Time to take profits in one of the fund stars of 2020?

One type of specialist fund has posted notable gains, but performance is starting to come off the boil.

It has been a roller coaster of a ride for investors in 2020, but among the market volatility and uncertainty gold funds shone.   

According to FE Analytics, MFM Junior Gold is the fifth best-performing fund year-to-date (up to 9 November), returning 78.5%. Two other gold-focused funds sit just outside the top 10 performers, with LF Ruffer Gold up 57.5% and ES Gold and Precious Metals posting a gain of 55.4%.

As a recent feature on specialist funds pointed out, gold funds should not form a core part of a portfolio. Instead, the role of a gold fund is to give investors diversification benefits (due to the precious metal’s defensive qualities) as a satellite holding. The bulk of a portfolio, the core (70% to 80%, typically), is often invested mainly in developed-market equity funds, with some exposure to bonds.

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Investors who had exposure to the yellow metal at the start of the year may now be thinking of converting some paper gains into real profits, as the announcement of a potential vaccine for Covid-19 appears to have taken the shine off gold.

As we reported yesterday, the iShares Physical Gold ETC (SGLN) lost 4.82% on Monday after Pfizer (NYSE:PFE) said that it had developed a Covid-19 vaccine that is 90% effective. 

In addition, and as noted by Saltydog Investor, the performance of gold funds has recently started to cool. 

Figures from FE Analytics show that on a three-month view, two of the three top-performing gold funds are showing a loss, with LF Ruffer Gold down 15.4% and ES Gold and Precious Metals losing 9.8%. MFM Junior Gold has produced neither gain or loss at 0%.

While the gold price reliably dims at times of stock-market euphoria, its safe-haven status has not been the only factor explaining investor interest. Since the end of March, when markets have largely been in recovery mode, the demand for gold has remained high. At the start of August, the gold price hit a record high, topping $2,000 an ounce. 

This is primarily because some investors are concerned that inflation, which gold has historically provided a hedge against, is set to return following promises from governments and central banks to “do whatever it takes” to support economies in the face of the Covid-19 crisis.

Investors in this camp, including co-manager of the Ruffer Total Return fund Steve Russell, argue that the build-up of enormous debt is too large to be tackled through tax revenues alone, and that a rise in inflation could help with the heavy lifting. 

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The prospect of higher inflation remains, which, in theory, could continue to benefit the gold price and the performance of gold funds and gold ETFs.

But in light of such strong gains in 2020 and the improvement in market sentiment following the potential vaccine breakthrough, now could be an opportune time to rebalance.

As a rule of thumb, exposure to gold should comprise around 5% of a portfolio, as it is a notoriously volatile investment.

Over the years, the precious metal has proved its value when it comes to reducing the impact of volatile markets on portfolios. 

Bear in mind, though, that gold does not have a yield, and does not generate cash flow or profit. Instead, its price simply reflects what the next person is prepared to pay for it.