Franklin Gold and Precious Metals Fund – What Gold Funds Are All About
Gold funds make up a fairly lucrative part of the mutual funds industry, although not many conservative investors would know it. Of course, some of the returns that a lot of gold funds are reporting can be largely attributed to recent monumental gains in the price of Gold itself, but if you strip away the price movement, these are essentially very tightly managed equity funds that invest in gold and metals companies.
One particular gold fund that caught our eye was the Franklin Gold and Precious Metals Fund (FKRCX). While Morningstar does not have an overly favorable rating on this mutual fund (an embarrassing 3-star rating), it does stand out for some pretty impressive reasons, namely a 4.66% yield. Notwithstanding the attractive yield, this gold fund has also returned nearly 18% on a YTD basis (to September 7, 2010) and ranked 13th in its Category for 2009.
More than Returns, More Than a Gold Fund
When boil away this gold fund’s specialty, it becomes a large cap growth fund, with 60% or more invested in Large and Giant cap equities, 22% in mid cap equities and the rest in small or micro cap equities. But perhaps more importantly, this is a global equity fund.
Since all of the equities in this fund play in the same sandbox, that is the gold sandbox, reviewing the sector by itself is something of a futile exercise here. Instead, what is well worth noting is that the bulk of this gold fund’s investments are made in non-US companies. With 80 individual stocks under management and only a minority of those stocks belonging to domestic companies, it is interesting to see where the Top 25 Holdings lie.
A look at Geography
When looking at the fund’s Top 25, investors will quickly notice the number of Canadian Gold/Mining firms that are held here. Canadian companies represent a little more than 25% of the total holdings, representing a fairly robust commitment to companies in this country. However, with a democratic system backing it up, combined with a strong Canadian dollar, it bodes well for the safety of such firms. For profitability, however, stronger Canadian dollar versus the US dollar means that gold prices alone will not add much to their income statements (labor, on the hand, is now cheaper for these firms).
The next largest Geographic holding is in South African firms. Unlike Canada with its solid and democratic political system, South Africa represents something of a risk. With that said, investing in gold companies but having a small South African representation makes absolutely no sense. This is because South Africa is arguably one of the richest areas of the world insofar as gold deposits. Perhaps the political risks are what has kept this particular gold fund from investing too heavily in this part of the world.
The last largest geographic holding is in Australia, which represents almost 11.5% of the total portfolio holdings. Like Canada, Australia is rich in gold and it also has a stable democratic system. Corruption is not so much an issue in Australia as it is in South Africa.
Nice Numbers, Not For Everyone
This particular gold fund has rewarded investors with above average returns with average risk, according to Morningstar. This means that greater gains can be found elsewhere. However, there are many other gold funds that require a greater initial investment compared to this fund’s $1,000 minimum. This makes the Franklin Gold and Precious Metals Fund a lot more accessible to the average investor. And returns such as these are nothing to laugh at either, with the 1-year at more than 40%, the 3-year at 21.73% and the 5-year at 25.6%.
And of course, we have the matter of the dividend yield, at a healthy 4.66%.
But the reality is that this particular gold fund is not for everyone. As with any specialty fund, this one is going to be highly sensitive to gold activity. And with Gold prices as high as they are, the risks are clearly pointing to the downside, which would lead many investors to the safer havens of more established, better performing gold funds.
After all, this is just like any other mutual fund – uh, any other global equity fund that invests only in companies involved in the gold and precious metals industries, that is. But the risks lie not only in the underlying equities and their corresponding political climates; it lies in the price of that high-in-demand commodity: gold.
