When contemplating a gold-related investment, many investors wonder whether they should buy the commodity or the companies that mine it. For Robert Cohen, manager of the Dynamic Precious Metals Fund, the answer is clear.
"When you own a brick of gold, you own a brick of gold," he says. "But if you own a gold-mining company, they have lots of ability to expand their resource base - by drilling or by acquiring junior companies or whatever - which could actually provide way more upside than the gold price alone."
He speaks from experience. The $1-billion Dynamic Precious Metals Fund, which has a 95 per cent exposure to the gold sector, has earned top ratings from Lipper Inc. for consistent returns: The fund boasts compounded gains of 34.4 per cent a year over the past five years, to the end of October.
Even with gold's amazing run over this same period, its compounded returns have lagged at about 25 per cent a year - and that's in U.S. dollar terms. In Canadian dollars, gold has gained just 20 per cent a year.
Mr. Cohen's fund has also walloped his peers. This year alone, the fund has gained nearly 54 per cent, or about 12 percentage points more than the average Canadian precious metals fund. The fund's five-year returns have beaten its peer average by about 10 percentage points.
The reasons for this success? Mr. Cohen has focused on many of the smaller, lesser-known companies, rather than senior gold producers like Barrick Gold Corp. Some of his top-equity holdings, in terms of their weighting within the fund, consist of San Gold Corp. , Perseus Mining Ltd. and Sabina Gold & Silver Corp. - names that might not be synonymous with gold stocks among most investors.
According to Lipper, companies in the Dynamic Precious Metals Fund have an average market capitalization of $4.7-billion, well below the $7-billion average market cap for all precious metals funds. To put this into perspective, Barrick's market cap is about $50-billion.
"For years, people have been upset with the seniors," Mr. Cohen said. He points to Newmont, which has been plagued with operating problems. Meanwhile, Barrick had capped the upside of gold prices with a hedging strategy in the earlier stages of the gold bull market (it has since shifted strategies).
Smaller firms tend to be more nimble. Lipper noted that companies in the Dynamic fund are growing their earnings at a 23-per-cent clip on average (on a per-share basis), compared to 17-per-cent earnings growth among the fund's peers in the precious metals group. This faster growth can translate into spectacular gains, in some cases.
"There are all sorts of exploration companies where you could literally go up fivefold or tenfold in a matter of weeks," Mr. Cohen said. "And senior companies weren't going to do that."
Of course, small stocks have a downside, too: They tend to be volatile, which can translate into a higher-risk fund. Sure enough, the Dynamic fund's standard deviation - which is a common measure of risk - is the second-highest among its peers over the past three years. But the fund's Sharpe ratio, which takes performance into account, is the third highest.
In other words, the fund has "delivered a lot of return for incremental risk," said Jeff Tjornehoj, head of Lipper Americas Research.
Meanwhile, Mr. Cohen points to his buy-and-hold strategy for at least part of his fund's success.
"I believe in investing in my companies," he says. "I don't think that buying and selling, and buying and selling, is a useful activity. I think a buy-and-hold strategy is a more useful way of investing your capital, it's more tax efficient and trading costs can be very high."
Still, that doesn't mean that Mr. Cohen is refusing to modify his positions to take advantage of new developments. While he's done well with smaller companies in recent years, he notes that some of the senior producers have been ignored so long that they are starting to look appealing again.
Meanwhile, he believes there is plenty of upside left in the price of gold. He thinks it could hit $1,800 (U.S.) an ounce within 12 months - a 28 per cent gain over November's record high of about $1,400 - if trade imbalances continue to build and the world's central banks continue to erode the value of paper money by essentially printing money.
"We've kind of reached the time of reckoning, where now what do we do?" he says. "Look at the mess we're in. It's not something that can be solved easily or quickly."
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