This £19.2m investment trust was launched in 2006 with the aim of providing capital growth through investing in companies in the precious metals sector.
Managed by Keith Watson and Will Smith from New City Investment Managers, the Guernsey-domiciled product has exposure to 43 holdings spread across the gold, silver, diamond and platinum group metal sectors.
The team adopts a top-down approach to the commodity market combined with bottom-up stock picking, including a comparative screening process. Given the focus across precious metals, Mr Watson notes that macroeconomic factors also play a part when the team considers portfolio construction. He explains: “Probably the most significant macro driver has been currency moves and the strength of the US dollar. Non-US dollar gold prices have held up remarkably well.
“The sharp depreciation in non-US dollar currencies has been helpful to much of the portfolio’s investments, whose assets are predominantly non-US based. Declining input prices – notably fuel – have also helped costs.”
The trust has delivered negative performances in the short and medium terms as a result of the pressure on gold and other precious metal prices. It lost 64.02 per cent in the five years to July 16 2015, data from FE Analytics shows, although this is only slightly behind the AIC IT Commodities and Natural Resources sector’s average loss of 55.01 per cent. However, in the past month the trust has edged ahead of the sector with a deficit of 5 per cent, compared with the sector’s average loss of 5.32 per cent.
Mr Watson notes some of the recent changes to the portfolio include increased exposure to funded mine developers and some additional investments in Africa, including gold miner Teranga, “which we felt could benefit from the euro-linked currency depreciation”.
He adds the reserves of the major metal companies are estimated to have reduced roughly 9 per cent in 2014 and that the developer segment may be a beneficiary of moves to replace reserves as the majors may have to “buy” future production. In addition, the developer sector has been the area of the market where merger and acquisition activity has been concentrated.
Meanwhile, the manager highlights silver exposure is a material part of the portfolio’s asset allocation and offers a similar resilience to metal price volatility, as the producers can adjust the grade of silver ore that is mined. But he adds: “In spite of this more defensive stance, the trust has gradually reduced exposure to some heavily indebted companies as US dollar gold prices have slipped back.”
Mr Watson notes holdings in platinum group metals exchange-traded funds “were significantly reduced early in the year”, although there remains roughly 5.5 per cent exposure to the metals. This includes exposure to rhodium, which he says “may benefit from more stringent emission regulations and which, following a strong rebound [recently], has been more resilient than either palladium or platinum year to date”.
The team has also purchased some Norilsk Nickel – the largest producer of palladium outside of the challenged South African market – which the manager says is benefiting from the rouble’s devaluation and can support an attractive dividend yield.
Recent strong performers include US-based Klondex Mines and developers such as Asanko, Continental Gold, Guyana Goldfields and Teranga. On the flip side, he notes a few detractors to performance, such as Independence Group following its proposed acquisition of nickel developer Sirius Resources. Tahoe Resources and Silver Wheaton also weighed on performance, with the latter suffering in the wake of Canada Revenue Agency’s challenge to its business structure.
Looking ahead Mr Watson seems optimistic about the sector. “To date, Europe has managed to cope with the threat of Greek default, a situation that may be managed for the remainder of the year,” he says. “The recent rise in long yields generally in May – which increased the opportunity cost of holding gold and weighed on prices – could allow precious metals to rise in spite of the modest interest rate increase flagged by the US Federal Reserve.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
This is a metals and miners fund with two-thirds of the portfolio classified as producers, while 50 per cent of its exposure is in gold and 34 per cent is in silver. The team has continued to trade in spite of volatility feeding through from changes in the gold price. The trust and sector fell out of favour from 2011-13 as the sector came under stress and at one point was at a nearly 25 per cent discount to net asset value (NAV). The discount is currently around 16.44 per cent. Performance of both NAV and the share price continue to fall and show no sign of reaching the bottom, losing nearly 70 per cent in three years. The discount effectively reduces the overall fee of the trust should the vehicle recover. Only brave value investors need apply.
