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How last year’s best trust is preparing for a very different environment

13 March 2020

New City Investment Managers’ Rob Crayfourd and Keith Watson explain how the liquidity concerns of other active managers benefited their Golden Prospect Precious Metals trust last year.

By Rob Langston,

News editor, Trustnet

A rise in gold prices fuelled by growing uncertainty and a lack of production capacity, as well as the ability to position in less liquid stocks, helped Golden Prospect Precious Metals top the investment trust performance table last year. But what will drive performance this year?

Last year, the £20.1m trust was the top performer from the universe of investment trusts, making a total return of 77.46 per cent.

A significant rise in negative-yielding debt and fears of a recession drove gold prices higher, said trust manager Keith Watson of New City Investment Managers, before falling back towards the end of 2019.

As the below chart shows, the Bloomberg Gold Sub index was up by 13.47 per cent last year, in sterling terms.

Performance of index in 2019

 

Source: FE Analytics

However, the trust’s performance last year was driven by its positioning – particularly in some less liquid stocks that other larger active managers were forced to drop as investors became concerned about liquidity amid the shuttering of Neil Woodford’s flagship fund.

“Because the fund is closed-ended it allows us to have a bit more flexibility on the liquidity of positions unlike the largest funds would have,” explained colleague Rob Crayfourd (pictured).

“We’ve seen a real shift in the number of active funds having to move materially up the market cap scale due to requirements that they’ve had [placed on them by] their internal management.

“That, in itself, has presented an opportunity to us to be able to position with the sort of late-cycle stage companies that we believe are going to benefit the most.”

With gold close to peak production and the major producers not investing sufficiently in new projects to increase supply, it is the smaller less-liquid companies that have presented some of the most attractive opportunities.

The pair were able to focus on smaller producers trading at a material discount relative to their peers and the sector overall, as well as developers that are becoming producers and being re-rated.

“In historic times that has been a dangerous place to be within the sector but what we’re seeing now is a very low level of inflation – and if anything we’ve seen capital deflation – and the lack of spending means that those companies building new projects are able to [recruit] the best quality teams and been building on time and in budget,” said Crayfourd.

“That allows us to take a relatively low risk way of seeing multiple uplift.”

 

And the backdrop for gold – with the prospect of monetary and fiscal stimulus now even greater than before the scale of the coronavirus became apparent – remains supportive. In addition, another rise in negative-yielding debt has correlated with a rise in gold prices, as demand from exchange-traded funds (ETFs) increased.

“We’ve seen a real pick-up in volatility across all markets and gold has been a beneficiary of that,” said Crayfourd. “One of the big factors feeding into that more recently and since early-to-mid January has been around coronavirus.

“There’s a degree of uncertainty about how long it’s going to continue and what the duration is going to be. Are we going to see a V-shaped recovery? Are we going to see a U-shaped recovery or an extended period [where] this will impact global markets [for a long time]?

“These are all questions and the uncertainty that has been supportive for gold. But the main driver behind the increase in gold prices has been the knock-on impact of global interest rates.”

Nevertheless, the pair have rotated out of a number of names in the Golden Prospect Precious Metals portfolio that had seen significant upside last year into companies with strong balance sheets that can fund future growth.

“We have preferred names which have been fully funded to develop [potential] growth and have at least seemingly delivered on that and that has limited any potential equity dilution and as a result have performed quite well,” said Watson (pictured).

While markets have fallen around the world, year-to-date the trust is down by just 3.81 per cent, comparing favourably with the global stock market as represented by the MSCI AC World (down 13.62 per cent) and the Nasdaq Philadelphia Stock Exchange Gold/Silver index (down 15.56 per cent), a commonly used benchmark composed of precious metals stocks.

Performance of trust vs indices YTD

 

Source: FE Analytics

Crayfourd said the direct impact of the coronavirus on its producer holdings is likely to be limited given the often remoteness of these projects.

“I guess early stages in capex [capital expenditure] there could be a potential implication for the manufacturing of equipment, but I’d say generally we have low exposure to that and will be more in the later stages of construction,” he said.

“The more direct effect is that it’s lifted the gold price quite materially and the stocks have lagged that fold move, so we don’t believe the stocks are pricing-in the current gold price.”

He concluded: “I think therefore that fold stocks offer a degree of protection versus physical gold because they’re not actually playing that spot gold price, which is why we think it is the best way to gain exposure.”

 

Over the past three years, Golden Prospect Precious Metals has made a loss of 22.31 per cent compared with a fall of 30.37 per cent for the average IT Commodities & Natural Resources peer.

Performance of trust vs sector over 3yrs

 

Source: FE Analytics

Golden Prospect Precious Metals is currently trading at a discount to net asset value (NAV) of 13.8 per cent (as at 12 March), is not geared and has ongoing charges of 2.91 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.