Junior shines in first-year results

Angelos Damaskos, the manager of Junior Gold, invests in small companies with strong reserves in the ground and aims to mitigate volatility by eschewing regions that are politically unstable.

Nobody ever got fired for buying IBM. Is recommending that clients invest in BlackRock Gold & General a bit like that too?

I’m not suggesting that Gold & General is going the same way as IBM, but it is extraordinary how dominant the £2.6 billion BlackRock fund is in the sector, and how few rivals it has. Yes, JP Morgan’s Natural Resources will have about a third of its resources in gold-related investments, but after that, the choice is limited. Investec has a £120m Gold fund, and Smith & Williamson a Global Gold fund, but it’s an £18m minnow.

Yet the price of gold is hitting new highs almost daily, and interest from investors is soaring. Much of the speculative activity is, understandably, going directly into physical gold through the exchange traded funds, or through online dealers such as BullionVault.com, but it remains puzzling how few retail gold funds there are to choose from.

”Although we’re not the size of BlackRock, we’re in touch with all the major brokers”

Sector Investments is hoping to capitalise on this gap in the market. It’s a small fund management group, set up six years ago, that specialises in resources. This time last year it launched a fund called Junior Mining, but has changed it to Junior Gold. Angelos Damaskos, the fund manager, says this is not about jumping on bandwagons but simply labelling it more honestly. At launch the idea was that it could invest in other precious metals apart from gold, but Damaskos says since then he has found all the best opportunities in gold mining shares.

Over the past 12 months, Junior Gold is up 38% compared with the 26% gain in BlackRock Gold & General, so he’s doing something right. He has also managed to appeal to retail investors, with £36m under management in the fund compared with £7m at launch.

It has a different investment profile to Gold & General, focusing on small and mid caps rather than the big-name stocks. “We have a mix of 35 positions. It’s a concentrated portfolio and you could call it a high conviction portfolio.” (article continues below)

You might be wondering quite who Damaskos and ’Sector Investments’ are. Damaskos worked in investment banking for 16 years, specialising in resources, but was so convinced in the ’super cycle’ in commodities he quit to set up his own asset management group. Today it has just over £70m under management, advising on three funds, Junior Oils, Junior Energy and Junior Gold.

“I launched Junior Mining, which became Junior Gold, as a response to the financial crisis. It was clear to me that gold was going to be well-positioned to benefit from the inflationary implications of the economic stimulus packages that were put in place to deal with the crisis. I believe that both the public and private sectors are massively indebted, and the temptation to inflate the debt away is too great. Already the Bank of England appears content to allow inflation to run at above its target rate. Politicians are always going to take the easy way out, through printing money and debasing the currency. Look at all the talk at the moment about currency wars. Everyone wants a weak currency.”

He acknowledges the risks to this strategy. If there is a significant strengthening of the global economy, and central banks start to pull back from quantitative easing, then that will be a warning sign to gold bugs everywhere to get out of the market. But he says the likelihood of this scenario developing is quite low.

His niche is small and mid caps. It’s not just because they are overlooked by the market, but because they are a geared play on a rising gold price. “Take, for example, a small company with a high marginal cost of production, say $700 an ounce. At a gold price of $1,300, they are making $600 profit an ounce. If the gold price rises to $1,600, that’s an increase of 25%, but for the marginal producer, it’s a rise in profits of 50%.”

He likes companies that are low on debt, with strong and verifiable reserves in the ground. He also sticks to companies with reserves of below 250,000 ounces (compare that with Newmont, which has reserves of 91m ounces) and only buys into stocks where the miner has not hedged the price. That way he can be sure the stock will ride upwards with the gold price.

Inevitably, it means that Junior Gold is going to be a more volatile fund than BlackRock’s. But Damaskos says he takes several steps to reduce risk and volatility. First, he steers clear of Russia and anywhere else where he perceives political risk to be too high. “At the moment, the bulk of the portfolio is in Canada and Australia, with a little in Chile and Argentina. Canada is probably the most mining-friendly country in the world.”

Julia Gillard’s electoral success in Australia – in part down to a promise that she’d tax mining companies more heavily – has introduced an element of political risk to Aussie stocks, but Damaskos is relaxed. “She’s focusing on big volume base metal producers and is likely to exclude gold and precious metal producers,” he says.

He insists that larger is not better in the world of resource stocks. “If you’d only held BP, you would have missed the bull run in oil stocks over the last six years. There is an asset allocation argument for investing in large caps through the likes of BlackRock, but it has become so large it can only really invest in large caps rather than the smaller companies that we access. We are widely recognised in the City as a sector specialist and although we’re not the size of BlackRock, we’re in touch with all the major brokers.”

This fund has also managed to obtain a lot of retail support. I had imagined that as a specialist fund on offer from a specialist group, then it would mainly be looking after institutionally-placed money only. But Damaskos says most of the assets are from investors putting up £5,000-£10,000.

Junior Gold will never trouble BlackRock in this market, but investors seeking diversification and willing to accept higher levels of risk may want to consider it. And I can’t believe it will be the last new entrant in this fizzing market.