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Precious metals funds outshine index

FUNDS REPORTER

With the spotlight on a soaring gold price, investors should know that the captains of their precious metals mutual funds are earning their keep.

While active fund managers often have a tough time beating their benchmark index, nearly all in the gold group have creamed the iShares Canadian Gold Sector Index Fund over five years.

It has been worthwhile for investors to pay 2 to 3.5 per cent in fees to fund managers instead of opting for the cheaper exchange-traded fund (ETF) rival that charges half a per cent.

"It's a classic case of pound wise, penny foolish," said Peter Loach, managing director of fund research at BMO Nesbitt Burns Inc. "An ETF is cheap, but how good is the performance? Precious metals funds have slaughtered the iShares."

The iShares gold ETF posted an average annual return of 12.5 per cent for the five years ended Sept. 30 - well below a fund such as AGF Precious Metals, which posted a 31.2-per-cent return.

With gold surging $10.10 (U.S.) in New York yesterday to close at $833.50 - near its record 1980 high of $850, investors may wonder how to play the yellow metal, and why so many mutual funds have outperformed their index.

The problem with the gold ETF is that "it is wildly concentrated at the top," Mr. Loach said. "The top three companies [Barrick Gold Corp., Goldcorp Inc. and Newmont Mining Corp.] represent 50 per cent of the fund. That is a big albatross around your neck. If those three don't perform, that's it."

The ETF, which trades on the Toronto Stock Exchange, invests in 35 gold firms that are weighted by market value. The iShares Canadian Gold Sector Index ETF has kept its name despite a change last December to add foreign stocks by tracking the newly created S&P/TSX global gold index instead of the former S&P/TSX's subindex of Canadian gold stocks.

Precious metals mutual funds focus on gold plays, and can also invest in companies mining silver, diamond or platinum and related companies.

For instance, AGF Precious Metals has less than 1 per cent of its portfolio in Vancouver-based Gemcom Software International Inc., which develops software used by the mining industry, and Moncton, N.B.-based Major Drilling Group International Inc., which supplies drilling services to miners. Gemcom is up 33 per cent this year and Major Drilling 119 per cent.

"Even if the metals are down, somebody is still out there drilling and paying [Major Drilling]," said Charles Oliver, a fund manager with Toronto-based AGF Management Ltd. who runs the AGF Precious Metals Fund. "It is value added - a bunch of little things to improve the risk-reward characteristics. But the core will be on the production and development of the metals themselves."

AGF also tries to reduce risk by having more than 130 names in its portfolio. That kind of strategy came in handy in 2004 - the most recent time the volatile sector was awash in red ink - and Mr. Oliver's fund was the best performer, with a loss of only 8 per cent.

Benoît Gervais, a manager at Toronto-based Mackenzie Financial Corp., tries to justify his funds' higher fees by ferreting out potential winners among junior miners, whereas the ETF is focused on more and larger gold producers.

Looking for juniors can pay off, but comes with added risks. "Some [junior miners] will go to zero if you are not careful," said Mr. Gervais, co-manager of the Mackenzie Universal Precious Metals Fund and World Precious Metals Fund. "You need to do a lot of homework."

About one-third of Mackenzie portfolios are in junior miners. Two winners include Aquiline Resources Inc., up 543 per cent, and Andina Minerals Inc., which has soared 724 per cent, over the 22 months ended Oct. 31.

Mackenzie's higher fees also go toward making trips abroad to visit mining sites and hiring geological and other experts, Mr. Gervais said. "So there is added value there."

Independent fund analyst Dan Hallett suggested the performance of the unhedged iShares ETF has been hurt by having a lot of foreign currency exposure compared with Canadian precious metals funds. "Generally speaking, the broad-based indexes tend to fare best against active managers," but not with these narrow, specialty plays, he said.

Ironically, despite the underperformance, the iShares ETF is the largest fund in its category by a wide margin, with more than $1-billion in assets. And half of its investors come from the institutional world.

"It's low cost ... and they can easily trade it," said Geri James, a product manager at Toronto-based Barclays Global Investors Canada Ltd., which runs iShares funds.

The iShares

Cdn Gold sector index fund

Top holdings, as of Nov. 6, (XGD-TSX)

Barrick Gold Corp.21.99%
Goldcorp Inc.14.12%
Newmont Mining Corp.13.36%
Anglogold Ashanti-Spon ADR6.81%
Kinross Gold Corp.6.68%
Gold Fields Ltd-Spons ADR6.41%
Yamana Gold Inc.5.57%
Agnico-Eagle Mines4.20%
Lihir Gold Ltd-Sponsored ADR4.11%
Harmony Gold Mng-Spon ADR2.47%

Top 3 - 50% of fund stocks

Top precious metal funds performance ranked by 5-year return, as of Sept. 30

Fund NameAssets (Millions)MER5yr. rtrn3yr. rtrn1yr. rtrn
Mackenzie Univ Precious Metals ($U.S.) 31.40%34.40%41.40%
AGF Precious Metal6382.6131.20%27.90%32.70%
RBC Global Precious Metals731.12.0728.20%24.30%22.70%
CIBC Precious Metals1432.3726.30%28.70%31.30%
Sentry Select Precious Metals Growth256.72.6724.50%36.50%24.00%
Altamira Precious & Strategic Metal67.42.6722.50%19.00%22.60%
Mackenzie Univ. Wld. Prec. Metal Class85.12.6421.70%26.80%28.90%
Dynamic Precious Metals451.82.8821.40%26.20%24.80%
Sprott Gold and Precious Minerals616.82.8421.40%16.70%2.60%
Mackenzie Univ. Precious Metals443.32.4819.70%24.10%25.80%
Quadrus Mac. Univ. Precious Metals252.8719.30%23.70%25.40%
TD Precious Metals209.52.1719.20%23.10%20.90%
London Life Precious Metals (MF)79.93.4918.60%22.90%24.60%
iShares CDN Gold Sector Index1124.30.5512.50%15.80%18.10%
BMO Precious Metals832.3711.30%21.50%16.80%
FCMI Precious Metals Fund Inc.1.29.01-1.20%2.70%-20.50%
BDC Gold Bullion Securities S17.90%2.30%
Sprott Gold and Precious Minerals F1.773.20%
TD Precious Metals-A2.3320.50%

SOURCE: THOMSON DATASTREAM, ISHARES

Yesterday's close: $80.26, down 80 cents

© 2007 The Globe and Mail. All rights reserved.

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