This £18m fund is managed by Angelos Damaskos and is a globally diversified portfolio investing in small- and mid-cap companies specialising in identifying and extracting gold. He says: “Typically, we run an 80/20 portfolio split, so 80 per cent gold, 20 per cent silver.”
Mr Damaskos says: “We have an active management style. We run a fairly concentrated portfolio of up to 45 holdings so we try to understand the dynamics behind every company we invest in – understand their assets, strategy and positioning before we include them in the portfolio. If you look at the top 10 positions, for example, they comprise around 45-46 per cent of the fund.”
The manager invests in gold mining shares “because they offer great operational leverage to the gold price”. He explains: “If a mine operates with a marginal production cost of $800 (£605) an ounce of gold and they sell it at $1,200 an ounce, they make a $400 profit margin. If the price of gold were to rise to $1,400, which is only a 16-17 per cent rise, the profitability of the mine would actually increase by 50 per cent.
“The negative side of that is in a declining commodity price environment, they also suffer to a greater degree, which is what has happened to the industry since the peak of 2011.”
The manager tries to avoid exposure to political risk by not allocating to countries such as Nigeria and South Africa. The biggest geographical concentration in the fund at the moment is to Canada.
“It is a very mining-friendly jurisdiction where you have a lot of industry expertise, you can find a lot of local labour to help produce the value from deposits but also the authorities understand the importance of mining to the local and regional economy and they are very keen to support it with relevant taxation and fiscal measures,” confirms the manager.
According to the key investor information document for the clean C share class, the fund sits at the riskiest end of the risk-reward spectrum at level seven, with ongoing charges of 1.93 per cent.
EXPERT VIEW - Marianne Weller, senior investment analyst, City Financial |
| Junior Gold was co-founded by Angelos Damaskos and Jim Slater in September 2009 under the name Junior Mining. The name was changed in October 2010 as the fund concentrated most of its portfolio in gold mining shares. It is focused on small-cap gold companies, including AIM-quoted stocks, but it also features silver companies. The emphasis on juniors has been beneficial to performance this year, but the approach can experience volatility; the maximum drawdown since October 2010 is 90 per cent. This is because there is more exploration and capital allocation risk, but at the same time, their discoveries are particularly attractive to the major gold companies looking to enhance their reserve positions. |
In the short term, the fund’s performance has picked up but long-term returns have been marred by the decline in the gold price.
“In the past 12-18 months, I would say we have been very cautious about the weak environment for mining,” Mr Damaskos explains. “Through 2015, gold traded between $1,000 and $1,200 an ounce; that’s a tough environment for gold mining companies. So we were keen to avoid exposure to companies that required financing from the capital markets because the capital markets were shut, and also [to avoid] companies that have excessive leverage on their balance sheets because, again, these were the companies that have trouble with the banks.”
He continues: “We focused on those companies that could sustain their operations in a lower gold price environment and also have a keen interest in reducing costs further. I believe this is the reason our fund has outperformed year to date – because these companies are the ones that benefit the most from a rising gold price environment.”
According to FE Analytics, the fund returned 149 per cent in the year to July 11 2016, outperforming its benchmark, the FTSE Gold Mines index, which was up 133 per cent.
But over five years to July 11, the fund clocked up a 60.8 per cent loss, while the index is down 26.9 per cent over the same period.
One of the biggest contributors to recent outperformance has been First Majestic Silver. Mr Damaskos says: “It’s a Mexican-focused operation, it runs five mines and has reduced costs through the weak market years and is in a position to grow profitability in the up cycle.”
Among the gold mining constituents in the fund, West Africa-based Endeavour Mining has also added to performance. Mr Damaskos notes: “It has a diversified base, which gives us comfort in relation to any residual political risk you may think exists in West Africa.”
He adds: “In the past year, we haven’t had many disappointments. The year before, we had several because of the drop in stock values and, frankly, it was such a cataclysmic sell-off that most companies were caught off guard with too much debt and high operating cost structures.”
