Explore the Merian Gold & Silver Fund in more detail, and discover why we believe now might be an opportune time to consider an allocation to the fund as part of a balanced portfolio.
The fund offers a unique investment strategy, providing actively managed exposures to gold, silver and shares in mining companies engaged in extracting the two metals in a format that is not available through an ETF. Exposures between gold, silver and mining shares are actively adapted according to the prevailing economic and market conditions.
Exposure to silver and mining shares offers potential for superior returns – as these assets typically rise and fall by more than the gold price itself. The effect of the “boost” provided by these assets overs the price of gold itself in a rising market means that a relatively small allocation to the Merian Gold & Silver Fund – perhaps just a few percentage points of an overall portfolio – can potentially offer similar portfolio diversification benefits to a larger holding in, for example, an ETF that is designed simply to track the “spot” price of gold bullion on the international markets.
The fund’s exposure to gold and silver bullion is achieved through investments in listed bullion funds demonstrating the highest standards of governance and traceability, with the assets physically held in politically stable jurisdictions. Similarly, the investment team devotes significant effort to ensuring that the fund invests only in the shares of mining companies operating with the highest standards of governance and employee welfare.
In times of political and economic uncertainty, gold is often heralded as the ultimate “safe haven” asset. With the outlook in 2019 for geopolitical tensions, inflation, and the associated challenges for central banks looking increasingly unclear, commentators are increasingly saying that an allocation to safe haven assets may be a prudent decision.
Gain exposure to assets with the potential to perform in a more inflationary environment before a sharp rise in inflation – which is notoriously difficult to track accurately, and which often has a tendency to present itself with very little warning – presents itself.
Many of the world’s largest central banks allocate a significant proportion – or even the majority – of their total reserves in gold, including the US Federal Reserve (74%), Germany’s Bundesbank (69%), the Banca d’Italia (65%), the Banque de France (61%) and the Bank of England (8%).
The US dollar’s highly privileged role in the global financial system as the world’s “reserve currency” is increasingly being questioned, with some countries, including for example China, looking for alternative ways to settle international trade (for example, to purchase oil). Gold, which is often seen as the greatest “apolitical” money, since it is not issued by any central bank, is seen by many of those looking to settle international transactions as a viable alternative to the dollar.
The team’s investment process is dynamic and flexible in nature. An integral part of the asset allocation process is to blend both bullion and equities in gold and silver. The manager starts with a “base case” or neutral scenario when deciding how assets are allocated. Depending on a range of technical and fundamental factors he may then wish to switch his position to either a bullish or defensive stance.
The different allocations of bullion and equity under the manager’s differing scenarios may typically look like this:
The fund holds between 30-50 stocks, including the listed bullion funds that make up the fund’s exposure to physical metal. The managers see this as an optimal balance between diversification of risk on the one hand and conviction in stock selection terms on the other. Most holdings on the mining equity side will be between 2% and 4% of the fund’s total value, with heavier weightings (up to 10%) in the more liquid bullion component. The fund has an expected annual portfolio turnover of around 20-50% depending on underlying market conditions. Inevitably, a more concentrated mining share component will be more volatile over short time-frames compared to the broader market.
The manager considers risk from both a top-down macro market level and bottom-up company level. Prevailing foreign exchange rates in mining jurisdictions versus the US dollar selling prices for both gold and silver are another important consideration from a risk-control perspective.
In terms of mining equities the fund aims for a quality bias in terms of company financials, project viability, management teams and growth potential. While this narrows the investable universe, the bullion weighting of the portfolio mitigates this in overall terms. The team adopts relatively high barriers to entry when considering geopolitical risk, as it sees gold and silver investing as being driven primarily by perceived safe-haven factors. The team also runs a specific balance sheet stress filter to identify potential funding issues ahead of time as the sector is relatively capital intensive.
Ned Naylor-Leyland joined Merian Global Investors in 2015 and is the fund’s manager. He has over 15 years’ investment industry experience, having worked at Smith & Williamson, before founding a dedicated gold and silver fund for Cheviot Asset Management. Ned is supported by Joe Lunn and Chris Mahoney. Joe is a mining engineer who worked in the industry in South Africa and Australia before returning to London to work as a mining analyst. Joe is the team’s dedicated mining equity research analyst. Chris, in his role as assistant portfolio manager, performs both portfolio management and equity research functions.