Commodities have performed poorly for almost four years and the sector is now deeply unloved. Many resources funds have suffered over the past few years and the Smith & Williamson Global Gold and Resources Fund, managed by Ani Markova, is no exception. The gold price has fallen for a second year running and over the past five years the fund has lost 44%*.
Percentage growth of Gold, Gold Mining Companies and Smith & Williamson Global Gold and Resources Fund
Past performance is not a guide to future returns. Source Lipper IM * to 02/01/2015.
|Annual percentage growth|
| Jan 10 -
| Jan 11 -
| Jan 12 -
| Jan 13 -
| Jan 14 -
|S&W Global Gold and Resources||65.14%||-26.47%||-12.63%||-46.02%||-2.21%|
|FTSE Gold Mines||25.79%||-8.55%||-18.75%||-51.90%||-10.67%|
Recent weakness in the gold price has been attributed to a strong dollar (as gold is denominated in dollars, it becomes more expensive for investors to buy when the dollar rises). However, the majority of the fund's exposure to gold, which accounts for around 65% of the fund, is via gold mining companies rather than physical gold.
Gold mining companies have had a particularly torrid time over the past five years, with share prices in this area falling by 59.7%*. A lack of focus on profit generation, poor management decisions and spiralling costs has led many to underperform. However according to Ani Markova, last year over 80% of gold mining companies have hired new management teams, many with financial backgrounds, who are focusing on cost cutting and profits. As an energy intensive industry, the falling oil price could also have a positive effect. Although cost cutting does not impact profits immediately, Ani Markova expects to see improved results in 2015.
The performance of gold mining companies is, and always will be, highly correlated to the price of gold. Now gold mining companies have decreased their costs, an increase in the gold price could have a positive effect on profitability. The manager is confident the gold price will rise from current levels for a number of reasons. Demand from central banks has increased, particularly from developing countries and Russia but also western banks which are no longer selling and have been net buyers of gold since 2010. As the traditional 'safe haven' investment, tensions in Russia, the potential for Europe to embark on quantitative easing, and inflation concerns could also be positive for the gold price.
The manager has sold stocks in companies she feels would be unable to withstand a gold price lower than $1,000 per oz. which has resulted in the removal of Barrick Gold and Yamana from the portfolio. She is seeking companies able to grow their business and generate profits even in a suppressed gold price environment. One example of such a company is Acacia Mining; they have achieved cost reductions over 2 years and are currently operating at a profit.
Our view on this fund
Despite recent falls in its price, gold is still a relevant investment. It can provide a hedge against inflation and, due to its low correlation to global equities, can be used to diversify a portfolio. It is important to remember this fund will produce different returns to investing directly into gold bullion and recent performance highlights its volatile nature. This is a specialised fund with exposure to emerging markets and smaller company shares, both of which increase risk. The general view is exposure should only account for a small portion of a portfolio.
This fund has outperformed the benchmark index by 15.84% over the past five years although returns have broadly been in line with the index for the past two years and remember past performance should not be seen as an indicator of future returns. The fund retains its place on our Wealth 150 list of our favourite funds across the major sectors.
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