Investors who want an equity portfolio that approximates the Toronto Stock Exchange will hold about a third of their portfolio in resource stocks. The further breakdown is: materials stocks (includes gold, metals, forestry and other sub-sectors)—12 per cent; and energy stocks—21 per cent. Here are two specialty equity mutual funds that concentrate in the resource sector.
RBC Global Precious Metals Fund (Fund code Series A: RBF468(NL)) offers the most concentrated portfolio of the resource funds. That’s, of course, because it concentrates on precious metals—mainly gold. The fund holds 95.5 per cent of its assets in equities, 2.9 per cent in cash and 1.6 per cent in fixed-income securities.
Because this fund is so heavily concentrated in just one industry sector, we rate it a ‘High Risk’ fund. But it also invests in junior and mid-sized mining companies, adding a further element of risk. Exposure to such senior mining companies, such as Agnico Eagle Mines, Barrick Gold and Newmont Mining, is limited. The fund’s volatility rating is 39, making it the most volatile fund on our Mutual Fund Planning Guide.
Over the past year, the fund has gained 12.0 per cent, a fairly good result given that the price of gold has risen very little over this time and the average fund in the category has returned 2.4 per cent. That places it in the top 10 per cent of 33 precious metals equity funds. Over three years, its 10.8-per-cent compound annual return ranks in the top 14 per cent of the category.
We recommend this fund as a nearly pure investment in gold. Keep in mind, we’ll have to see a much stronger gold bullion market to get this fund performing really strongly, such as it did in 2016, when it gained 60.7 per cent. But with a top-quartile performance ranking for the past 10 years, we think this fund will perform relatively well in its category in most years.
A more diversified resources portfolio
RBC Global Resources Fund (Fund code Series A: RBF575(NL)) offers a more diversified portfolio concentrating on two industry sectors and a number of sub-sectors.
The fund currently holds about 52.2 per cent in energy stocks and 47.8 per cent in the natural resource materials sector. Holdings in the latter sector include chemicals, construction materials, consumer and packaging, metals and mining (encompasses gold), and paper and forest product stocks. That makes it much more diversified than RBC Global Precious Metals Fund. Plus, its volatility is considerably less. The fund also invests more heavily in major international companies. All this considerably lowers the fund’s risk compared to the RBC precious metals offering.
The fund has gained 16.0 per cent over the past year, reflecting a general recovery in the resource sector. That performance ranks in the second quartile of 93 natural resource funds. But the fund still has to recoup its 1.4-per-cent compound annual loss for the past three years, though this loss was still a second-quartile performance.
We recommend this fund as a buy for investors familiar with the risk inherent in an aggressive, resource-oriented fund. It represents an opportunity to buy a diversified portfolio of resource stocks at a time when they are still rebounding from a couple of difficult years in 2014 and 2015. But we caution the risk is still high.
Each of these funds offers its own characteristics, and is an attractive investment for the right investor.
Favourites in a risky sector
These two equity funds specialize in resources. They provide you the opportunity to over, or underweight your total portfolio in this volatile economic sector.
Many see resources as a hedge against future inflation. After all, if inflation erodes the value of money, including future dividends, what better protection is there than ownership of hard assets, even those as yet not mined?
What’s more, with Canada’s dollar so weak on international currency markets, stocks with assets like mines and metals, forest products and energy sources, normally priced in U.S. dollars, offer protection against any further currency weakness. That’s not to mention the demand for these products from developing countries.
But we caution these two funds are not for everyone. Most well-diversified funds invest in resource stocks along with equities from more stable sectors of Canada’s economy.
This is an edited version of an article that was originally published for subscribers in the May 19, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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