The disconnect between the colossal gains in gold and the companies that mine and refine the element has been one of the most striking features in the investment world post financial crisis.
Over three years to the end of June this year gold equities rose a meagre 15.6%, compared to the highly impressive 79.6% gain in gold itself.
Despite the meagre returns in gold, this has not stopped active managers in the precious metals space delivering high levels of risk-adjusted returns.
The recently launched Citywire 1000 shows that it has been a good source of outperformance during that period with close to two thirds of all active managers beating their benchmarks. So who has done the best with investors’ money?
1. Fund manager: Fritz Eggiman
Fund: AMG Gold Minen & Metalle
A quick glance at the Citywire AAA-rated manager’s portfolio and it’s clear a lot of his outperformance has come from his significant stakes in bullion both gold and silver and healthy allocations to silver miners.
Specialist silver miners currently account for 17.2% of the fund, with a 4.5% stake in Mexico’s First Majestic Silver one of its biggest. The fund's top holding is a near 8% position in silver bullion itself.
Along with the global slowdown, one of the key factors in the disappointing equity performance of gold miners has come from their reluctance to reward investors with income.
However, that is a trend Eggimann has started to see change, with dividend payouts practises shifting and some even linking explicitly to the higher gold price itself. This has caused Eggimann to sell his direct gold holdings in favour of gold miners which now account for two thirds of the portfolio, compared to just 5% in the metal itself.
In terms of his geographical allocation he has a strong emphasis on Canadian producers. He has been underweighting the Australian based Newcrest mining, which has performed very poorly in 2012. Its absence from the top 10 will have significantly aided his performance.
2. Fund manager: John Hathaway
Fund: Tocqueville Gold
Next up isTocqueville's John Hathaway, manager of the Tocqueville Gold fund. Having returned 52.2% over that time it has really impressed in both absolute and risk-adjusted terms. This is much purer play on the gold market with 92% in gold related securities.
While 6% of the fund is invested directly in bullion the rest is in gold companies. It also has a much larger weighting to Canada than Eggimann’s fund, at 71%, which when you include the US brings the total allocation to North America to 87%.
In his latest investor note, the Euro Stars AAA-rated manager said the sharp rally in precious metals stocks in the third quarter of this year indicates that the correction, which started in August of 2011, has now played out, 'setting the stage for a powerful new bull market for precious metals and related mining shares'.
However, on the gold price itself he urges caution. ‘Gold sentiment has improved substantially from historic lows earlier this year, indicating the possibility of a short-term pull back’.
3. Fund manager: Robert Cohen
Rounding out the top three we have the Dynamic Gold & Precious Metals fund run by Robert Cohen of Canadian group Dundee Wealth which has returned 47% over three years to the end of June.
The first thing that strikes you about the Euro Stars AA-rated manager's portfolio is that its chief holding is in fact cash, with 8.3% in the US dollar. This is the highest liquidity of the top ten precious metals funds on the list.
Canada once again takes the largest share, but Australia is also well represented at 30% of the portfolio. Both Perseus Mining and Regis Resources are in the top ten holdings with stakes of 7.2% and 6.1% respectively.
These are by no means the largest Australian producers and that is a clear theme in the portfolio the average market cap is well below the index. With a weighted average market cap a quarter the size of the market average.
There is a perception that these low cost producers are better value than their larger peers and that has translated into stock market performance over the past 18 months with Regis in particular having a very strong period.
Indeed this aversion to the largest companies exists throughout the portfolio, with Newcrest and Barrick Gold absent from their top tens and Newmont Mining an underweight position in Tocqueville.
Note: Citywire 1000 is a ranking of the best individual fund managers, based on their positive total return and risk-adjusted performance over the last three years up to June 2012.