Specialty funds call for special tactics

The lessons of stock-market volatility especially apply to specialty funds. If you learn from them, consider any losses the cost of tuition at the school of Bay Street. You can, however, turn the odds in your favour for the next time.

The best approach to specialty funds, in our view, is to invest after a year or two of poor performance in the overall sector in question. That doesn’t guarantee success, of course. But it does reduce risk in these increasingly volatile markets.

Using such a strategy might see you holding a precious metals fund now. In 2011, precious metals funds declined 23.8 per cent; in 2012, they fell 14.7 per cent; and in 2013, they plummeted 47.1 per cent. Taken together, precious metals funds lost close to 66 per cent of their value over these three years.

Had you invested in a precious metals fund after two years of dismal performances in the sector, you would have invested at the beginning of 2013. And by the end of the year, you would have seen your investment decline by about 47 per cent.

Buy low and be patient

However, had you invested gradually in your precious metals fund, say, once a month, you would have limited your losses, and even purchased some units near their lows. What’s more, you would have seen an increase in the value of your 2013 investments, as, so far this year, precious metals shares have gain 12.1 per cent.

Mind you, results have continued to be volatile. Precious metals funds gained close to 31 per cent in the first half of the year, only to lost 16.5 per of their value in the third quarter.

Given the relatively modest gain in precious metals stocks this year, they’re still well below the highs achieved near the end of 2010. This may be justified by the sector’s fundamentals.

After all, the cash flows of gold companies remain limited, even though many industry players have significantly reduced costs and chopped capital expenditures. That means it could be difficult for many companies in the sector to generate free cash flow if the price of gold drops considerably below $1,200 an ounce. Currently, bullion is trading at around $1,234.

On the other hand, gold-stock valuations seem attractive, and there could be a rally in the sector if the bullion price finds a firm bottom. Then too, gold stocks may enjoy a seasonal rally early next year, as there is usually increased post-holiday gold buying in Asia.

A key argument for holding a gold position in your portfolio, of course, is the possibility that loose monetary policies will eventually trigger inflation down the road. For this reason investing a small portion of your portfolio in gold investments may be a good idea from a diversification standpoint. With this in mind, we continue to recommend RBC Global Precious Metals Fund (RBF468 (NL)) for gold exposure. The fund is a long-term buy if you want the above-average growth potential of a specialty fund and you can tolerate high risk.

 

Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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