Gold is an asset class that has been particularly popular with investors since the start of the year due to concerns around China’s slowdown, a loss of confidence in central bank policy and the UK’s impending EU referendum.
The price of gold saw a particularly significant boost as soon as the Brexit result was announced, in fact, with the S&P GSCI Gold Spot index jumping from 18.59 per cent to 40.07 per cent between the 23 and 27 June alone on a year-to-date basis.
Performance of index in 2016
Source: FE Analytics
While this is indeed positive for those who already own gold in their portfolios, some investors remain wary that an asset class which is often bought for its ‘safe haven’ qualities is rallying hard and outperforming rising equity markets.
In an article published last month though, Fidelity’s Nick Peters told FE Trustnet that there are a series of tailwinds on the horizon for the asset class including ultra-loose monetary policy from central banks and investor sentiment.
“The Federal Reserve’s (Fed) adoption of a more dovish stance at the beginning of the year resulted in an easing of the strong dollar trend, normally a headwind to the gold price,” he pointed out.
Jason Hollands, managing director at Tilney Bestinvest, says that a small allocation to physical gold in portfolios is prudent given weak global growth and the high valuations of both equities and bonds.
“It’s been the provision of vast amounts of liquidity by central banks in recent years that has sustained a prolonged bull market in both shares and bonds, but there is an increasing perception that central banks have now reached the limits of what can be achieve through monetary policy having experimented with ultra-low rates, quantitative easing and negative rates,” he said.
“Normally we are not fans of unproductive assets with no yield but these are not normal times with vast swathes of the government bond markets now offering up negative yields. While yields are so low on bonds, the opportunity cost of holding a zero-yielding asset like gold is therefore low.”
Given that the yellow metal is now back in favour with markets, FE Trustnet has taken a look at the gold funds which have achieved strong returns in varying market conditions (with the usual adage that past performance is no guide to future returns).
When it come to the best total returns over five years (a time frame which includes both sharp rises and falls in the value of gold), every gold fund within the Investment Association has made a loss overall given the strength of the US dollar over this time frame. The FTSE Gold Mines index, for instance, is down 46.98 per cent over five years.
The fund to have lost the least, though, is the £18.9m WAY Charteris Gold & Precious Metals Elite fund, which has two FE crowns and is headed up by Ian Williams. Over five years, it has made a loss of 14.94 per cent.
Not only this, it has achieved the highest total return compared to its peers over one and three years as well as over three and six months.
Table of gold funds’ total returns over 5yrs
Source: FE Analytics
The fund has a concentrated portfolio of 38 holdings which can either be instruments with direct underlying gold or stocks that are predominantly involved in mining, refining, producing or marketing gold and precious metals.
Its list of top 10 holdings includes the likes of Mag Silver Corp, Fortuna Silver Mines and Tahoe Resources, all of which account for more than 6 per cent of the fund’s portfolio respectively.
Other gold funds which have lost less money than their average peer and the FTSE Gold Mines benchmark over five years include Smith & Williamson Global Gold & Resources, Investec Global Gold and BlackRock Gold & General.
On the opposite end of the spectrum, the gold funds that have fared particularly badly over this time frame include SF Peterhouse Smaller Companies Gold, which is down 74.5 per cent, and MFM Junior Gold, which lost 66.9 per cent.
Interestingly though, it is Peterhouse Smaller Companies Gold which has boasted the strongest performance during falling markets over five years, given that it has exposed investors to just 91.44 per cent of the losses made by the FTSE Gold Mines index over this time frame (as measured by its downside capture ratio).
Not only this, the four crown-rated fund has the lowest annualised volatility over five years as well as the second-lowest downside risk ratio, although it is still second-from-last for its risk-adjusted returns as a result of its lacklustre performance.
The £2.1m fund is headed up by Amanda Van Dyke and Stephen Watson and mostly invests in stocks that are involved with the mining, exploration, development and production of gold. However, up to 20 per cent of the fund’s portfolio can be invested in companies that mine, explore and develop silver and other precious metals.
Currently, the fund’s largest holdings include the likes of Rye Patch Gold, Noricum Gold and Hummingbird Resources.
Hot on Peterhouse Smaller Companies Gold’s heels in terms of its downside capture is the aforementioned WAY Charteris Precious Metals fund at 93.41 per cent, followed by Smith & Williamson Global Gold & Resources at 95.34 per cent and BlackRock Gold & General at 95.62 per cent.
The only gold fund within the Investment Association universe to experience greater downside capture over five years versus the FTSE Gold Mines index is MFM Junior Gold at 101.29 per cent.
Table of gold funds’ downside capture versus index over 5yrs
Source: FE Analytics
On the other hand though, not a single gold fund has managed to achieve an upside capture ratio in excess of the FTSE Gold Mines index.
Given its total return over five years as well as its downside capture, readers will be unsurprised to hear that Peterhouse Smaller Companies Gold is at the bottom of the pile for its upside capture of just 7.77 per cent over this time frame.
The only other fund to have an upside capture of less than 50 per cent versus the index over five years is the four crown-rated CF Ruffer Gold fund at 44.56 per cent.
Angelos Damaskos’s £18.8m MFM Junior Gold has delivered the strongest returns out of all gold funds during rising markets over the last five years, with an upside capture ratio of 78.77 per cent.
Performance of fund vs index over 5yrs
Source: FE Analytics
The two crown-rated investment vehicle invests mostly in small and mid-cap stocks that specialise in identifying, developing and extracting gold. It has a higher annualised volatility than all of its peers as well as the FTSE Gold Mines index over five years – it also has the lowest Sharpe ratio.