Gold Equity Fund Management
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Gold Equity Fund Management Gold Equity Fund Management Document Transcript

  • Gold Equity Fund Management Cyrille Urfer Head of Fund Research & Multi Management, Lombard Odier Darier Hentsch & Cie Thank you and good morning. My presentation will not address how to select gold stocks but how and with whom we and you should be exposed to this market. Like a geologist, we aim to detect ores and in our case, we are looking at the fund manager’s skills. Like a developer, we aim to design solutions for our clients. As a manager, we have to allocate the wealth of our clients efficiently to generate above average returns. Since the decade long bear market of the 1990s, commodities as an asset class have been rediscovered by market participants including traders, speculators and more recently investors including institutional investors. There has been a recent burst of euphoria. The This attribute is very popular in bull markets, but old custom of keeping coins and bullion buried works against investors in falling markets. It is in the garden appears to have died out. The worth noting that gold stocks have not reacted to amazingly creative financial industry is the recent sharp uptrend in the way we might recruiting new fans for investments such as have expected. Are recent developments a sign structured derivatives of which we have seen sent by the market? I shall allow you your own some very clear examples in the previous answers there. presentation: ETFs, certificates, options and others. All of these products have eased access for most investors and encouraged others to join Gold equities: definitely more volatility the party. The fund management industry has But look at recent developments! kept out of product creation and been active in offering new funds to investors, either in former ( MSTD 251 , REBASE ) PHLX Gold/Silver Sector (XAU) Index, Close - United States [Max: 32.25, Min: 4.15, Last: 26.44] ( MSTD 251 , REBASE ) Precious Metals Gold Spot, USD/troy oz, Close - World [Max: 24.03, Min: 1.30, Last: 24.03] specialised hedge funds or more common long 30 only strategies. 25 20 There are differences between investing directly 15 in gold and in gold equity. First, equities have a 10 greater return potential than gold. This is what 5 we are referring to when we talk about 0 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 optionality to the gold price. Please see important information at the end of document Department or service provided I Author I Date I 6 Secondly, gold stocks are indeed more volatile Gold equity returns are far superior than gold. Again, recent developments are Yes, due to the optionality to gold price, but… worrying, as gold has been as volatile as equity. ( REBASE ) PHLX Gold/Silver Sector (XAU) Index, Close - United States [Max: 254.64, Min: 63.20, Last: 215.33] ( REBASE ) Precious Metals Gold Spot, USD/troy oz, Close - World [Max: 210.48, Min: 73.88, Last: 190.81] 250 Some of the former speakers have mentioned the benefits of gold and gold equity in terms of 200 diversification. It is not surprising that these 150 two types of investments are providing diversification, as we can see in an analysis of 100 the correlation of rolling gold stocks and gold 50 price to an equity index, the S&P 500. '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 Please see important information at the end of document Department or service provided I Author I Date I 5 The LBMA Precious Metals Conference 2006, Montreux Page 27
  • Gold Equity Fund Management Cyrille Urfer volatile. That is a risk but also creates opportunity to add value in the long run. Gold as a provider of diversification! Clear benefits due to negative correlation How to benefit from a secular bull market ( %1M , REBASE ) PHLX Gold/Silver Sector (XAU) Index, Close - United States [RSquare: 0.02, Correlation: 0.14] ( %1M , REBASE ) Precious Metals Gold Spot, USD/troy oz, Close - World [RSquare: 0.03, Correlation: -0.17] 40 Long-term commitment and short-term opportunities 30 USD in % PERFORMANCE IN % 600 550 USD base 20 500 450 Period 25.06.1999 - 19.05.2006 400 350 10 300 250 200 0 150 Manager 1 533.59% Manager 2 486.93% Manager 3 435.51% 100 Manager 4 359.76% -10 214.22% Manager 5-7 202.59% 184.83% 50 FT WLD 043GOLDMINES 180.58% -10 -5 0 5 10 ( %1M , REBASE ) Standard & Poors 500 Composite Index, Price Return, Close - United States Please see important information at the end of document 0 Department or service provided I Author I Date I 7 -25 1999 2000 2001 2002 2003 2004 2005 2006 Source: LODH Research Please see important information at the end of document Department or service provided I Author I Date I 10 Again, the best provider of diversification remains physical gold. One explanation is the greater influence of financial market fluctuation as well as the impact of management decisions Several decisions have to be made in order to associated with any company. capture this value. The first is to position your portfolio for that secular bull market. This We have looked at the different investment structural alpha is crucial for the long term options and characteristics of gold stocks performance, as can be seen in the strikingly compared to gold. I would now like to turn to the different performance between the index, the mutual fund industry that all of us have access to group of funds close to it which are index like as investors. Since the end of the bear market for managers and the best performer. I will discuss gold price, at least 12 new long only mutual structural alpha later in my presentation. funds have been launched, expanding the universe by one third to a total availability to The second is to be nimble enough to allocate European investors of 48 funds. I refer only to your wealth tactically to the most appropriate the long only strategy and do not include the fund and managers. Different types of strategy alternative and long short type of funds. are frequently associated with a specific part of the market: gold or equity, small cap or large cap, aggressive or defensive managers. Gold equity fund universe 48 funds of which 12 launched since 1999, representing USD 4.2 bn Best way to take advantage of the different phases 10000 Rule-of-thumb decision grid 1000 AuM in USD100 Gold Equity Large cap Small cap 10 Phase 1: 1 24.06.1999 23.06.2000 23.06.2001 23.06.2002 23.06.2003 22.06.200422.06.2005 Launch Date Phase 2: The sum of all the assets under management of these funds is Phase 3: worth more than USD 35 