Gold-Bug Funds Revisited
Big gold bets have helped these funds lately, but don't get too complacent.
Big gold bets have helped these funds lately, but don't get too complacent.
As the worldwide recession drags on and equity markets continue to drop, lots of people are looking for safe havens amid the turmoil. That's why one of the most traditionally safe investments, gold, has been looking so good in recent months. Gold futures hit a new all-time high of $1,033 an ounce after the federal bailout of Bear Stearns in March 2008. They then pulled back sharply before rising again over the past couple of months amid bad economic news and increasing fears over the viability of the U.S. banking system. On Feb. 20, gold once again topped $1,000 an ounce and has been hovering around that level since.
Investors who want to invest in gold but don't want to buy and store actual gold bars have plenty of options. The SPDR Gold Shares (GLD) exchange-traded fund is the most direct, as it tracks the price of gold bullion, and various other ETFs also provide gold exposure, as Paul Justice recently described. There are also a number of open-end mutual funds that invest in the stocks of gold miners and producers; the largest such fund by assets is Fidelity Select Gold (FSAGX). These stocks (and the funds that hold them) tend to be more volatile than direct investments in gold because they involve business risk on top of the fluctuations in gold prices. Over the past three months (as of Feb. 25), SPDR Gold Shares has gained 17%, while Fidelity Select Gold has gained 32%; over the past year, however, the ETF has gained 1.43% and the mutual fund has lost 30%.
It's not too surprising that gold-focused mutual funds and ETFs have done well lately, but what about more-diversified funds with substantial gold holdings? We first explored this question in November 2007 after another spike in gold prices but before the stock market had completely cratered. Back then, we looked at diversified domestic-stock funds with the largest percentage of their portfolio in gold and silver stocks, which Morningstar combines into one category. We found that those funds had done pretty well relative to their peer groups, with five of the 10 ranking in their categories' top decile.
We've updated that 2007 list in the table below, which shows the diversified domestic-stock funds (that is, those in the nine Morningstar Style Box categories) that currently have the biggest percentage of their portfolio in the gold/silver category, as of their most recent portfolio. We show each fund's category, the size of its asset base, the percentage it has in gold/silver stocks, its percentile ranking in its category for the year to date as of Feb. 26, and its percentile ranking in its category for the past 12 months, also as of Feb. 26.
Domestic-Stock Funds with the Biggest Gold/Silver Bets | |||||
Category | Size ($Mil) | Gold/ Silver % | % Rank Cat YTD | % Rank Cat 1 Yr | |
Nuveen Tradewinds Val Opp | Mid-Cap Blend | 644.8 | 21.77 | 3 | 10 |
ING Value Choice | Mid-Cap Value | 263.3 | 21.73 | 1 | 12 |
Church Capital Value Trust | Large Blend | 9.6 | 12.64 | 1 | 3 |
Royce Low Priced Stock | Small Blend | 2,319.0 | 12.40 | 14 | 45 |
Royce Value (RYVFX) | Small Blend | 806.8 | 11.68 | 6 | 47 |
Monteagle Value | Large Blend | 11.4 | 11.47 | 15 | 80 |
Ralph Parks Cyclical Equity | Mid-Cap Growth | 4.0 | 10.40 | 97 | 99 |
Wells Fargo Adv Sm/Mid Cap Val | Small Blend | 123.6 | 10.20 | 21 | 92 |
Nuveen NWQ Multi-Cao Val (NQVRX) | Large Value | 375.3 | 9.74 | 29 | 94 |
Wells Fargo Adv Sm Cap Val | Small Blend | 2,203.4 | 9.46 | 11 | 69 |
Data as of 02-26-2009. |
The top two funds on this list, Nuveen Tradewinds Value Opportunities and ING Value Choice , are the same two that topped our November 2007 list. They're essentially clones of each other, both run by David Iben of Tradewinds Global Investors, and the top four holdings of both funds are gold-mining stocks: Lihir Gold Limited , Newmont Mining (NEM), Barrick Gold (ABX), and Kinross Gold (KGC). Those holdings have helped both funds rank near the top of their categories for the year to date, losing "only" about 6%. The funds also look good over the past year, when they've beaten about 90% of their peers, and even better over the trailing three months, when their 10% gains have topped 99% of their category peers.
The other funds on the list have also done pretty well, with seven of the remaining eight ranking in or near their categories' top quartiles so far this year. (The one exception is Ralph Parks Cyclical Equity , whose gold holdings have been no match for a portfolio heavy in financial and industrial stocks.) Four of these eight were also in our November 2007 list: Royce Low Priced Stock , Royce Value (RYVFX), Wells Fargo Advantage Small/Mid Cap Value , and Wells Fargo Advantage Small Cap Value . While all four of these funds have held up well over the past couple of months, all have posted mediocre returns at best over the past year, with Wells Fargo Advantage Small/Mid Cap Value ranking in the bottom of the small-blend category. Why? There's no single reason, but many of the same gold stocks that have helped these funds in recent months have lost ground over the past year. For example, Randgold Resources , the top holding of Wells Fargo Advantage Small/Mid Cap Value, has gained 30% over the past three months--but has lost 9% over the past 12 months.
All this illustrates the hazards of investing in gold. Yes, during times of market stress, gold tends to do very well, and it can be a useful hedge for that reason. But gold prices are still notoriously unpredictable, and putting too much of a portfolio in gold--especially in gold-mining stocks--can cause it to move around in unexpected ways.
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