In How to make money in gold mining stocks, we explained how such stocks can generate better returns than investing in plain gold. In India, one cannot really participate in this sector, unless they invest in global mining stocks.
DSP World Gold Fund
is a feeder fund, that feeds into BlackRock Global Funds - World Gold Fund. The fund predominantly invests in gold mining stocks, with a small exposure to silver, platinum, copper, nickel and diamond stocks. These mining companies are listed across Canada, U.S., Australia and the U.K.
Morningstar analyst and associate director Peter Brunt did a detailed analysis in June 2019, the observations of which are mentioned here.
He lowered the Morningstar Analyst Rating to Bronze from Silver. He noted that significant changes to the investable universe and benchmark present problems for a UCITS-compliant portfolio. This dented his level of conviction in BGF World Gold's ability to consistently outperform.
But he maintained a positive rating as he continued to see many favourables.
-
Experienced manager and stable team
Evy Hambro has been directly involved in this strategy since January 2002, when he was appointed comanager alongside Graham Birch. He was made lead manager in April 2009, following Birch's retirement. His long involvement has provided investors with a high degree of stability compared with many of its peers.
He is supported by Tom Holl, who has been working alongside Hambro since 2008, covering both the gold and mining segments, and was appointed comanager on the gold strategy in July 2015.
-
Structured approach
The managers have consistently implemented an approach that we consider well-structured.
The team undertakes analysis on supply and demand and market sentiment, together with political and regulatory monitoring, to forecast directional trends in each commodity price. This is used to guide and support its company-level analysis, which focuses on companies in production. The primary emphasis is on lower-cost, higher quality producers where the team believes equity valuations underestimate the longer-term earnings prospects. In assessing quality, the team considers: asset quality (high margin, barriers to entry, intellectual property advantage), management (proven track record of delivering value to shareholders), capital structure (strong financials and debt coverage), and allocation (sensible allocation between investment and dividend growth).
The team incorporates site visits and management meetings. It looks at different valuation metrics depending on the nature of the sector and stage of the company development, including discounted cash flow analysis, price to net asset value, P/E, free cash flow yield, and price/book. A stock will be reviewed for sale on valuation grounds if leverage becomes excessive or upon a change in strategy/management.
-
Sensible portfolio construction
The portfolio is constructed in a benchmark aware fashion with the main focus on gold.
Individual position sizes are dictated by the type of company and associated risks: less volatile and more liquid producers with sustainable business models are limited to 5%-10% absolute; companies with a narrow range of operations and some risks to 2%-5%; less liquid small/mid-caps that may be developing a project, with a high-risk, high-return profile are kept below 2%.
A note about the benchmark
The strategy aims to outperform the FTSE Gold Mines benchmark using top-down and bottom-up analysis.
The focus on quality has typically resulted in a more defensive performance profile--providing more resilience in challenging market conditions for gold equities.
In this context, underperformance in 2018 was disappointing, largely because of stock-specific issues. The strategy has delivered respectable long-term returns relative to the FTSE Gold Mines benchmark, however.
This benchmark, as with all other gold equities indexes, suffers from high levels of concentration, with some its largest constituents accounting for more than 10% each. Because of UCITS regulations, which limit individual positions to 10%, the portfolio has therefore long exhibited a structural underweighting in the largest stocks. This situation was badly exacerbated by the merger of Randgold Resources and Barrick Gold at the end of 2018, and of Newmont and GoldCorp in April 2019.
Barrick Gold, Newmont GoldCorp and Newcrest Mining accounted for 18%, 21% and 11% of the index, respectively, at the end of April 2019. The structural underweightings have become more material as a result, further limiting the managers' ability to add value on a large part of the market.
Performance
As mentioned above, the structural underweighting to the benchmark's heavyweight constituents will prove a headwind when they outperform.
The strategy has tended to hold up better than the average peer in challenging market conditions for gold equities, helped by its emphasis on quality assets and lower/controlled beta approach. This was evident from 2011 to 2013, when it lost less than the benchmark and typical peer.
The quality emphasis has also meant that the strategy has struggled to keep up with the benchmark and peers in favourable environments for gold. This was evident in the first half of 2016 when gold rallied strongly, and the fund lagged both yardsticks.
Stock-specific issues led to underperformance in 2017 and 2018, weighing on medium-term results.
© 2020 Morningstar. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc. in India and other jurisdictions. Research on securities, referred to for the purpose of this document as “Investment Research”, is issued by Morningstar Investment Adviser India Private Limited, which is registered with SEBI as an Investment Adviser (Registration number INA000001357), providing investment advice and research, and as a Portfolio Manager (Registration number INP000006156). For the complete disclaimers, click here.