bn. Source: LODH proprietary Research & Morningstar Phase 4 : Please see important information at the end of document Department or service provided I Author I Date I 9 Aggressiveness – leverage to gold price Please see important information at the end of document Department or service provided I Author I Date I 11 One question remains: does this greater depth also improve the breadth of this universe? With only 48 funds, are we able to get differentiated Different parts of the market perform well in products to build an efficient portfolio? These different market phases. In phase one, gold and two dimensions – breadth and depth – are indeed large cap equity companies perform the best. In key factors when considering whether to invest phase two, equity out perform gold prices and in equity funds since they allow you to capture small caps outperform the larger ones. During short and medium term opportunities that arise phase three, correction, gold prices are less during a secular bull market. We have seen that volatile and protect your assets on the downside the gold price and gold equity behaviour is as well as the large cap types. Finally, the last phase we have experienced since the May The LBMA Precious Metals Conference 2006, Montreux Page 28
  • Gold Equity Fund Management Cyrille Urfer correction was highly geared towards small cap Do you really believe that the current universe of exposure as well as gold. You saw earlier that fund managers provide you with enough gold has performed very well compared to differentiating factors to adjust your portfolio equity during the last phase of that bull market. and your allocation to the different managers to This means that as I stated earlier, each phase adjust the risk return parameters of your current corresponds to a type of investment and exposure to the gold equity exposure? therefore the managers have to be selected accordingly. My answer is yes. Again, as for the mining industry, you need to know your managers and Our activity is not that far from that of the the competition in great detail and actively mining industry. The search for new properties, allocate between these different managers to the exploitation and production of existing mines adjust your portfolio according to your vision. and the management of such companies require We have changed the allocation between the a strong commitment, proven processes and a three managers we have selected. great deal of experience. All of these attributes are what we are looking for year long when we select fund managers and manage multi manager Our solution portfolios. LODHI World Gold Expertise Tocqueville Van Eck As a firm, we have identified the benefits – 3Q05 Large/Mid >$2bn 18% 37% 17% diversification – but also the growth potential 37% of commodity prices, including gold. We have LODH reintroduced gold and related commodities as Small Cap $300mn-2bn specific asset classes within our private client 44.5% asset allocation scheme. We then had to work Today 32% 13% out how to implement this decision. We Micro instinctively and immediately recognised that we <$300mn Value Tocqueville Konwave Growth needed specialised managers to address this Please see important information at the end of document Department or service provided I Author I Date I 15 asset class. The three managers are managing four different Our convictions Leverage on the upside, mitigate the risk on the downside strategies; one of them is managing both large cap and small cap portfolios. These different OPPORTUNITY Bias towards smaller caps (new reserve discovery, new mines in production), offering “optionality” to managers have different ways of managing the gold price. money. Some are more geared towards growth characteristics; others are more geared to large RISK Diversification is key … and/or small caps. The combination of these No outsized market cap exposure. managers provides diversification. Access to gold experts by outsourcing specialist ACCESS mandates to a multimanager concern. LODHI World Gold Expertise Please see important information at the end of document Strong recovery: 30.09.2005-30.04.2006 Department or service provided I Author I Date I 14 LODHI World Gold Expertise: 64.6% MLIIF World Gold: 49.2% Gold 39.0% FTSE Wld Gold Mines: 32.8% As we were convinced by the secular nature of Large caps are the the investment theme, we have designed our first winners of the gold rally … own investment vehicle based on the following Full upside convictions and features. First, leverage to the participation … smaller caps begin Large caps suffer. Small caps + cash are rewarded … upside with a strong bias on small cap. This is to attract interest … what I referred to earlier as the structural alpha. We have mitigated the risk through a proper Please see important information at the end of document diversification and active management. Finally, Department or service provided I Author I Date I 17 we use best of breed managers in that field with segregated mandates but under one single fund and brand. As an example, if I look at these different portfolios and holdings, a very small number of I asked a question regarding the depth and stocks are held in each of these manager’s breadth of the gold fund universe. I have portfolios. Despite the tiny universe of stocks in answered the depth part but not yet breadth. the mining industries and markets, there is little The LBMA Precious Metals Conference 2006, Montreux Page 29
  • Gold Equity Fund Management Cyrille Urfer overlap of stocks. For us this is a sign that you To conclude, we believe that we are in a secular can find managers, portfolios and exposure that bull market, as does my colleague in the first are highly differentiated. presentation. We have positioned our portfolios to benefit from this market, but we are also aware that volatility will be part of the road to Forecast range above average performance. We have mitigated Analysts’ annual forecasts Forecast average Actual average price that risk by diversifying our portfolios through Source: London Bullion Market Association; 607 different managers and different ways of the LBMA makes an annual forecast based on over 20 market participants (see http://www.lbma.co.uk) 534 selecting stocks in that universe. 482 Thank you very much. ■ 471 450 476 2006 Forecasts 417 402 436 409 2005 Forecasts 395 363 2004 Forecasts 374 345 2003 Forecasts 312 Please see important information at the end of document Department or service provided I Author I Date I 18 The LBMA Precious Metals Conference 2006, Montreux Page 30