A sense of nervousness strengthened by the UK’s vote to quit the European Union has caused gold equity funds to post triple-digit gains during the up-and-down year of 2016, as investors flocked to the perceived safety of the yellow metal.
Funds focusing on gold miners have endured a difficult few years since the commodity’s price peaked in 2011 at the height of the eurozone sovereign debt crisis. Our data shows that gold equity funds were hit by losses of up to 65 per cent in 2012, 2013, 2014 and 2015.
However, the price of gold has strengthened this year thanks to a general rebound in the commodities sector and a resurgence of safe haven demand on the back of lacklustre economy growth and a move to areas of perceived safety.
The yellow metal, represented here by the S&P GSCI Gold Spot index, is up 24.23 per cent in US dollar terms. For the sterling investor – whose returns have been flattered by the weaker pound - this translates to a 40.96 per cent gain and is around double the gain made by global equities.
Performance of indices in sterling over 2016
Source: FE Analytics
In their latest update, the managers of the SF Peterhouse Smaller Companies Gold fund said: “Gold has once again demonstrated its value as a safe haven. This is important and means that any pull-backs are likely to be temporary.”
“Indeed, other potential shocks lie ahead, including the prospect of a fresh bout of political uncertainty ahead of (and perhaps after) the US presidential election in November. There is also still a significant risk that contagion from Brexit to the rest of Europe will prompt a resurgence of the debt crisis in the southern economies of the eurozone, or even speculation that other countries will break away from the EU too.”
This revival in gold’s fortunes was good news for gold miners, many of whom have suffered in recent years and suffered brutal falls in their share price after the safe haven asset saw its value drop from the eurozone crisis-inspired highs of 2011.
FE Analytics shows that the best performing fund between the start of the year and 30 September was Angelos Damaskos’ £18.8m MFM Junior Gold fund, which has surged 194.8 per cent. The fund focuses on small- to mid-cap gold miners.
Source: FE Analytics
Indeed, all seven of 2016’s best performing funds invest in gold miners – our data shows that the average gold equity fund has made a 130.35 per cent total return over the year to date and has outperformed the FTSE Gold Mining index.
However, it’s worth remembering that these eye-catching gains have come after a period of heavy losses. Despite the 2016 surge, the average Investment Association gold equity fund is still down 25.13 per cent.
Performance of sub-sector vs index over 5yrs
Source: FE Analytics
But Damaskos argues that investor fears over the health of the global economy – which has been highlighted by a rotation away from more cyclical commodities like oil and towards havens such as previous metals – is positive for the sector.
“It is clear that investors are increasing their allocations to safe havens, particularly in precious metals. Risk aversion towards the global markets, including long-term US treasuries, continues to build as evidenced by a recent sharp rise in yields,” he said.
“Gold and silver should continue to do well under such circumstances, providing further expansion in the profitability of the specialist miners.”
The general theme of rebounding commodity prices dominates the list of the best performers year to date. General resources funds such as BlackRock GF World Mining and JPM Natural Resources also appear after making respective total returns of 72.71 per cent and 64.74 per cent.
Furthermore, emerging markets that rely on commodity exports have done well as prices recovered. BNY Mellon Brazil Equity and HSBC GIF Russia Equity are examples of funds that have benefitted in this area.
Performance of funds over 5yrs
Source: FE Analytics
But like with gold funds, it’s worth keeping in the mind the heavy losses that are possible with – and have already been experienced by – specialist funds of this kind. The chart above highlights the falls the above funds have endured over five years, with the resources funds still down significantly even after this year’s gains.