Category Archives: Mutual Funds

Examining Gold Mutual Fund Holdings

Gold investment strategies have enjoyed a particularly glamorous investment discussion over the year. Between the huge volatility implications of macro-economic trends, and the micro-economic challenges of producing companies creating returns for investors through their resource bases, and the financial issues surrounding a emerging difference between demand levels for physical and ‘paper’ gold, investors have spent the year juggling around a variety of different gold-related asset classes to try and maintain their exposure to the precious metal.

From the perspective of a personal investor, we can see how it is that the mutual fund industry provides us with the best opportunity to access this kind of exposure because of the way in which the provision of diversification and scale keeps things affordable on an individual scale. However, with hundreds of mutual fund options available to us, all of which with similar holdings and return profiles, it can be hard to decide which fund we should buy into. With the help of a little bit of number crunching, this article is going to illustrate an alternative option for investors that allows them to invest directly into gold stocks in a way that replicates a portfolio of mutual funds, without as much cost. From there, we can take steps to diversify the portfolio on our own to suit our own investment profile.

In reviewing the top 5 gold mutual fund performers with a reasonably long history of operations (symbols of: EKWYX, OGMNX, TGLDX, IGDYX, FGAPX), we can notice right away how it is that each of these funds has anywhere between 43-57% of its entire portfolio invested into its top-ten holdings. While these funds are holding more than 50 equities each, the fact that we are paying somewhere around 1.5% in management fees per year for such a heavily weighted portfolio brings up some questions about what it is exactly that we’re paying for. Given that these funds are putting such a large weighting on their top-ten holdings, we can take another step to determine just how important fund managers feel that these positions are by comparing them all together to see what a portfolio of all of the top-ten holdings of these five mutual funds would look like, to see if there are any trends that emerge.

Gold Mutual Funds

If we were to create a stock portfolio of all the top-ten positions of the 5 mutual funds examined into this study, and weighted the holdings accordingly to how it is that each fund has placed the individual holdings in their own portfolios, we’d notice that the effects of the over-weightings actually stack. What we can essentially see here is that mutual fund managers in the gold industry are not only heavily weighing their funds in favor of their top-ten holdings, but they are all choosing the same individual securities as being their favorites.

With respect to our above 5 mutual funds, a portfolio of 6 individual equities would actually represent an extremely similar profile to what the portfolio of mutual funds would demonstrate (symbols: GOLD, GG, ABX, EGO, NCMGF, NEM). What’s more, if we look at the average returns of the mutual fund portfolio against these 6 securities, we can see that the mutual fund portfolio lost 33% over the last year (remember, this is because gold just took a bit hit from Europe recently), and the securities portfolio only lost 27%. While this isn’t really a thorough evaluation of the scope of the returns, it does provide an indication that we might be looking in the right direction with this train of thought.

So what does all of this information mean? It means that mutual fund managers in the gold industry all seem to believe that these 6 securities represent a very strong back-bone for a gold portfolio, to the point at which they are representing a great deal of their portfolios with these securities. Assuming we can purchase these securities with a $5/lot brokerage fee, it means that an investor with more than $2,000 is in a position to consider building up their own personal portfolio of these 6 securities as opposed to buying into a mutual fund, because of the way in which the cost/return profile works out in their favor. From there, the investor can further diversify themselves to create their own personalized gold investment portfolio, at a lower cost, and with a greater flexibility than had they gone with a straight mutual fund.