After the latest downward lurch in commodity prices, investors in the mining sector have now endured terrible returns for five years. Thegold price has nearly halved and the FTSE 350 Mining index has dropped by a gruelling 75%, returning investors to where they were more than a decade ago.
There is, however, nothing better than a prolonged bear market to filter out the best fund managers. Using the industry's dire performance as a litmus test, which funds have actually added value the whole point of active management in the last five years? Sadly to say, the short answer is "none". The performance of the best-regarded mining funds available to UK investors has been unwaveringly dismal. The longer answer is "some, a little bit, but not enough to justify the fees".
Uninspiring performance
Over the last five years it has droppedby 70%, a grim performance, butstill better than a 78% drop in its benchmark, the FTSE Gold Mining index. Indeed, according to Citywire it's the top performer of seven funds in its sector. "Investors are very aware that we are going to perform in the direction of the gold price," Hambro has told the Financial Times, "but they expect us to outperform our benchmark."
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However, the small margin of outperformance is hardly inspiring no one is going to cheer on a 70% loss, after all and is largely attributable to the small amount of cash (currently 2.2%) that the fund holds on the sidelines to manage its relentless flow of redemptions. Its assets under management have plunged from $3.4bn in 2011 to £681m at the end of last month, as the City has turned its back on mining investments.
Lack of conviction
With so many companies in each portfolio, a manager's individual stock selections are heavily diluted and it is hard to see how they can hope to add any value. So it's not that surprising that the performance of each has been near-identical: the three funds mentioned are down 58%, 59% and 62% respectively over the last three years.
One fund with slightly higher conviction though it also has a broader remit is the Baring Global Mining fund, managed by former mining analyst, Clive Burstow. It holds around 30 stocks and is heavily overweight Rio Tinto versus industry leader BHP Billiton.
Burstow, however, has turned 180 degrees on Glencore in recent years and assets under management are just £5m. Its overall performance has, meanwhile, been pretty much identical to the sector's other funds: over three years, it is down 59% and the fund's launch in 2012, at the tail end of China's investment boom, is proof in itself that fund managers have no special insight into the mining cycle.
Better to go passive
The reality is that if you are currently keen to invest in gold miners (and,as Edward Chancellor argued a few weeks ago in MoneyWeek, now doeslook a promising time to do so), but you would rather not take the risk of researching and investing in individual companies, then you would be betteroff finding a cheap passive tracker to avoid paying fees on an active fund.
One such fund is the Market Vectors Gold Miners (LSE: GDX) exchange-traded fund, which tracks the biggest listed gold miners. It's had a similarly rough time over the last five years down around 75% but the expense ratio is around 0.53%, meaning less of your returns will go on fees.
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