Investors can afford to hold gold equity funds as part of a cautiously managed portfolio strong despite falling commodity prices, according to Hawksmoor’s Ben Conway, who has upped his exposure in recent weeks.
The manager, who co-runs the PFS Hawksmoor Distribution and PFS Hawksmoor Vanbrugh funds, says that one of the main reasons to be positive on gold mining equities in particular is their beta to the gold price.
The price of gold has suffered over recent years, having dropped in value over the one, three and five years. The S&P GSCI Gold Spot index has taken the biggest tumble over three years though, having lost 35 per cent compared to the MSCI AC World’s positive return of 39.81 per cent.
Performance of indices over 3yrs
Source: FE Analytics
The poor performance of gold has also been exacerbated by plummeting commodity prices over the last year, so it’s no surprise that it remains an unloved area of the market to date.
However, with ultra-loose monetary policy leading to a correlation in the performance of bonds and equities and with many alternative assets beginning to look expensive and high-risk, the manager says now is an attractive time to hold gold mining equities.
Last month, the team at Hawksmoor made a net addition to their position in gold mining equities in their £63m Vanbrugh fund through switching out of Investec Global Gold and into a larger weighting in CF Ruffer Gold.
“With gold having fallen so far – close to many miners’ marginal cost of production - any incremental increase in the gold price meaningfully increase miners’ profitability,” Conway explained.
“The shares of the miners should therefore react very positively to any increase in the gold price to reflect the much healthier prospects for the business. We would rather own gold equities than the metal for this reason – while a potentially more volatile investment than the metal, the prospective returns should more than compensate for this.”
While the team at Hawksmoor isn’t necessarily forecasting a definitively higher gold price, it does believe that these types of assets have an important part to play in a diversified portfolio.
Conway says that it is the best way to play a loss in central bank credibility because, unlike money, it can’t be endlessly printed so its supply is far more restricted, meaning it should benefit when sentiment slides on holding paper money.
He adds that this could well happen due to low inflation levels, currency wars and a lack of belief in central banks’ ability to boost the economy, and as such he expects gold to perform well at a time when other assets won’t.
The asset is also cheap at the moment because of its poor performance over recent years, although the manager says that he is unsure whether it has finally bottomed out.
“We don’t attempt to forecast – we prefer to try and build portfolios of diversified assets, each with a margin of safety. Gold equities have fallen so far that their sensitivity to upward movements in the gold price should now be greater than downward movements,” he explained.
“So even if the gold price did keep falling, we’re hopeful that our holdings in gold equities won’t hurt us too much. Most industry experts expect some support for the gold price given it is so close to the industry marginal cost of production – but, playing devil’s advocate, companies can always go bust and lower this cost.”
The reason Conway and the team have opted to increase their exposure to gold mining equities through Paul Kennedy’s CF Ruffer Gold as opposed to George Cheveley and Hanre Rossouw’s Investec Global Gold fund is that they believe Kennedy’s approach is better balanced between preserving capital and capturing potential upside.
While CF Ruffer Gold has underperformed the five FE Crown-rated Investec Global Gold fund over three and five years, it has outperformed its peer over three and six months and over the last year, as well as outperforming its benchmark over these same time frames.
Performance of funds vs index over 1yr
Source: FE Analytics
It must also be noted that Cheveley and Rossouw have only been at the helm of Investec Global Gold since April this year, and since then the fund has outperformed its Euromoney Global Gold sector by 5.05 percentage points to lose 22.78 per cent, but has lost more than four times the amount that CF Ruffer has over this time.
“The team at Ruffer are not geologists. They manage the fund based on fundamental company analysis and stocks are chosen employing bottom-up analysis rather than a view being taken on the gold price,” Conway continued.
“Every stock in the portfolios needs to be able to withstand a number of negative scenarios that will include a fall in the gold price, but that is as far as they go with including the gold price in their thinking.”
“The beta of the fund to the gold price will thus be lower than Investec’s and this was part of the reason why we felt we could tolerate a slightly higher weighting in the portfolio. Note the Ruffer fund is dealt weekly. We are hopeful that this change improves this part of the portfolio’s risk return metrics.”
However, the fund is still less than 2 per cent of the portfolio, reflecting Hawksmoor’s view that gold equities are still a potentially volatile investment. On the other hand, Conway adds that their potential upside is so great, it could really “move the needle” of the overall fund’s performance.
Other asset management companies, on the other hand, are far less positive on the asset class. While Ben Willis, investment manager at Whitechurch Securities, says that gold is potentially a great diversifier, he remains wary on gold mining equities.
“We do invest in some funds whereby they do allocate to gold but, with gold miners, we think the gold price is speculative and driven by the rise of ETFs and obviously by the advent of QE - gold has traditionally been used as a dollar hedge and an inflation hedge and the dollar has been strong,” he explained.
“Gold miners are obviously price takers so, when gold is at such a low price, their end product is therefore not generating much in revenue and in terms of profit margin.”
“They’re going to benefit from lower costs because of the oil price but, compared to the gold price, their costs are going to be higher.”
Since its launch in 2009, PFS Hawksmoor Vanbrugh has returned 101.13 per cent, outperforming its benchmark and its peer average in the IA Mixed Investment 20%-60% Shares sector by 19.09 and 41.33 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It has also top-quartile for alpha generation, which measures performance in excess of its benchmark and a top-quartile Sharpe ratio, which measures risk-adjusted performance, over the same time period.
PFS Hawksmoor Vanbrugh has a clean ongoing charges figure of 1.95 per cent and yields 1.7 per cent.
