Both the gold spot price and mining shares have suffered in recent months, and gold miners have been particularly hard hit, according to data from FE Analytics. The heavy falls the companies have suffered from have piqued the interest of value investors, but Pflugi (pictured) says fundamentals in the sector are poor.
While she likes broad-based miners, and says that valuations are at bargain levels, she warns gold miners are facing an uphill struggle.
"Gold equities, unlike other commodity companies, cannot benefit from low asset prices or even declining prices," she said.
"Gold companies need the gold price to go up and I do not see a driver over the medium-term for it to go up."
"The gold price is driven by investments which I cannot control and on which I cannot have a view."
Pflugi points out that central banks have now done their buying and bought the reserves they needed, taking a certain amount of demand out of the market.
Data from FE Analytics shows that the gold spot price is 15.45 per cent down over the year, after a sharp sell-off in March that surprised investors who used the metal as a hedge against inflation.
The HSBC Global Gold Index of gold mining companies has lost 39.18 per cent over the same time.
Performance of gold and mining indices over 1yr
Source: FE Analytics
The manager says that she is not investing in the sector, warning that the industry lacks the supply and demand mechanisms that can protect other commodity stocks.
"There’s no floor in the gold space against which you can measure investments," she said.
"For example, there’s a limited amount of oil that the world needs to run on, so when the oil price drops below a certain number, a lot of production goes out and supply goes down so much that it can’t keep up with demand, which protects the price."
"But with the gold price, you don’t have that. If 20 per cent of gold companies go out of production, where is the gold demand that will support that? There’s no downside protection."
"Most importantly, I see a lot of other companies outside the gold space that have more specific stock-specific reasons to buy them."
Pflugi says that she is looking for stocks that should do well without price increases in commodities, such as steel companies which are geared to a recovery in the US housing market.
That story should lead to an increase in demand for steel that will benefit the suppliers regardless of what is happening to the steel price.
"Stock exposure isn’t about price but companies that benefit from valuation and have a distribution part of their business," she said.
Her biggest mining position is in Glencore.
"In the medium-term, I like its low exposure to iron ore prices that are coming down in the short-term," she said.
"I am also eyeing up African Minerals. We have had exposure to it but have reduced it a little bit."
African Minerals produces iron ore in Sierra Leone, but with the lowest costs in the industry.
The manager says that this has not been priced in by the market, and as prices continue to fall, eventually investors will cotton on, giving the company’s share price a boost.
Overall, Pflugi admits the outlook for the mining sector is highly dependent on China, but says that while that economy slows, prices of companies have fallen so much that they are now attractive.
"For mining equities to re-rate, the biggest driver will be China, and we believe China is not growing as fast anymore," she said.
"We are trying to not pick companies that need those price recoveries."
"We look for companies with low-cost assets or low-cost technologies so they can increase their earnings or cash to shareholders, so not investing so much in growth any more but spending cash on shareholders."
"Until China shows a few signs of recovery for a certain period of time, I do not think the space will be in much favour."
Pflugi took over the $35m JB Natural Resources fund in early April with co-manager Roberto Cominotto.
The fund had previously performed largely in line with the Offshore Commodity & Energy sector in sterling terms, according to data from FE Analytics, having lost 8.48 per cent compared with losses of 8.51 per cent from its peers.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The three-year annualised volatility is 19.32 per cent on the fund, compared with just 15.02 for the sector average.
The managers have repositioned the fund to decrease the volatility by buying companies that provide water and irrigation services to commodity firms.
The fund is available in euros, dollars or Swiss francs, and has ongoing charges of 2.5 per cent.
