This article is part of Morningstar's Guide to Alternative Investing; providing everything you need to know about property, commodities, infrastructure and other diversifying assets.
Investors have been snapping up gold funds this year – as geopolitical threats added uncertainty to markets, the perceived safe haven has provided welcome cover. The gold price started the year at $1,074 per ounce and rose as high as $1,367 in July following the Brexit vote, subsequently falling to $1,251 and spiking again to $1,305 in the midst of US election uncertainty in November.
IG Group’s Chris Beauchamp, says that next year investors should see a return of risk appetite, meaning gold will suffer over the course of 2017.
“While a reflationary environment will provide a short-term tailwind for the asset, we could see it go below US$1000 by the end of 2017,” he predicts.
David Coombs, manager of the Rathbone Multi-Asset Portfolios said gold remains at an elevated level and he would not advocate owning it while rates are rising.
“Other commodities are more interesting,” he added. “We are investigating buying a bespoke basket of materials, including iron, copper, oil and wheat, as a way of inflation-hedging the portfolio and offering greater diversification into the bargain.”
However, Geir Lode, Head of Global Equities for Hermes is not as positive on the outlook as others and says that there is still much uncertainty in markets – a backdrop which is beneficial for gold.
“Although we share much of the market’s new found optimism, there are still many potential headwinds,” he said. “Trump’s pro-growth promises will lead to a huge budget deficit, potentially undermining the US Dollar and benefiting gold prices; the new president’s world views risk escalating tensions in the Middle East; European elections throughout 2017 may generate further political uncertainty.”
If you are a more cautious investor who prefers to hedge against uncertainty there may be a case for owning gold funds in your portfolio. We outline the best below.
BlackRock World Mining (BRWM)
The management team at BlackRock World Mining is highly experienced and has been successful in applying the outcome of its bottom-up and top-down analysis, and investors here have been well compensated over the long term, says Morningstar fund analyst Fatima Khizou. Analysts like the managers' work over the past few years, which aims to encourage better corporate behaviour among their investee companies.
The board made use of the revenue reserve to maintain the level of the dividend in 2015. It is worth noting that the amount and growth of future dividends will depend on the portfolio's underlying companies, and, given that many producers have cut or cancelled their dividend, the level is closely monitored.
iShares Physical Gold ETC (SGLN)
When investing in gold via ETPs, the most straight-forward way is via physical gold vehicles. These funds take investors’ money and invest directly in the underlying commodity. Investors seeking direct physical exposure can consider the iShares Physical Gold ETC, says Morningstar passive fund analyst Kenneth Lamont, which charges a TER of 0.25% which is lower than its peer-group.
As it is valued in USD, for a non-US investor buying gold is a joint bet on the price of gold and on the strength on the Dollar. For example, A UK investor may still lose money even if gold prices are rising, if there is a simultaneous drop in the USD/GBP exchange rate.
JP Morgan Global Natural Resources
Despite its recent woes, Morningstar analysts continue to believe this fund is a compelling offering within the resources space for investors who understand its risks and distinct features, says Khizou.
The investment process is structured around the team’s philosophy of seeking to add value through material investments in smaller-cap companies from preproduction stage/discovery to reserve definition. Stocks are predominately identified through a bottom-up analysis that focuses on mis-valued firms even when accounting for political and development risks. The portfolio is diversified across regions and three key subsectors: energy; gold and precious metals; and base metals and diversified mining.
