I am not a gold bull, but I do accept that gold can be a great way to build diversification and protection into a portfolio. As my fellow MoneyWeek writer Dominic Frisby recently pointed out, gold has been money “forever” and is likely to retain this title, which makes it a good hedge against periods of economic or political upheaval.
There are really three ways investors can get exposure to gold in their portfolios: they can buy physical gold, buy gold miners, or buy a fund that focuses on both.
There are benefits and drawbacks to all of these approaches.
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Owning physical gold can come with significant costs such as storage fees and insurance. Using an ETF (exchange-traded fund) can cut these costs and make it easier to buy and sell – and you won’t have to store it yourself – but it won’t eliminate the drawbacks entirely. There are usually management fees to pay and because gold doesn’t generate any cash flow, there’s no chance of a dividend.
Picking mining stocks has its own set of challenges. These companies quite literally mint money, but they’ve struggled to turn that money into shareholder value. The challenge is, mining can be unpredictable.
It takes years and costs billions to find a gold prospect that’s worth mining, and turn that prospect into a productive asset. It is hard enough for a skilled geologist on the ground to determine if a prospect is worth exploring, let alone analysts and investors based in London or New York (although Dominic disagrees with me on this point).
Still miners, especially the big established players, tend to offer a dividend. That’s favourable to the charges that come with owning physical gold.
My favourite method for getting exposure to gold is to use funds, specifically, investment trusts. While I want to hold gold as part of a diversified portfolio, I’d rather leave the process of stock selection to the professionals.
The gold mining funds to buy for diversification
The BlackRock World Mining Trust’s (LSE: BRWM) objective is to provide a “diversified investment in mining and metal assets worldwide.”
It offers exposure not only to gold miners, but also to other key resources such as copper and iron ore. Considering the role copper plays in the global economy, this is arguably going to be a far better investment for the long-run than gold. However, it’s not as sought after as gold as a store of value (gold is a byproduct of copper mining). I’ve discussed why copper could be an undervalued asset here.
The World Mining Trust also has 6% of its assets in bonds and preferred stock of mining companies. I think this gives it an edge. Bonds and preferred equity tend to offer a stable and predictable income stream through dividends and interest income. They’re also further up the capital structure, meaning holders have preference over ordinary stockholders in the event of bankruptcy. This kind of diversification is precisely what I’m looking for.
The trust paid out a dividend equivalent to 5.9% of its current share price last year, charges a 0.9% annual management fee and currently trades at a modest 3.7% discount to underlying net asset value.
Two other trusts that meet both of my criteria are Personal Assets Trust (LSE: PNL) and Ruffer Investment (LSE: RICA). Both of these trusts have a mid-teens exposure to physical gold alongside other inflation-proof assets, such as inflation-linked bonds and real estate investment trusts. They’re two great options for investors looking for a portfolio that is built to withstand inflation and uncertainty.
Mining funds that focus on the gold sector
Other potential options that offer a more focused investment approach include the unit trust BlackRock Gold and General Fund. Managed by Evy Hambro, who also looks after the portfolio at BlackRock World Mining, Gold and General focuses on gold mining equities. Nearly 10% of the portfolio is invested in Newmont Corporation (NYSE: NEM), the world’s largest gold mining company (it also produces substantial quantities of copper, zinc, silver and lead).
Unfortunately, its performance in the past five years leaves a lot to be desired. Over the past five years, the fund has returned around 35% including dividends, whereas World Mining has returned more than 109% excluding dividends. Its diversification has been a huge benefit during a period of stagnating gold prices.
Ruffer also offers a specialist gold fund, LF Ruffer Gold Fund. Like Gold and General, it concentrates on gold mining stocks. With an ongoing charge of 1.5% it’s a bit pricey although its accumulation shares have returned 94.1% over the past five years – so perhaps you get what you pay for.
Lastly, two smaller unique funds are the OMR Merian Gold & Silver and Golden Prospect Precious Metals Limited (LSE: GPM). Both focus on gold equities, but have a mixed record. OMR has returned just 11.9% over the past five years. Golden Prospect has declined -16.6%.
All of these funds offer exposure to gold and gold miners. Some are more diversified with a better record than others.
Disclosure: Rupert Hargreaves owns shares in Personal Assets Trust.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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