Your gold investment portfolio - gold shares or gold funds?
Julian Phillips comes down strongly on the side of managing your own gold stock portfolio rather than relying on a fund manager to do it for you.
Posted: Thursday , 27 Oct 2011
In a recent series of articles we have looked at where in the world one invests in a precious metal share and the factors that must be considered. Also, should one invest in a gold fund, holding a spread of gold shares, or in gold shares direct? In this article we look at the two options.
We remind our readers of the prime objective of investing, to "Maximize Total Returns". This gives us focus when answering this question. Before addressing the issue we are going to ask another question. Are you an investor who wants someone else to do the investing for you or do you keep your own hands on the reins of your own wealth. In other words, "Are you a passenger or a driver?" This Article helps you to see why we ask the question.
So let's look first at the option of investing in a gold share fund.
GOLD SHARE FUND
What is a Gold Share Fund? It is a fund that holds a selection of gold shares in terms of the prospectus of the fund and bought to achieve the objectives laid out in that prospectus.
It may be that the investment manager of the fund buys and sells shares that he feels would better suit the fund's objectives so varying the shares held. It may or may not state that it aims at maximizing total returns. It may set a short-term capital gain objective and earn its fees based to some extent on performance, charging additional fees for that performance. Or it may aim to achieve this objective through a long-term performance.
There can be an enormous variation of objectives or a tremendous amount of leeway given to the investment manager in the fund. So the first step of any investor is to fully understand what leeway he has given to the investment manager and what the objectives of the gold share fund are, in detail.
But look at what an investor who invests in the gold share fund is really doing. He's giving his money to someone else to manage for him for a fee, with what might not be so clearly understood as an objective. Some investors see the name of the investment manager and say, well it's a great bank or a great company. They will certainly be able to achieve great gains for me. Then they take their hard earned wealth and give it to someone else to handle for them. This immediately makes them a passenger not a driver of their situation. At worst this gives rise to complaints from investors who say, "Why didn't you sell at the top and buy at the bottom."
If they have paid the fees to invest in the fund, then they really have no cause for complaint at whatever happens, because they didn't invest in gold shares, they invested in someone who has a fund with gold shares in it. They resigned themselves to letting the fund perform for them. They then glance at its performance from time to time.
It does strike the writer that it is remarkable that a professional or successful businessman should gain such in depth knowledge in his own business, realizing the critical nature of acquired expertise to achieve the wealth he has over a long period of time, only to happily pass it onto someone else to make more and protect his wealth.
But look at the vast number of funds out there. Yes, many have a captive audience, such a Pension Funds, to which workers contribute during their working life and who have no choice in the matter, but to willingly, on purpose, become a passenger in someone else's train, is amazing.
When the fund invests in gold shares, it has to pay the costs of buying and selling those gold shares just as the original investor would have done to buy and sell those shares. The investor pays fees to buy and sell the fund's units or shares and also the costs of buying the mining shares. This is a double dose of fees.
It may be that long term holders of shares follow a fund carefully and monitor its investments. If they do, surely it would make a huge amount of sense to simply mimic the holdings of the funds by going direct to the shares, which the funds hold. This cuts out one entire layer of fees and gives the investor the flexibility to not hold a share that the fund likes, but he doesn't? By doing this the investor immediately increases his wealth's performance through the saving of those extra fees.
We must emphasize that the dividend flow, as the dark days in the financial world cover us, should become the foundation of one's investment selection. We're moving into a more cash flow oriented world. The days when capital gain was the sole consideration in investor's minds are passing. With the growing levels of uncertainty and falling confidence, much more attention will be given by markets to shares that pay for their keep. If dividends are not there, or are just a hope, then the share will not perform well.
Markets are going to shorten their horizons in terms of the size of Price/Earnings ratios too. Paying a high price on a share with a very high P/E ratio is paying for a large part of future earnings too.
Paying for a much shorter future through lower P/E ratios will increase. This will undoubtedly favor the share that's paying dividends. So the Dividend Yield will become more and more important. It'll be seen as reinforcing a particular P/E ratio and allow the price to rise higher. This makes the financing or future projects for the companies easier too.
Even now, the gold shares that are performing well, are paying their shareholders and justifying why they should continue to hold them, in the face of those oh so safe, Treasuries. The link between the income paying low risk Treasury Bills and Bonds and dividend income will grow in importance over time. The cost of added risk should be measured and measured against dividends into the future to give an income-related value to the shares.
Now apply this to a gold share fund. The criteria that decide the make-up of a gold share fund may or may not emphasize this changing nature of the gold share markets. Once you deduct the added fees, the income flow from the fund will reduce, lowering the yield unacceptably.
Julian Phillips is a longstanding, and well-respected, gold and silver analyst and principal contributor to www.goldforecaster.com and www.silverforecaster.com
iPad Version: Gold bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna: Lisi Niesner / Reuters