When it’s actually an equities fund.
This may seem rather obvious; however, it does address a common misconception that we at Morningstar have come across when discussing our approach to fund research with IFAs.
As many advisers have begun to add commodities exposure to their clients’ portfolios, a number have turned to the BlackRock Gold and General fund to provide the commodities piece of their asset allocation puzzle. The only problem is it’s not invested in commodities – it’s certainly not a gold fund – it’s not even a precious metals fund – and this is where the misconception lies.
An analysis of the complete holdings of the BlackRock Gold and General fund shows a portfolio full of shares in mining operations and companies whose business is the procurement of precious metals and natural resources.
No where in the holdings will you find actual gold bullion, silver bars, or sacks of diamonds. You won’t even find derivatives of these physical assets which artificially replicate the market prices of commodities.
The fund’s own objective even states an aim “to achieve long-term capital growth by investing in gold, mining and precious metal related shares.” The key here being “related shares.”
Commodities and equities are two different asset classes. They perform differently in various market conditions and they are subject to their own unique risks. And we at Morningstar think this is a critical piece of information for IFAs and investors.
So why the misconception? Why do some IFAs and investors consider this fund a play on physical commodities when it is actually an equities fund.
Surely, nobody is arguing with the fund’s impressive returns to investors – Morningstar included. Our analysts have given this fund an “Elite” rating, and looking at the Morningstar Qualitative Report for the BlackRock Gold and General Fund, there is plenty for investors to like.
In response to a client query, I recently discussed this report with Jackie Beard, now Morningstar’s Director of Investment Trust Research, and author of the report.
She noted several references to the fund’s rigorous approach to company analysis, the importance of good management at those companies and the type of companies in which the fund invests. She also added the fact that the fund even falls within the “Equity Sector Precious Metals” Morningstar Category for open-end funds.
But many IFAs see this as “a gold fund” or a way of diversifying a client’s portfolio with commodities. I have had several conversations with our Adviser Workstation clients who question our analysis of this fund and expect to see it as the commodities component in a portfolio.
Along the same line, I have also had this conversation about property funds and the difference between a fund that owns actual property and a fund that invests in the shares of real estate companies.
Both types of investments – owning physical assets and owning shares in the companies with exposure to those assets – have their own merit in a portfolio, but it’s important for investors to understand the difference.
Jackie’s comments were in response to an IFA who wanted some clarification of Morningstar’s classification of this fund as equities rather than commodities. She went to considerable length to provide a comprehensive answer to this question because it illustrates such a common misconception and is at the core of Morningstar’s value proposition to IFAs in terms of fund research.
Jackie also reached out to Malcolm Smith, Product Specialist for the BlackRock Gold and General Fund, to get BlackRock’s take on the question of commodities vs. equities and where their fund sits.
Mr. Smith, who was kind enough to provide a very prompt response, had this to say: “You have to remember it’s a gold equities fund with exposure to gold. We believe in the superior fundamentals that equities will outperform the gold price. Morningstar is right to have it in the equities category as that’s precisely what it holds.”
We relish these kinds of questions because it shows our clients are digging deeper and trying to fully understand the investments they recommend.
It illustrates the need for transparency and how access to quality data and analysis helps advisers make better investing decisions. Morningstar has grown on this principle and we feel there is much we can do in the UK to foster better understanding and further the interests of investors.
We always welcome a healthy debate and I look forward to similar conversations with our clients in the future.