Gold equities are leveraged to the gold price and typically outperform the physical metal in a rising gold market, while underperforming in a falling gold market, giving investors useful options at the portfolio level.
Gold equities offer many of the same qualities as gold, including having a low correlation with general equities and being «counter-cyclical» in nature, while bringing other complementary features to a portfolio, Ninety One's George Cheveley said in an interview with finews.asia.
«Even if the gold price remains in its current range, gold companies are enjoying very high margins and producing, in most cases, very high levels of free cashflow,» Cheveley, who is the portfolio manager of Ninety One's GSF Global Gold Fund, explained.
The fund invests in equities issued by companies around the globe involved in gold mining, with the flexibility to invest in physical gold and other precious metals (indirectly via exchange-traded commodities), and focuses on companies with responsible strategies, good management teams and quality assets.
Potential Winners
Gold companies are currently in their best state in over 20 years, Cheveley said, citing low oil prices and less pressure on labor markets. Gold mining costs have fallen in recent years and margins are on average the best the industry has experienced since 1980.
«Cash generation continues to improve rapidly for many companies, which are responding by lifting dividend payouts and/or share buy-backs,» said Cheveley.
While the industry trend is towards resilience, responsible spending and shareholder returns, Cheveley said that individual gold companies that are taking different approaches give active investors the chance to focus on those they believe will outperform in different market conditions.
Sustainable Income
While physical gold offers no income, gold equities increasingly have done, in the form of dividends, Cheveley pointed out, noting that dividends per share of the top five gold companies have doubled since 2015.
He explained rising dividends as a result of a strategic shift in the gold industry away from «more mines, more ounces» and towards resilience, less debt and shareholder returns.
«Looking forward, while there is uncertainty in the macro outlook, for us, there remains certainty in the importance of gold and gold equities as a strategic portfolio holding,» Cheveley said.
