ipped and lagged energy over the past three years, due mostly to the slump in gold prices in 2004.
Broader is Better
The above is just a small suggestion of how difficult it is to predict commodity prices, and is why we think most investors are better off with a diversified resources fund that spreads its bets across different subsectors than a focused offering. If you do want to buy a pure gold fund or a pure energy fund, however, we strongly suggest it be viewed as a long-term holding that will enhance the diversification of your client’s portfolio and help hedge against inflation. Such funds should be used in moderation only and clients will need to be prepared to hold on through rough patches—precious metals funds have the highest standard deviation of any Morningstar category over the past three year, at a gut-wrenching 26% annualised.
Golden, but Pricey
For investors seeking gold exposure in a UK domiciled offering, Merrill Lynch Gold and General is fairly pure offering, with just a smattering of non gold-related shares in the portfolio. It also features an experienced manager in Graham Birch. Like all gold funds, this one is extremely volatile, but it has put that risk to good use, outperforming the vast majority of its Morningstar Precious Metals Category peers over the three-, five-, and ten-year periods. At 1.81%, however, its TER isn’t attractive, and we’d encourage Merrill to cut it.
One to Avoid
We can’t leave the natural resources sector without mentioning MFM iFunds ETF Commodity fund. The fund levies an AMC of 1.75% (it does not disclose a TER), which is far too high for an offering that essentially uses a computer to allocate assets across trackers. And that 1.75% doesn’t even include the fees of the underlying ETFs or other administrative costs. Caveat emptor, indeed. A version of this article previously appeared in Investment Adviser, Financial Times Ltd.