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Three funds for precious metals

Daniel Lane

Daniel Lane - Fidelity Personal Investing

When the outlook seems uncertain and investors reach for the safe haven assets, precious metals are often the first port of call. However, it’s not all about going straight for the physical metal like gold bullion. Investors can access precious metals through investment trusts, open-ended funds and exchange-traded funds - all carrying their own specific features and benefits.

Here are three different ways to gain exposure to precious metals on fidelity.co.uk.

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BlackRock World Mining Trust

Commodities are a popular way of diversifying a portfolio, but investing directly in one natural resource leaves investors heavily exposed to a single factor: price.

Managers Evy Hambro and Olivia Markham address this problem by taking a multifaceted approach to commodity investing. In the knowledge that materials like gold do not pay an income, they harness the advantages of the investment trust structure to spread their portfolio across a variety of mining-related assets, many of which pay attractive dividends.

The managers note that the size of these dividend payouts could also increase. Some of the weaker mining companies reduced or even suspended their dividends over the past few years. But now that these firms’ balance sheets have recovered, they will soon be able to afford to reinstate or increase their payments to shareholders. 

Even if pay-outs stay flat, Hambro and Markham point out that because major mining companies dispense dividends in dollars, British investors could still see their receipts grow if sterling continues to depreciate against the greenback.

Mining companies are attractive not just for the dividends which many pay, but also for their shares’ performance relative to the resources they extract.

And while mining companies have been battered by several years of weak commodity prices, Hambro and Markham observe that firms have responded positively by cutting costs, reducing debt, and improving their balance sheets.

As the managers of an investment trust, Hambro and Markham have a number of useful tools at their disposal. They can invest borrowed money to increase the magnitude of their returns (a practice called ‘gearing’), employ derivatives to manage risk, buy shares in non-public companies, and even own physical commodities.

The trust also maintains a royalty agreement with a Brazilian copper and gold mine whereby the trust receives a direct share of the mine’s revenue.  

Investec Global Gold

“We’re very bullish on gold,“ says George Cheveley, manager of the Investec Global Gold open-ended fund. The portfolio has had a gold-focus been investing in global gold mining companies for over 25 years, aiming to give investors exposure to a diversified portfolio of global mining companies. Its aim is to achieve long-term capital growth primarily through investment in equities issued by companies around the globe involved in gold mining.

Cheveley comes from a steel and mining background and has worked in the industry for a number of years. Before he joined Investec, Cheveley was a market analyst at BHP Billiton, the world's largest mining company.

As Cheveley explains, he uses a multi-layered approach when it comes to assessing the companies he might want to invest in. “Mining is very capital intensive. People invest a lot of capital, so what we focus on is companies who have made good returns on that capital; in other words spent their money wisely and generated a lot of cash.

“We also focus on the management teams; have they delivered in the past? How good are they at doing their jobs?

“How much we invest in each company also depends on the macro environment. That includes how positive we are on gold prices; what risk we see coming through; which parts of the world they’re invested in; where their mines are. We have to take all of those risks into account.”

The manager can also invest in ETFs which invest in physical gold, with the freedom to invest up to a third of the fund in companies around the globe that are involved in mining for other precious metals and minerals.

He says Canadian Barrick Gold Corp is a good example of the sort of turnaround the industry has seen.

“Two or three years ago Barrick was in a terrible state. Really high cost, no strategy, not clear where it was going. In the last year that company has changed. We’ve seen a big turnaround in the way that company has operated and acted.”

ETFS Physical Gold

In the passive world, investors can choose between index trackers and exchange traded funds (ETFs). Trackers recreate an entire index and spread your money across the companies that make up the index so that the fund mirrors it. These provide instant diversification, as the fund is a replica of the index.

ETFs meanwhile are listed on a stock exchange like a share or an investment trust. These offer a wider choice of theme-based assets like gold, oil or currencies as well as being able to track a broader spectrum of indices and specific sectors. They are able to track an index cheaper than traditional passive funds can through a unique process which avoids the transaction costs associated with constant rebalancing.

Likewise, management fees are also lower as the fund is not responsible for the fund accounting. The associated brokerage company incurs this cost and the savings are passed on to the ETF holders.

Physical ETFs like ETFS Physical Gold (an exchange traded commodity, ETC) offer the advantage of investing in areas such as precious metals without owning the metal and investors can buy shares in smaller denominations than if they were to buy the physical asset itself. What’s more, while transactions in physical assets can take time to finalise, adding to or withdrawing from an ETF can prove a lot simpler.

ETFs can also offer welcome diversification by blending assets in the same class, as with ETFS Physical PM Basket which holds gold, silver, platinum and palladium.

More on BlackRock World Mining Trust

More on Investec Global Gold

More on ETFS Physical Gold

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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What you could do next

Read more about BlackRock World Mining Trust

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about Investec Global Gold

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about ETFS Physical Gold

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.