PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Mutual-fund investors are famous for rushing into the funds that top the short-term performance rankings. Yet, in the first quarter of 2002, most of them breezed right by the top-performing category -- precious metals.
Buoyed by the rising price of gold, that group beat other equity-fund categories by a mile -- gaining 37% through the end of March, while the Standard & Poor's 500-stock index and the average U.S. equity fund were flat. The first quarter's next-best performing group of stock funds focused on emerging markets. It gained a comparatively tepid 12%. Over the past year, the return of the precious-metals category looks even better. The group gained an average of 72% in the last 12 months, while the average stock fund is up just 2% in that time.
Yet managers of precious-metals funds say they have seen only a moderate increase in fund flows. Research from AMG Data Services shows that total assets in its gold and natural-resources fund category -- a tiny sector in comparison to other mutual-fund groups -- have grown from $4.3 billion in the beginning of the year, to $5.2 billion by Apr. 10. Given the degree of outperformance, "these numbers indicate a degree of apathy toward the sector," says Bob Adler, AMG's president.
BACKS TURNED. That lack of interest shows up in other ways as well. Frank Holmes, who leads the team that manages U.S. Global Investors Gold Shares (USERX
), which gained 84% in the past year, says at a recent investor conference only about 20 people showed up for the talk on gold funds. Yet the room for U.S. Global's Accolade Bonnel Growth Fund (ACBGX
), which fell 3% in the past year, was packed with some 500 people.
It's understandable why mutual-fund investors have turned their backs on gold funds so far. Prior to the past year, the metal was in a 22-year bear market that burned many gold investors. Prices reached a high of $860 an ounce in 1979, only to tumble to a low of $252 in early 1999. It then bounced up to $300, only to fall back to the $250 range in early 2001.
During the '80s and '90s, price spikes lured investors to buy a gold fund, and they then lost their shirts as gold dipped back down again. Gold funds, which for the most part buy the stocks of mining companies, such as Barrick Gold (ABX
) and Newmont Mining (NEM
), are typically more volatile than the metal's price by about 3-to-1. Despite the recent gains, in the past five years gold funds have lost an average of 5% a year.
CALAMITY INSURANCE. "Even though it has done well lately, I still don't see a great role for gold in a portfolio," says Morningstar's Christopher Davis, pointing out that efforts to time the market usually backfire, while even long-term investors have met with severe losses. He thinks better ways exist to protect against inflation and hedge investments -- the traditional reason for buying a gold fund. "The only convincing reason to own one is as an insurance policy against calamity," he says.
Indeed, many precious-metals fund managers and analysts still say the primary motivation for buying a gold fund is as a defensive play. Fund managers are optimistic that gold will climb to $350 or even $400 an ounce over the next year, but they warn that at its current $300, climbing higher will be a tough slog in the near term.
Gold stocks have been bid up so high that many investors who got in early are likely to take profits. "Gold shares have already risen about 70% in the last 12 months," says Prescott Crocker, who manages Evergreen Precious Metals (EKWAX
) fund. To get in now, he says, investors need to really believe that the U.S. dollar is going to weaken and inflation rise. "It's a search-your-soul kind of thing. You have to be convinced."
SMOOTHER RIDE. Bill Martin, manager of American Century Global Gold Investors (BGEIX
), says his fund makes the most sense as a hedge for very conservative, fixed-income investors because it does well when everything else doesn't. "It really helps smooth out the ride," he says. Holmes recommends that investors put no more than 5% in a gold fund and do it by dollar-cost averaging, or putting in a small amount at regular intervals, to avoid buying at peak prices.
Despite his general distaste for gold funds, Morningstar's Davis does have his favorites in the group. Among the pure-play gold funds, he recommends American Century Global Gold Investors. He cites its seasoned manager (Bill Martin), low expenses, and its one-year return of 98%. Two precious-metals funds he likes are Vanguard Precious Metals (VGPMX
) and Oppenheimer Gold & Special Minerals (OPGSX
), which have low expenses and include stocks related to metals like palladium and platinum, which are mainly used in industry. The exposure to other metals can reduce volatility a bit, says Davis.
Individual investors have a history of getting into gold funds at just the wrong time. The fact that they aren't pouring into the sector now indicates to U.S. Global's Holmes that the rally in the metal has further to run. But it also may just indicate that most investors have already learned their lesson.
Stone is an associate editor of BusinessWeek Online and covers mutual funds in her Mutual Funds Maven column Edited by Patricia O'Connell
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
