Legacy of the financial crisis contributes to impressive performance of Baker Steel Gold.
CF Ruffer Baker Steel Gold has generated impressive returns over the past year, driven by the rising gold price and the managers’ active stock selection.
Launched in 2003, David Baker and Trevor Steel’s £366m vehicle, which sits in the IMA Specialist sector, is up 206.8% over five years to 4 May. On a three-year and one-year view the fund is up 58% and 85% respectively.
The portfolio aims to achieve capital growth over the long term by investing in undervalued gold and precious metal-related companies. It does not invest in physical commodities.
Steel describes Baker Steel Capital Managers as “very bottom-up in our approach” and all research is carried out in house. The investment team of five shares a background in geosciences.
The past 12 months has been particularly strong for the fund. Steel says performance has been driven primarily by stockpicking, pointing to Archipelago Resources, which was the fund’s largest holding, as an outstanding contributor to performance. It remains one of the fund’s top 10 holdings, accounting for 3% of the portfolio at 30 April.
Strong performance has also come from the legacy of the global financial crisis.
“A year ago we saw gold shares become very undervalued relative to gold,” Steel says.
“It was an environment of significant mispricing and pricing anomalies between gold stocks, That was no doubt some of the legacy of the rout we saw in equities in 2008.
“It was a good environment for stockpicking, and we have seen some catch up of the de-rating that had existed.”
The managers take a longer-term investment horizon with core positions typically held for two to three years.
Steel explains: “Our specialism in the sector gives us an advantage in identifying companies that are bringing new gold projects through to production.
“You need to do more homework on those to assess their quality and the risks in them. As a specialist we have done particularly well in this part of the market, which in our opinion offers the most attractive long-term returns in this space.”
Ruffer Baker Steel Gold’s main competitor is BlackRock’s £2.1bn Gold & General vehicle, which is one of a handful of gold funds in the IMA Specialist sector. Steel believes the BlackRock fund’s size puts it at a disadvantage.
He says: “The BlackRock fund is much, much bigger which restricts the managers to invest in the largest gold companies, which tend to offer the least attractive growth potential in our experience, certainly in the current market environment.
“As specialists, having less money to manage gives us more flexibility to invest in the most attractive stocks, regardless of their capitalisation.”
The managers are closely monitoring the gold price in Australian dollars and South African rand. The two countries are significant producers of gold globally and both have had relatively strong currencies over the last year.
Steel says: “As a result the gold price in local currency terms in Australian dollars and South African rand is somewhat off the high compared to a year or eighteen months ago when their currencies were very weak during the global financial crisis.”
In recent weeks both countries have seen their currencies weaken as the markets have started to become more concerned about the outlook for global growth.
“We are seeing an interesting scenario of strongly rising local gold prices driven by weaker currencies, which is driving margins,” Steel says. “If we see this break out further we are poised to put more money to work in Australia and South Africa.”
Steel believes there should increasingly be a place for gold in UK investors’ portfolios.
He points out the performance of gold in sterling terms is up 21% in 2010 to 11 May, compared to a 3% drop in the FTSE 100. In addition, since the UK election date was announced on 6 April the gold price in sterling has risen 11%, while the FTSE 100 has fallen by 9%.
Steel says: “An investment in gold is a way of helping to protect purchasing power – and for a sterling investor this is quite a graphic example of how it has done this over this year, and the election period.
“Gold should be seen as an alternative investment for protecting wealth, particularly from a UK perspective with the remaining uncertainty.”
He believes there is widespread recognition of the risk of sovereign debt contagion.
“We have seen it rippling through the euro in recent weeks. We have had this big stimulus package and it remains to be seen whether it reassures markets,” Steel says
Steel adds: “I think we all expect the currency markets are going to start to focus on sterling fairly soon as a potential risk to the downside given the fact we now have a $1trn worth of backing for the euro.
“The path of least resistance might now be an assault on sterling. So I think for the sterling investor it is the right time to be looking at a gold investment.”
