Apr 7, 2008

Mutual Funds - Gold ETF - The gold rush is on

The gold rush is on

Bakul Chugan, TNN

Gold has been shining brighter, ever since the global markets turned blue. So, while most mutual funds suffered a drastic erosion in their net asset values (NAVs), DSPML World Gold Fund (WGF) saw its NAV touching an all-time high during the first fortnight of March '08. DSPML WGF is a feeder fund (also known as fund of funds), which invests in stocks of companies involved in mining gold, through its master fund ML International Investment Funds-World Gold Fund (MLIIF-WGF).

Thus, while DSPML-WGF is administered by Dhawal Dalal and Aniruddha Naha in India, the active management of MLIIFWGF lies with London-based fund manager Evy Hambro. PORTFOLIO:Being a gold fund, MLIIF-WGF primarily invests in stocks of companies engaged in mining gold. Since it is an equity fund, it does not hold the metal in physical form like gold exchange-traded funds (ETFs).

Moreover, the fund has not restricted its domain to the yellow metal alone; it also has exposure to equities of companies that mine silver, platinum and diamonds. While almost 70% of its portfolio is reserved for gold alone, the balance comprises a combination of other metals, with platinum being a major constituent. As on December '07, the fund's portfolio composition comprised gold (80%), platinum (9%), silver (5%), diamonds (1%) and cash (1%). According to the management, gold provides consistent returns and stability to the fund while silver is the most volatile among all precious metals. Being a global fund, MLIIF-WGF can invest in mining companies throughout the globe. Its geographical asset allocation as on February '08 shows a high concentration in North America (35%), followed by South Africa (18%).

MLIIF-WGF currently has an asset size of $7.9 billion (around Rs 31,710 crore), of which $434 million (around Rs 1,742 crore) is contributed by India through DSPML-WGF. PERFORMANCE: The fund's performance is strongly linked to global gold prices. So, how is this fund different from a gold ETF? According to the management at MLIIF-WGF, gold equities tend to outperform bullion over the long term.

This is because the ability of gold mining companies to increase production and efficiency over a period of time can yield dividends, which leads to an increase in share prices. Furthermore, corporate actions like mergers and acquisitions can give these companies higher valuations in the long run. According to MLIIF-WGF, the gold fund has generated 304% absolute returns during the five-year period ended February '08. Gold bullion during the same period gave 178% returns.

However, over a shorter time frame, the difference between the returns generated by gold bullion and this fund has been marginal. While gold yielded 29% during'07, DSPML-WGF gave a 32% return till December '07 since its launch in September '07.

lts returns as on March 26, '08 stood at 39%, after touching an all-time high of 63% on March 14, '08, when gold prices breached the Rs 13,000/10-gm mark. FOR INVESTORS: There is no return without risk. So, even though this fund invests in a different asset class, it is an equity fund and so, rates high on the risk scale. A strengthening US dollar, rise in real interest rates and broader equity market risks are the downsides associated with this fund. But as gold is known to have an inverse relationship with equities, this fund can be used to diversify the portfolio within the equity space.

Also, rising demand for gold, coupled with stagnating supply, has made the management bullish on gold prices over the long term. Hence, if gold prices continue to soar, this fund is bound to gain.

Source: Economic Times - Investors Guide