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FE Alpha Manager Cheveley: Why the macro supports buying gold now

19 September 2017

FE Trustnet speaks with the manager of the Investec Global Gold fund – a new entrant to the FE Approved List – about the outlook for the yellow metal.

By Rob Langston,

News editor, FE Trustnet

Gold equities could be approaching a bull market as companies focus on cutting costs, improved returns and strengthened balance sheets after several challenging years, according to FE Alpha Manager George Cheveley.

Mining companies have been forced to change their approach in recent years as commodity prices have remained low during a period of subdued global growth and demand.

However, improving commodity prices and greater corporate capital discipline could support greater cash flow generation for gold miners, said Invest Asset Management’s Cheveley.

After hitting highs in 2010 and 2012 amid ongoing uncertainty caused by the European sovereign debt crisis, the price of gold fell hard but has begun picking up more recently.

Performance of gold over 10yrs

 
Source: FE Analytics

Gold’s reputation as a ‘safe haven’ has led to greater inflows, particularly in the past few months as US president Donald Trump has responded to North Korean missile tests with escalating verbal threats.

However, there are several other reasons why gold might rise further and why that would be positive for investors.

Cheveley said: “What’s important when looking at the macroeconomic environment is that we want to understand whether it is a favourable environment for gold or a non-favourable environment.”

The manager and colleague Hanre Rossouw oversee the four FE Crown-rated Investec Global gold fund after being appointed as managers in 2015.

The manager said the gold team will try to understand the precious metal in a macroeconomic setting and how other factors may affect supply and demand.

According to Investec, the precious metal tends to perform well once an interest rate hiking cycle starts. While this has begun the path for further rises remains uncertain.

As a store of value, the yellow metal can also act as an inflation hedge in high or low inflationary environments. However, the asset manager noted that it has not performed well historically in moderate inflationary environments.



FE Alpha Manager Cheveley said the precious metal “works well in a real low rate environment”, where both inflation and interest rates are low.

He added that gold and gold equities can offer investors diversification benefits for investors’ portfolios.

The Investec Global Gold fund sits on the FE Invest Approved List and is highlighted for its low cost among its peers and “very active approach”.

“The fund managers believe shares of gold mining and extracting companies can outperform gold bullion over the long term because the companies can work on costs and margins, and boost their profits by more than just gold’s performance,” noted FE Invest analysts.

However, the analysts also noted that the fund typically outperforms the gold when prices rise but underperforms when it drops.

Cheveley said a greater focus on cutting costs as gold prices fell in recent years has now led to improved returns and stronger balance sheets for gold mining busineses.

Combined with a brighter outlook for commodity prices, gold mining companies could be set for stronger growth, he said.

Investec Global Gold is unable to invest in companies with a market capitalisation below $100m, which means it does not invest in smaller exploration companies.

In practice, however, the fund does not invest in companies with a market cap of less than $500m, he said, noting the potential for liquidity issues and limited ability to trade in and out of stocks.

Cheveley said he and Rossouw look for companies with production in place and cash flows, with the decision based on value.

The process considers a number of different metrics to judge whether a company offers good value and how the stock is likely to perform.

The managers construct a high conviction, concentrated portfolio of stocks but Cheveley said there is a focus on risk management.

He said: “We don’t like to own much more than 30 stocks in the fund. The benchmark is 60 stocks and we want to keep it fairly tight.

“It’s fairly concentrated. If we look at the stock and it is overweight, risk analysis will look at what the total risk contribution to the fund.”



As a high conviction fund, the manager said that it can hold a stock “for years or for weeks” depending on how the stock is moving and the upside.

Among the fund’s top 10 holdings – which make up 58.7 per cent of the portfolio – are Agnico Eagle Mines and Goldcorp, each representing more than 9 per cent of the fund.

The manager can also hold up to a third of the fund in miners of other precious metals, minerals and other non-precious metals. Indeed, exposure to silver represents a 6.6 per cent weighting in the fund, with Cheveley noting that the precious metal can offer some of the same benefits as gold.

Since taking over as managers, the £96.4m fund has delivered a total return of 50.16 per cent compared with a 104.95 per cent rise in the Euromoney Global Gold benchmark.

Performance of fund vs benchmark since April 2015

  Source: FE Analytics

However, Cheveley said investment constraints meant that the fund would underperform the benchmark if it rises as two of the largest constituents – Barrick Gold and Newmont Mining – represent more than 10 per cent of the benchmark.

“What ‘s interesting in the gold and the benchmark is that they are highly correlated,” he said. “We’re pretty active and so we are quite a long way from the benchmark.”

Over 10 years the fund has performed better returning 22.12 per cent compared with the benchmark’s 4.04 per cent gain.

Investec Global Gold has an ongoing charges figure (OCF) of 0.97 per cent.

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