The performance of gold equity funds —or funds that invest in shares of gold mining companies — has failed to live up to the expectations of investors, who desired higher returns and effective portfolio diversification.
Despite firm gold prices and sterling performance by gold exchange traded funds (ETFs), actively managed gold equity funds have underperformed most fund categories by a wide margin.
The Rs 818-crore DSP Blackrock World Gold Fund and Rs 177-crore AIG World Gold Fund — the only two gold equity funds launched in 2007 and 2008 — have generated negative 11.5% (-11.5%) and negative 16.5% (-16.5%), repectively, in the past one year.
The underperformance of these funds comes at a time when gold prices have appreciated 27% and gold ETFs have returned an average 26% over the past one year. The two gold equity funds have also underperformed popular equity diversified funds and sectoral funds by a good measure.
"There's serious risk aversion to equities at this point of time... This is creating a weigh-down effect on gold mining stocks as well," said Pankaj Sharma, head of business development and risk management at DSP BlackRock Investment Managers.
According to senior officials at both DSP Blackrock and AIG Global Investment, gold equity funds had their best gains in 2009, when both funds gained nearly two times the net asset value of gold ETFs. It was risk aversion to equities market that led to the fall of gold equity funds, they said.
"Gold mining companies are doing extremely well. Most gold miners are posting decent growth in profit margins, thanks to buoyant gold prices. These companies are not getting good valuation support due to poor equities market," Sharma said.
Both DSP Blackrock World Gold Fund and AIG World Gold Fund act as feeder funds to Blackrock Global Gold Fund and Falcon Gold Equity Fund, respectively. Blackrock Global and Falcon Gold — the master or target funds —have gold mining companies like Randgold Resources, El Dorado Gold Corp,Yamaha Gold Inc, Silver Wheaton Corp, Newcrest Mining and Franco-Nevada Corp among others in their core portfolios.
"These companies are doing very well and there is great demand for these stocks in market. But because there is demand, investors sell these liquid stocks when portfolios are bleeding or when the risk aversion to equities is high," said a large distributor empanelled with AIG Global.
Shares of gold mining companies have also remained subdued due to frequent down-rating by market analysts. A 15% increase in mining costs and concerns over equities market globally, have prompted several institutional brokers to downgrade gold mining companies over the past few months.
"Also, gold mining stocks are high-beta stocks. It will over-react to overall market momentum at both sides," the above-quoted distributor said. The fundamental question that comes to mind is should investors park their money in gold ETFs or wait for a turnaround in gold equity funds.
According to money managers, ETFs are for investors who want returns similar to physical gold prices. Gold equity funds are normal equity schemes with negligible reference to physical gold prices. "Gold equity funds are for investors with a long-term view.
Despite firm gold prices and sterling performance by gold exchange traded funds (ETFs), actively managed gold equity funds have underperformed most fund categories by a wide margin.
The Rs 818-crore DSP Blackrock World Gold Fund and Rs 177-crore AIG World Gold Fund — the only two gold equity funds launched in 2007 and 2008 — have generated negative 11.5% (-11.5%) and negative 16.5% (-16.5%), repectively, in the past one year.
The underperformance of these funds comes at a time when gold prices have appreciated 27% and gold ETFs have returned an average 26% over the past one year. The two gold equity funds have also underperformed popular equity diversified funds and sectoral funds by a good measure.
"There's serious risk aversion to equities at this point of time... This is creating a weigh-down effect on gold mining stocks as well," said Pankaj Sharma, head of business development and risk management at DSP BlackRock Investment Managers.
According to senior officials at both DSP Blackrock and AIG Global Investment, gold equity funds had their best gains in 2009, when both funds gained nearly two times the net asset value of gold ETFs. It was risk aversion to equities market that led to the fall of gold equity funds, they said.
"Gold mining companies are doing extremely well. Most gold miners are posting decent growth in profit margins, thanks to buoyant gold prices. These companies are not getting good valuation support due to poor equities market," Sharma said.
Both DSP Blackrock World Gold Fund and AIG World Gold Fund act as feeder funds to Blackrock Global Gold Fund and Falcon Gold Equity Fund, respectively. Blackrock Global and Falcon Gold — the master or target funds —have gold mining companies like Randgold Resources, El Dorado Gold Corp,Yamaha Gold Inc, Silver Wheaton Corp, Newcrest Mining and Franco-Nevada Corp among others in their core portfolios.
"These companies are doing very well and there is great demand for these stocks in market. But because there is demand, investors sell these liquid stocks when portfolios are bleeding or when the risk aversion to equities is high," said a large distributor empanelled with AIG Global.
Shares of gold mining companies have also remained subdued due to frequent down-rating by market analysts. A 15% increase in mining costs and concerns over equities market globally, have prompted several institutional brokers to downgrade gold mining companies over the past few months.
"Also, gold mining stocks are high-beta stocks. It will over-react to overall market momentum at both sides," the above-quoted distributor said. The fundamental question that comes to mind is should investors park their money in gold ETFs or wait for a turnaround in gold equity funds.
According to money managers, ETFs are for investors who want returns similar to physical gold prices. Gold equity funds are normal equity schemes with negligible reference to physical gold prices. "Gold equity funds are for investors with a long-term view.
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