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Kennox’s Heenan: Why I’m going for gold in a post-Trump environment

02 March 2017

Charles Heenan, lead manager of the Kennox Strategic Value fund, tells FE Trustnet why his largest holding is a gold mining stock, despite the sector remaining unloved by the broader market.

By Lauren Mason,

Senior reporter, FE Trustnet

Gold mining stocks are set to thrive over the next five to 10 years despite short-term market noise dampening valuations in the sector, according to Kennox’s Charles Heenan (pictured).

The lead manager of the Kennox Strategic Value fund currently holds Newmont Mining as his largest individual portfolio weighting at 6.1 per cent and reasons that gold mining is one of the few industries currently on the road to rapid expansion.

This is despite widespread fears that gold will struggle, as the asset class tends to have an inverse correlation with interest rates and the value of US dollar, both of which are widely expected to rise throughout the course of the year.

“One aspect that a value manager can easily analyse is supply. If you can find an industry where you’re quite convinced there will be a decrease in supply over the next few years, you have an industry that has tailwinds,” Heenan explained.

“Because of what has happened over the last eight years with quantitative easing, there are actually very few industries in the world that have been cutting back on supply.

“One of the few industries in the world where you’ve seen a real change is gold mining. Essentially, the industry expanded very quickly for years and years as the gold price kept increasing. August 2011 was the peak of the gold price. They continued capex and grew production for another 18 months.

“If you look at the balance sheets, in December 2012 they cut capital expenditure. So this is one of the very few industries that were doing it at a time when everyone else was still expanding very quickly.”

While gold has typically been viewed as a ‘safe haven’ by investors in the past, its performance has been choppy over recent years. In 2013, for instance, the S&P GSCI Gold Spot index finished the year on a loss for the first time in more than a decade, having fallen by 29.98 per cent.

The yellow metal then picked up pace somewhat over the following year, but made another loss of 5.72 per cent in 2015.

However, the asset class made a significant comeback in 2016 as, due to historically low bond yields, high equity valuations and a number of geopolitical uncertainties on the horizon, investors sought to diversify away from traditional risk assets.

Performance of index over 5yrs


Source: FE Analytics

Following gold’s recent rally – combined with impending tightening from the Federal Reserve and a strong US dollar – a number of investment professionals are cautious on the asset class for this year.

In an article published last month, FE Trustnet referred to Capital Economics’ report on gold prices, which suggested that the current rally may not be sustainable.

“While we suspect that geopolitical risks will give a lift to gold price at times over the course of this year, the bigger picture is that US monetary tightening is likely to prove too much of a headwind,” it stated. “We forecast that the price of gold will fall to $1,050 per ounce by end-2017.”

However, Heenan believes it is all too easy for investors to place too much focus on short-term time horizons without considering the benefit certain investments can bring over a five to 10-year time horizon.

“In the last few years, gold mining company management teams have been getting a hard time from their shareholders, who have been urging them not to spend any money,” the manager reasoned.

“They bought the capex down by 50 per cent plus and, finally, you started to see supply contract at the end of 2015. It took three and-a-half years after the peak in capex before that fed through in supply.

“It just shows you how long the time lag is. We’re saying now gold is in a very interesting position where, for the next five years, all that cut in capex is just going to be a tailwind for them.”

He adds that gold mining share prices are down between 80 and 90 per cent relative to history, which means now is a particularly attractive time to buy into them.

At the same time, Heenan points out that, over the last 17 years, there have only been two years that more gold has been found than has been mined.

The manager attributes this mismatch to markets “looking backwards” at events that have already been announced, as opposed to considering the benefits that certain investments can offer over the long term.

“When you combine these factors with a crash in capex, it is one of the very, very few industries in the world where you will almost certainly see a tailwind for the next five years,” he continued.

“We think that makes it very, very attractive and we think Newmont is very well-placed to benefit from this. It is in safe jurisdiction – most of its production is in North America and Australia.

“It’s also a low-cost producer, it’s cheaper than the industry and that gives it a strategic advantage, so we made that the biggest stock in the portfolio about 18 months ago.”

When it comes to potential rate hikes from the Federal Reserve and the impact that could have on the gold price, Heenan says this is a short-term factor.

Not only this, he believes interest rates won’t rise as significantly as markets seem to expect, given that consumer and government debt levels are at historic highs.

“One of the major concerns is, if interest rates were to go up, how high can they go before the system is in trouble?” he pointed out.

“We think it means it is very difficult for interest rates to normalise, which means that gold still looks very attractive.

“In any case, our point is that it’s a short-term factor. Go back to five years. It’s possible gold could be volatile, but still, we think over five and 10-year time horizons.

“We’re absolutely convinced this is one of the advantages we have. Can you look through the short-term noise and volatility? If you can, that’s where you get your great opportunities.”

Since the fund’s launch in 2008, Kennox Strategic Value has returned 138.2 per cent compared to its sector average’s return of 101.86 per cent.

It also has a maximum drawdown – which measures the loss if bought and sold at the worst times – of 16.07 per cent over the same time frame, compared to its average peer’s drawdown of 26.88 per cent.

Performance of fund vs sector and benchmark since launch


Source: FE Analytics

The £203m fund has a clean ongoing charges figure of 1.14 per cent and yields 1.82 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.