Though it was one of the worst performing asset classes and hated by investors last year, gold mining equities have bounced back strongly in 2014.
Our data shows Williams’ £4.9m fund has taken full advantage of the rally and is currently up more than 30 per cent year to date.
However, the manager is expecting his fund to outperform even more throughout the back end of the year.
“I think this fund will be the best performing fund in the country this year,” Williams said.
“We are third at the moment and the two ahead of us are India funds, which have spiked since the election. However, the first six months of the year are always most unfavourable for gold so we are heading into the most favourable six months.”
“Also, we have 70 per cent in silver – which tends to outperform gold when the market rallies because it has such a high beta – so we are in auto-outperform mode relative to other gold funds as well.”
“That’s our take on it anyway.”
According to FE Analytics, Williams’ WAY Charteris Gold & Precious Metals fund has returned 32.75 per cent in 2014 so far.
Performance of fund vs composite portfolio and index in 2014
Source: FE Analytics
As a point of comparison, an equally weighted portfolio of all the IMA gold equity funds – including the likes of BlackRock Gold & General, Smith & Williamson Global Gold & Resources and MFM Junior Gold – has returned 18.7 per cent while the gold price has returned 7.53 per cent.
The only two funds to have beaten WAY Charteris Gold & Precious Metals this year have been Matthews Asia India and HSBC GIF Indian Equity.
Investors in Williams’ fund have had a very volatile ride since its launch in February 2010, however.
Though the fund ended 2010 with a return of 45.65 per cent, WAY Charteris Gold & Precious Metals lost 28.51 per cent in 2011, another 22.54 per cent in 2012 and an eye-watering 54.23 per cent in 2013.
It means that, since launch, the fund has lost 50.99 per cent and has underperformed the average IMA gold equity fund by more than 13 percentage points.
Performance of fund vs composite portfolio and index since Feb 2010
Source: FE Analytics
Our data shows the fund’s maximum drawdown – which measures the return if an investor had bought at the highest point and sold at the lowest – is 76.01 per cent since launch.
Williams’ admits that his fund is very high risk and should only be used as part of a diversified portfolio, but he is very bullish on gold mining equities.
“We have been saying gold will outperform everything else,” he said.
“The main reason is that valuations were so bombed out. Mining shares were, at the start of the year, trading at a 30-year relative weakness to other sectors in the equity market. They were also at a 50-year cheapness to the gold price.”
“They are at quite unique oversold levels and though they have come back this year, it is still a once in a 20 or 30-year buying opportunity. I don’t think we will ever see it as out of kilter again.”
While the gold price has dropped over the recent years, gold equities have fallen far further because it is costing miners more to extract the precious metal due to production and cost gaps.
Though his fund and others like it have already rallied hard so far this year, Williams says it won’t be a short-term spike.
“Even on mean reversion, gold miners will have to go up 300 per cent from here to get back to their 50-year trading range, relative to the gold price. They are still very cheap,” he said.
Another supporting factor, according to Williams, is that the recent bear market in physical gold and silver is over.
Performance of indices over 5yrs
Source: FE Analytics
Firstly, he says it comes down to seasonal patterns as the prices of the two precious metals always tend to trend higher in the last six month of the year.
Secondly, he says the price of gold has been in backwardation over the last six months.
Backwardation occurs when the price of a forward or futures contract is trading below the expected spot price of a commodity at the contract’s maturity.
Williams says this very rarely happens and the previous three times it has over the last 20 years were a precursor to a huge jump in the gold price.
Other reasons why Williams is bullish on the gold price are because the replacement cost of the precious metal is well above its actual, meaning that supply will tighten, and because the main drivers of the market have shifted from west to east, meaning the price is now a lot less affected by what the US Federal Reserve does regarding its monetary policy.
Williams added: “It is an absolutely fabulous backdrop for gold, while at the same time bonds are ridiculously expensive and blue-chip equities are looking overstretched.”
Jim Wood-Smith, head of research at Hawskmoor, agrees that the immediate outlook for gold mining funds is very positive.
“I think now is actually a good time to buy, but that is much more a punt than anything else. There are so few potentially cheap asset classes and with the outlook for gold bullion looking much more positive, I think it could be a good year for gold mining equities,” Wood-Smith said.
However, he says he won’t be rushing into the asset class and warns investors about chasing short-term returns.
“My view has always been to buy gold bullion instead of gold mining equities, because you are basically taking on double the amount of risk,” he said.
“It’s a bit of cliché that gold miners give you all of the downside and none of the upside, but it isn’t that far off. They do very different things within a portfolio. Gold gives you a hedge, whereas gold equities give you almost precisely the opposite.”
WAY Charteris Gold has 83 per cent exposure to Canada, 12 per cent in the UK and 3 per cent in the US.
Williams also holds a minimal cash weighting. Its ongoing charges figure (OCF) is 1.98 per cent.
