Loading...
 

Value Line’s Precious Metals objective group consists of funds investing at least 50% of their assets in gold and/or precious metals stocks or bullion. In reality, most funds in this group place well over 50% of their assets in these investments. That said, there tend to be two types of funds here, those that invest almost exclusively in gold and those that invest more broadly in precious metals (though, in reality, even these funds will have material exposure to gold and gold stocks). There are also a small number of funds that offer “inverse” performance to the price of gold.

In general, the Precious Metals objective group is fairly small, and most of the funds have very similar goals and performance. The strategic exception, of course, is the “inverse” style of fund. The similarity in the funds and performance is driven by two factors.  First, there simply aren’t all that many ways to invest in gold and precious metals—the list of stocks is about as short as the list of funds. Second, gold and precious metals are commodities, and their price swings can be extreme.

That said, precious metals, particularly gold, are often considered a “store of value” in times of inflation and, for the more extreme times, in case society falls into chaos. Thus, some recommend a small gold component for all portfolios. Small, however, is a key word, as most asset allocation models, including Value Line’s, don’t recommend more than a few percentage points of exposure to this category. It is also important to note that gold and precious metals stocks and funds are very different from owning gold or precious metals directly in the form of bullion. Indeed, if society did happen to fall into chaos, owning shares in a gold fund isn’t going to help anyone buy a loaf of bread.

At the end of the day, gold and precious metals funds can fill an important niche. But it is a niche and a volatile one at that. Investors should be cautious about how much exposure they maintain here.

Over the long term, the Precious Metals objective group has been a very strong performer relative to the broader market, as measured by the S&P 500 Index. For the 10-year period ended February 29, 2012, the group had an annualized gain of 18.4%, while the S&P 500 Index reported an annualized gain of 4.2%. For five and three years, the group had returns of 9.9% and 23.1%, respectively, while the Index reported gains of 1.6% and 25.5%. Over the trailing 12 months ended in February, the Precious Metals objective group reported a loss of 9.7%, compared to gain of 5.1% for the S&P 500 Index. For the year-to-date period ending February 29th, the group had a total return of 9.9%, while the S&P 500 Index reported a total return of 9.0% The group has an average Risk Rank of 5, indicating a very high level of risk.  This reflects the dramatic up-and-down moves that the group has experienced over the past 10 years. 

One fund with a relatively high year-to-date (YTD) return through February 29, 2012, is Van Eck Global Hard Assets Fund A (GHAAX). This fund seeks long-term capital appreciation by investing primarily in hard-asset securities. Income is a secondary consideration. 

The fund invests at least 80% of its net assets in securities of “hard-asset” companies and instruments that derive their value from these precious metals (such as gold), base and industrial metals, energy, natural resources, and other commodities. A hard-asset company is one that derives, directly or indirectly, at least 50% of its revenues from the exploration, production, and distribution of hard assets. The fund may invest without limitation in any one hard-asset sector and in securities of companies located anywhere in the world.

Utilizing qualitative and quantitative measures, the fund’s investment management team selects equity securities that it believes represent value opportunities and/or have growth potential. Candidates for the fund’s portfolio are evaluated using a wide range of criteria and are regularly reviewed to ensure that they continue to offer investment appeal. 

The fund uses derivative instruments, such as structured notes, futures, options, and swap agreements, to gain or hedge exposure to hard assets and hard-asset companies. Management enters into foreign currency transactions to attempt to moderate the effect of currency fluctuations. It can also invest up to 20% of its net assets in securities issued by other investment companies, including exchange-traded funds (ETFs), but exposure to money market funds is not limited. It generally invests in ETFs to gain exposure to certain market sectors, or when direct investments in certain countries are not permitted. 

Another fund with a relatively good year-to-date return is Invesco Gold & Precious Metals Fund (IGDAX). This fund seeks growth of capital by investing at least 80% of its assets in the equity securities and equity-related instruments of companies involved with discovering, mining, processing, or dealing and investing in gold, gold bullion, and other precious metals, such as silver and platinum.

Up to 100% of the fund’s assets may be invested in foreign securities. It may also invest up to 10% of assets directly in gold bullion. The fund focuses on both established companies with good free cash flow and fundamentals, as well as junior and intermediate exploration companies from around the world. It will also use futures and options to enhance its return and/or reduce risk. 

As of December 31, 2011, the fund was more than 99% invested in equities, with the top ten holdings accounted for 51% of assets. Canadian investments made up 64% of assets while U.S. investments comprised 20% of the total.

A third fund with a relatively good year-to-date return through February 29, 2012 is GAMCO Gold Fund A (GLDAX). The fund seeks long-term appreciation of capital by investing at least 80% of its total assets in gold bullion and companies engaged in gold-related activities. The fund focuses on stocks that are undervalued, but have favorable prospects for growth. Factors considered in this determination include capitalization per ounce of gold production, capitalization per ounce of recoverable reserves, quality of management, and the issuer’s ability to create shareholder wealth.

Management may also invest in securities of companies engaged in silver, platinum, or other precious metals or minerals. They include common and preferred stocks, securities convertible into common stocks, and securities such as rights and warrants that have common stock characteristics.

Management may reduce a holding if the stock reaches a predetermined valuation target, the underlying fundamentals of the company are deteriorating, or a more attractive investment opportunity is identified. Also, when adverse market conditions exist, the fund may temporarily invest all or a portion of its assets in defensive investments, such as short-term fixed-income securities.

As of December 31, 2011, the fund was more than 99% invested in equities. Canadian investments accounted for about 44% of assets, as of that same date, with U.S. investments at about 12% of assets. Also, as of December 31, 2011, the fund’s top-10 holdings accounted for 67% of assets.

 In the table below, we have listed 10 top-performing funds through February 29, 2012 that we follow in our Fund Advisor database.

                                                   10 Top Precious Metals Funds Performance

 

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

Van Eck Global Hard Assets A

GHAAX

13.11

3.99

4.66

-0.81

7.27

  

Vanguard Precious Metals & Mining

VGPMX

12.74

-1.26

-2.47

-10.81

4.45

Invesco Gold & Precious Metals A

IGDAX

11.87

-1.19

-2.60

-11.04

11.27

  

US Global Investors World Precious Minerals

UNWPX

11.53

-0.61

-0.80

-11.02

3.41

GAMCO Gold A

GLDAX

11.36

-0.79

-3.54

-10.66

11.30

Blackrock World Gold A

BWGAX

11.19

-0.51

-3.22

-11.55

  

  

Oppenheimer Gold & Special Minerals A

OPGSX

10.78

-1.16

-4.79

-17.27

11.87

Van Eck International Investors Gold A

INIVX

10.74

-1.72

-3.99

-14.23

13.68

  

DWS Gold & Precious Metals A

SGDAX

10.40

-0.78

-5.03

-12.14

6.72

  

Rydex Precious Metals A

RYMNX

10.30

-2.83

-4.72

-12.23

5.33

  

Precious Metals Objective Group

  

9.89

-1.23

-3.90

-11.49

9.89

  

At the time of this article's writing, the author did not have positions in any of the companies mentioned.