How a Top-Performing Gold Stock Fund Has Played the Precious Metals Rally

Gold stocks are notoriously volatile. But even with a portfolio that concentrates its bets on a relatively small number of companies, the Gold-rated C$621.9 million Dynamic Precious Metals Series F fund has built a long track record of outperformance.

The fund’s managers look for companies with strong histories of growth and acquisitions and high returns on assets among precious metals. The portfolio holds just 30 stocks, the top two names make up nearly 25% of the fund, and the top ten stocks are nearly 70% of its assets.

Among the fund’s top holdings:

  • Spartan Resources SPR
  • Kinross Gold K
  • Bellevue Gold BGL

The strategy has paid off over time. In a year when a surge in the price of gold has lifted the stocks of many mining companies, the fund is up 44.22%, well ahead of the 35.22% return on the average precious metals fund and some 18 percentage points ahead of the Morningstar Global Gold Index. That ranks it near the top of the precious metals equity category.

Over the last three years, the fund’s performance has been softer, landing it in the 66th percentile for the category, thanks to a rough 2022, when it fared much worse than its peers. However, the fund’s five-year returns put it back at the top, with an average annual return of 17.13%. That’s well ahead of the average annual return of 11.9% for the category and 9.5% for the index during that time.

Gold Prices Rally, Lifting Precious Metals Stocks

The fund has been helmed since its launch in 2007 by Robert Cohen, vice president and portfolio manager at Dynamic Funds, a unit of Bank of Nova Scotia BNS. Cohen works alongside Emily Griffiths, a portfolio manager at Scotia Global Asset Management who co-manages funds across the Dynamic and ScotiaFunds brands.

Precious metals stocks tend to closely track movements in the price of the underlying commodities, which also include silver, platinum, and other metals. Gold has staged a significant rally in the past year, hitting a record high in late October. Gold futures prices are up roughly 37% over the past 12 months.

Cohen points to fiscal policies in major economies as fueling demand. “Monetary policy is bad, but fiscal policy in many countries is atrocious too,” he adds. He points to the US budget deficit as a prime example. “We are pushing the monetary system to limits that have not been tested before. People are nervous, so they buy gold stocks for leverage to the underlying bullion price. As profit margins increase, you get more leverage. And since gold companies are in the business of discovering gold, you can get the upside from that, too.”

While the fund can buy gold bullion or gold certificates, its focus is picking stocks. The team scans both the Canadian and Australian markets. Cohen argues that after the Toronto Stock Exchange, Australia is the most important market for gold stocks. “By opening our minds to pick the best opportunities in Canada and Australia, we can construct a portfolio that, in our opinion, has a great risk-reward characteristic.” From a geographic standpoint, Canadian stocks account for 63% of the fund, while Australia accounts for 35.5%, plus about 2% cash.

A Highly Concentrated Portfolio

The fund’s portfolio is highly concentrated with only 30 stocks. The top 10 stocks account for 72% of the fund, with a few holdings that make up as much as 11.5%-13.0% of the portfolio. However, its holdings are spread across the spectrum of market capitalization. About 39% is held in stocks with a market cap of C$1 billion-C$5 billion, 35% in mid-to-large-cap names with a C$5 billion market cap, 13% in a market cap of C$500 million, and 11% in a C$100 million market cap. Turnover is low, at 33%.

Cohen acknowledges that the gold business has a reputation for volatility. He points to Newmont NGT, a senior gold producer he does not own, which was recently punished for missing its quarterly earnings, with the stock falling 15% in one day. “That’s unusual for a large-cap company,” he says. “But things can go bump in the night. Our job is to avoid investing in companies that we feel are risky. It could be the biggest gold company in the world, but it [might still not] measure up to our standards, what we are looking for, or what we prefer.”

Looking for Stocks With Strong Growth and Return on Assets

Cohen and his team look for attributes such as astute management with a good track record of growth and acquisitions and high return on assets. Take Spartan Resources, an Australian junior firm that is the top holding in the portfolio, at 13%. Acquired about 14 months ago at A$0.44 per share, the stock now trades at A$1.41 per share. The company has a market cap of A$1.5 billion (C$1.36 billion). “We’ve done well with it,” says Cohen.

Spartan’s management took over the Dalgaranga mine, an open-pit mine in Western Australia, and turned it into an underground mine. “They have already put together a fairly significant resource of 2.4 million ounces, at a really good grade. So this is a standout in terms of the geology,” explains Cohen, who visits Australia several times a year to research local firms.

“Basically, all the resources they are finding are in one area,” Cohen says. “As they go deeper, the grade is going up, giving them better economies of scale. And as they go deeper, that will fill in the ounces we think are there. I see a lot more opportunity as they continue going deeper in the orebody. The gold they found isn’t going to disappear. And they are finding more. I see the risk very skewed to the upside.”

Another top holding is Snowline Gold SGD, a Vancouver-listed firm active in the Yukon with a market cap of C$825 million. “They have 7.3 million ounces of gold,” says Cohen, adding that there should be relatively little waste compared with the gold that will be extracted. “When a lot of companies mine six tons, one ton is processed and five tons are set aside as bearing material. But this will be a nice, tidy operation.” He notes that it is encouraging that another mining company, B2Gold BTO owns almost 10% of Snowline’s stock. “It’s good when a larger company identifies it at an early stage and wants to share in the upside.”

Acquired in early 2023 at about C$1.90 per share, the stock is now trading at C$5.35. Cohen admits that the firm’s challenge is building infrastructure in the wilds of the Yukon. “We expect it to move slowly. But as they continue down the path of defining the resource, and doing the permitting, engineering, and financing, they should do very well. The stock is extremely cheap, but for a reason.”

Another favorite is Founders Metals FDR, a Vancouver-listed exploration firm with a 20,000-hectare parcel of land in Surinam. “They have drilled about 120 holes and yielded decent grades. This looks like it will be a multi-million-ounce site with all the different discoveries combined,” says Cohen. “They have also attracted Chris Taylor, a seasoned geologist, to the board of directors. He’s very picky, like me.” About 16 months ago, Dynamic bought 10% of the company at C$0.40 a share. The fund owns 17% of the firm, and its stock now trades at C$4 per share. “That’s pretty good in just 16 months,” says Cohen, who admits that he’s also owned a few losers and sheds about one to three names a year.

Going forward, Cohen is reluctant to forecast the price of gold, but he sees a supportive backdrop in government policies. “The gold price has exceeded my expectations for this year,” he says. “And I can take that bet on lousy government monetary and fiscal policy all day long. There is no way these governments will suddenly take a smart pill. That’s good for gold.”

And if the stock rally is sustained, Cohen believes that’s also good, because companies will have more capital for exploration. “More exploration could turn into more drill results,” he says. He shies from identifying cycles and simply urges investors to take a buy-and-hold approach. “And more drill results can turn into higher market capitalizations for the companies that make exceptional discoveries. Our goal is to own those.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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