Gold mining funds, which invest in shares of mining companies, have grossly underperformed the returns of that of gold ETFs in the past one year. DSP BlackRock World Gold and AIG World Gold fund gave one-year return of 19.2% and 19.1%, respectively against 45-48% by gold exchange traded funds(ETFs). Even over a three year period, gold mining funds have given lesser returns than that of gold ETFs with the former giving a compounded annualised return of 20-25% compared with 32-34% for gold ETFs.
DSP BlackRock MF, executive VP & head of business development & risk management Pankaj Sharma said, “In the recent gold price rally such divergence can be attributed to the widespread sell off in equity markets as a risk aversion trade and even gold equities irrespective of their strong underlying getting engulfed in the same.”
AIG declined to comment on the issue. Gold ETFs are exchange-traded funds which tracks international gold spot prices. Currently, both DSP BlackRock World Gold and AIG World Gold fund are available for investment for Indian mutual fund investors and are structured as fund-of- funds and they invest into the global funds. While DSP BlackRock World Gold invests into units of BlackRock Global Funds and World Gold Fund, AIG World Gold Fund invests into units of Falcon Gold Equity Fund. These funds in turn invests in listed shares of gold production, processing and marketing companies across the world.
According to experts, the share price of gold companies haven’t moved in tandem with that of gold for several reasons. Firstly, the cost of mining gold has increased. An average cost of extracting gold from the ground has gone up from over $200 per ounce to $850 per ounce. This in turn has hit margins of producers, given that they have to spend more on ageing mines, labour and equipment. Secondly, hedging by producers have turned counter-productive. Gold producers hedge in the forwards market by selling forward to ensure smooth cash flows. But rising gold prices hurt their profit.
Interestingly, fund houses, which sell gold mining funds mention that gold mining stocks usually outperform Gold and Gold ETFs during periods of rising gold prices. And that as the price of gold rises, profits of gold-mining stocks tend to rise even more that that of gold in percentage terms.
However, historically speaking the case has been the reverse. According to bloomberg data, FTSE Gold Mines index has given lesser returns than that of gold across all time horizons including during the times when the gold prices were rising. In the last ten years, FTSE Gold Mines index has given an absolute return of 392% as against 584% for Gold. Since February 1993 (FTSE data not available earlier), FTSE Gold Mines index gave a return of 292% compared with 472% for Gold.
As of May 31, DSP BlackRock World Gold Fund’s top investments were Newcrest mining (9.7%), Goldcorp (7.7%), Kinross Gold corp (7.3%) and Fresnillo (6.4%). Interestingly, a sectoral break-up of its investments reveals it has invested 13.4% in stocks of firms in business of Silver, 4.2% platinum and 0.5% diamonds. Silver has give a return of 138% against 52% for gold in the past one year. As of June 30, there were only two gold mining funds in india. DSP BlackRock World Gold, with assets worth R1,062 crore, is market leader.