Fund in focus: BlackRock Gold & General

Posted by Liz Rees in Fund and industry updates category on 20 Nov 19


The proposition

The fund aims to grow investor’s capital over the long-term (at least 5 years). At least 70% of the fund is invested in the shares of companies with a significant proportion of their business in gold mining. Up to 30% can be held in other precious metals stocks.

Investments can be listed on any recognised stock exchange although there is a revenue bias to regions with plentiful natural resources, such as Canada and Australia. The managers avoid countries with unstable political regimes.

The team

BlackRock has a large team dedicated to the natural resources sector and the managers on this fund are Evy Hambro and Tom Holl.

Evy Hambro has nearly 30 years of experience covering the mining sector and is CIO of BlackRock’s UK-based natural resources team as well as being global head of commodities. He started his career with Mercury Asset Management before joining BlackRock in 2006.

Hambro has been directly involved with this strategy since 2002 and became lead manager in 2009. Tom Holl, who has worked alongside him since 2008, was appointed co-manager in 2015. Tom has been with Blackrock since 2006.

Investment philosophy & process

Hambro and Holl believe a portfolio of carefully selected gold mining companies has potential to of outperform the gold price over the long term. They employ a disciplined process to identify large companies with the most attractive opportunities for where we are in the commodity cycle.

Valuation and risk assessments are incorporated into the stock selection process. Businesses must have strong balance sheets and financial controls plus the ability to generate sufficient cash to reinvest in new production.

Screening on criteria such as liquidity, growth prospects, debt levels, asset quality and management calibre narrows the investible universe down to around 150 companies. These are subjected to further in-depth research to produce a portfolio comprising 50-80 current best ideas. The team regularly visits important mining regions.

The managers incorporate Environmental, Social & Governance (ESG) factors in their investment process as they believe companies that act responsibly are more likely to produce sustainable earnings. They consider how businesses behave towards local communities in which they operate. Positive actions include improving local facilities, treating employees well and mitigating any environmental impact of their operations.

Performance & costs

Over five years to 18 November 2019, the fund has returned 55% compared to 85% for the benchmark FTSE Gold Mines index and 44% for the S&P GSCI Gold Spot index*. In the 12 months to 18 November 2019, the fund returned 37% compared with 40% for the FTSE Gold Mines index and 19% for the S&P GSCI Gold Spot index*.

The fund has lagged its benchmark due to the strong performance of Barrick Gold. Fund rules mean it cannot hold more than 10% in an individual stock which dictated a relative underweight position.

Fees are a little higher than a typical equity fund which is normal for a more specialised strategy that involves extra research. BlackRock absorbs research costs so there are no additional transaction fees.

Fund positioning

At the end of September 2019 the fund had 92% of its assets in gold producers with 44% invested in Canada, 17% in Australia, 24% in the United States and 9.5% in the UK.

Significant positions are taken in companies where there is greatest conviction and the top 10 typically account for around 60% of the assets. Half the fund is in companies with a market size above $10bn and it avoids small and speculative exploration businesses. Currently, the largest positions are Barrick Gold, Newmont Goldcorp, Newcrest Mining and Agnico Eagle Mines.

Barrick Gold is the world’s largest gold mining company. After merging with Randgold Resources, it launched a hostile takeover bid for second ranking producer, Newmont Goldcorp. Terms were not agreed and instead they formed a joint venture, Nevada Gold Mines, to operate the biggest gold mine in the world. Newmont Goldcorp itself has a large portfolio of reserves for future development when current mines are exhausted.

Newcrest is an Australian gold and gold-copper concentrate miner with high environmental standards. Margins have benefitted from having revenues in US dollars and costs in Australian dollars. It also operates mines in Papua New Guinea, Ivory Coast and Indonesia.

Agnico Eagle Mines has operations in Canada, Finland and Mexico and exploration and development activities extending to the United States. It has full exposure to the gold price as it makes no forward sales.

Silver producers currently represent around 4% of assets, with a position in Fresnillo (a Mexican firm listed in the UK) sold down recently due to operational issues. Wheaton, a ‘silver streamer’ providing capital to miners in exchange for revenues, has also been reduced as this is a more defensive activity.

The managers are cautious on the prospects for platinum and palladium due to their heavy use in diesel and petrol car engines respectively.

Outlook

Trade tensions have fuelled demand for gold this year and with elevated geopolitical risk and economic growth less certain it could continue to perform well. The price broke through $1500 an ounce in the summer and while the BlackRock team do not make forecasts they are positive about the direction.

Gold miners tend to outperform in a bull market for gold, and underperform in a bear market, partly because they have certain fixed costs meaning higher gold prices can significantly improve profitability.

The main driver of the gold price is falling 10 year US real interest rates which seem set to remain low. This means the opportunity cost of holding gold, which does not generate an income, is lower. Demand is high from both investors and emerging market central banks looking to reduce their reliance on the US dollar.

Gold (which is priced in dollars) usually moves inversely to the US dollar yet it has performed well recently despite continued dollar strength. A weaker dollar could therefore provide a further boost for the gold price.

For gold miners, gaining scale is critical to deliver cost efficiencies. For example, Barrick and Newmont’s joint venture is predicted to produce about $2.8 billion in synergies and substantial additional free cash flow.

The fund managers believe gold mining shares, particularly North American ones, presently trade on attractive valuations on a number of fundamental measures, including price to net asset value.

Our view

BlackRock Gold & General fund may differ substantially from the FTSE Gold Mines index. The benchmark is concentrated with the two largest constituents accounting for nearly 40%. However, the managers are comfortable with holdings capped at 10% (on regulatory grounds) as this mitigates risk and enhances diversification.

Investors should remember that investing in gold miners is a geared play on the gold price. Fixed extraction costs means higher prices can boost profits, and shares prices, but if the price falls there is a reverse effect. Furthermore, unlike with physical gold, there are operational and stock market risks involved. This fund could under-perform if the global economy strengthens and interest rates rise.

Provided you can tolerate volatility and understand the risks involved, we believe BlackRock Gold & General is a fund worth considering if you wish to allocate a small proportion of your portfolio to the asset class in order to improve diversification.   

* Source: FE analytics, total return in pound sterling

Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.

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