Damaskos, who runs the MFM Junior Gold fund, says that gold will undoubtedly be a popular asset as investors look to hedge their bets in the current environment of open-ended monetary easing policies and large sovereign debt. However, the manager believes gold mining equities can offer better returns than gold bullion, and says that the smaller companies he invests in tend to outperform their larger counterparts when investors’ appetite for gold increases.
"Investors have once again shied away from buying gold shares and instead we have seen a lot of inflows into ETFs," he said.
"Investors want to lock into gold as we are seeing many of the developed nations trying to devalue their currency. It is almost like a 'currency war' as each country wants to pay off their debt cheaply."
"However, we have seen mining companies trading at three- to four-times their cash flows – these kinds of valuations are unprecedented."
"I think over the next year or so investors will wake up to this and the shares of mid-cap mining companies could react sharply and dramatically."
Damaskos has been bullish on gold since the turn of the millennium and set up his MFM Junior Gold fund in order to give investors a different option for gaining exposure to the precious metal.
He commented: "We launched following the crisis as we saw there wasn’t a diversified vehicle in the small and mid cap mining space. We thought this would be a good option for investors as they can add exposure to the market with a professionally managed gold fund, instead of simply buying a tracker."
The manager has had a tough time of late and his fund is down almost 30 per cent year-to-date, and has also lost money since launch. He tends to underperform his peers significantly during down markets, but has a far better record in rising ones.
According to FE Analytics, MFM Junior Gold returned 55.96 per cent in the calendar year of 2010 while the gold spot price and HSBC Gold Mining & Energy index saw returns of 33.74 per cent and 30.92 per cent, respectively.
Of all the gold-focused funds in the IMA universe, only CF Ruffer Baker Steel Gold and Smith and Williamson Global Gold & Resources returned more.
Performance of fund vs indices during 2010
Source: FE Analytics
Although the fund is globally focused, Damaskos says MFM Junior Gold’s largest regional weighting is in Canada.
"We have 50 per cent of the fund positioned in Canada – we believe it is a mining-friendly jurisdiction and there are ample opportunities to build more mines. It also doesn’t carry the exploratory risk that other regions do," he explained.
"A number of Canadian mining companies are cheap and have strong balance sheets and good cash flows."
"Our largest holding is in Allied Nevada, which rose in value massively when there was a spike in gold, but is now falling away. It is strange as it has sold off 65 per cent, while the gold price has only sold off 15 or 16 per cent."
MFM Junior Gold requires a minimum investment of £1,000 and has a total expense ratio of 1.79 per cent. It was launched in September 2009.