojan Income | 18.82 |
| Newton Asian Income | 16.25 |
| First State Asia Pacific Leaders | 12.48 |
| Smith & Williamson Global Gold & Resources | -45.89 |
Source: FE Analytics
Ouch. It may only be 10 per cent of my portfolio, but it has still made a big dent in my profits.
Not only has the disconnect between gold and gold equities increased as a result of high management costs and poor sentiment, but the gold price itself has plummeted over the period.
Performance of fund and indices since Apr 2012
Source: FE Analytics
Smith & Williamson Global Gold has protected against the downside better than the market at large, but this is a small consolation – I’m sure you’ll agree.
So what do I do with it now? Do I accept that I’ve made the wrong decision and crystallise my losses? Do I hold on to my exposure, hoping that my high-conviction call will eventually come good? Or do I add to my holding, giving me the chance to make back my money and more when the tide inevitably does change?
I’ve been staring at that big red number for a long time now, so I think the time has come for me to ask for some help from an industry expert – head of FE Research Rob Gleeson (pictured).
"It’s very simple – refer to your reasons for buying it in the first place, and if those reasons still hold true, then you should hold on to it," he said."Short-term movements shouldn’t matter and could be seen as a reason to buy more if you believe in the story enough."
Sound advice, but that’s the easy bit. Now I need to work out if I do still believe in the gold equity story.
There’s no doubt that the asset class is cheap, particularly compared with the wider equity market. The Share Centre’s Helal Miah recently highlighted gold equities as one of the very few genuine value plays in the UK market, which is encouraging on a long-term basis.
While I’m no gold bug, I don’t think the gold story is over, as many people are suggesting. I think inflation will inevitably rear its ugly head at some time in the foreseeable future, and like Ruffer’s Steve Russell, I don’t think we’ve seen the end of quantitative easing, not by a long shot.
There are question marks about how effective gold is as an inflation hedge, but as long as investors continue to believe that it is, that’s all that matters. Gold is a purely speculative asset – as long as someone is willing to pay a higher price for it than the current price, that’s all that matters.
Moreover, FE Alpha Manager Martin Gray’s warnings over the unsustainability of the global economy – particularly in the eurozone – suggest to me that another major political event could see demand increase for the precious metal again. Growing social unrest in the Middle East, South America and now Europe adds further fuel to this argument.
The performance of gold equities isn’t just dependent on bullion, of course, but issues of poor management and rising costs can be resolved over time. I don’t believe gold equities are structurally in decline, and importantly they can still go up even if the gold price doesn’t.
Equity sectors come in and out of fashion very often and it’s very rare for one to stay rooted to the ground for a decade or more. If something is cheap enough and isn’t a default risk, then eventually sentiment will shift in its favour – that’s what Nick Kirrage and Kevin Murphy over at Schroders believe, anyway.
Who thought the banks would rebound when sentiment was at its very lowest in 2011? Not many fund managers, as I recollect. At the end of the day, everything has its price.
Thanks to Mr Gleeson, I’ve realised that my reasons for buying the gold fund back in April last year still hold true to this day. It’s a high-risk move to stick with my exposure, and I wouldn’t be surprised if it went down further; however, that was something I was prepared to live with all those months ago and it’s something I’m prepared to live with now.
The fund is now significantly less than 10 per cent of my overall portfolio thanks to the losses it has sustained and the gains the others have made, and so any further falls shouldn’t derail my ISA.
I haven’t got the conviction to significantly increase my weighting because of the risk of further losses in the near future, but my time frame is long enough for me to bear some more downside.
There you have it – I’m sticking with my choice. Let’s just hope the next 15 months are more fruitful than the last…
