Method To Madness: Opportunity in a Volatile Time

Over the past several days volatility has increased in the junior gold mining sector where we have a significant exposure in the Tocqueville gold strategy. This volatility is the result of last week’s announcement that the composition of the MVIS Global Junior Gold Miners Index (MVGDXJTR) will change to allow for the inclusion of larger capitalization companies to enhance diversification and liquidity.
 

At present, the GDXJ is the second largest gold equity ETF and currently has $5 billion of assets under management. The GDXJ has recently become very popular with investors and has grown rapidly alongside the VanEck Vectors Gold Miners ETF (GDX), which has $12 billion of assets under management and is focused on the larger gold companies. Together, the two ETFs represent ~5% of the global gold sector. For context, the largest ETF in the world (SPDR S&P 500 ETF [SPY]) represents less than 1% of the value of U.S. equities and would need to have over $1 trillion in assets under management to be comparable in relative size.
 

Recently, the GDXJ has shown signs of stress, with its holdings deviating significantly from the index it is supposed to track. Exhibit 1 compares the top ten holdings for the GDXJ with the index it seeks to replicate. The most obvious deviation is the holding of the GDX: on March 31, 2017, the GDX represented 4.8% of the GDXJ and was its third largest holding. It’s a perversion of the GDXJ strategy to incorporate another ETF into its overall holdings – let alone as its third largest position – but is illustrative of the GDXJ’s inability to sufficiently invest in smaller gold companies with its current methodology.
 

 

The GDXJ’s struggle to stay below 20% ownership of several securities is also a significant development.  This level of shareholder ownership is important because in Canada, where most of GDXJ’s holdings are traded/domiciled, 20% is the take-over bid threshold. (In other words, in Canada, one must make an offer for the remaining equity securities, subject to some exceptions, if a shareholder is above 20% ownership.) Recently, the GDX and GDXJ together held 10 Canadian stocks that were within 2% of this threshold.¹
 

The scale of the change is large and we anticipate ~50% turnover in the GDXJ’s holdings. The GDXJ and GDX have historically done a good job fulfilling their respective objectives. However, the implementation of the aforementioned changes will cause the ETFs to overlap on many holdings. Scotiabank currently expects that ~80% (by weight) of GDXJ holdings will be in the GDX after the changes to the MVGDXJTR are complete.
 

Tocqueville Gold Fund’s (TGLDX) methodology continues to focus on a comprehensive, holistic approach to gold sector investing, with a primary objective to identify companies that are adding value independent of the gold price. As noted in Exhibit 2, our approach is to invest in all parts of the gold mining value creation process, albeit with a concentration on small/mid-capitalization companies where a lot of value in the industry is added. We also hold physical gold bullion where we pay minimal storage/insurance fees. In sum, we have created a “one-stop shop” for investors looking for exposure to gold.
 

 

Another important feature of TGLDX is its daily liquidity based on the underlying net asset value (NAV). ETFs, however, trade on exchanges and are subject to differences in price from the underlying NAV. Exhibit 3 shows the premium/discount of the GDXJ’s share price vs. the underlying NAV. The data shows that 59% of the time the premium/discount was +/- 50 bps.
 

 

With investors scrambling to position themselves before the new methodology for the MVGDXJTR takes effect in June 2017, the junior gold equity sector is experiencing significant volatility. Since the announcement the share price of the GDXJ has declined by 9% vs. a 1% decline in the gold price. We, as always, will attempt to take advantage of any price discrepancies among individual stocks in the global gold sector during this period.
 

Ryan T. McIntyre
Portfolio Manager
April 19, 2017
 

© Tocqueville Asset Management L.P.
 

  ¹Source: Scotiabank as of 03/31/17.
 

This discussion reflects the views and opinions of the author as of the date or dates cited and may change at any time. Neither the information nor the opinions stated should be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized.
 

Mutual Fund investing involves risk. Principal loss is possible. Past performance is not a guarantee of future results. The Fund invests in gold and other precious metals, which involves additional and special risks, such as the possibility for substantial price fluctuations over a short period of time; the market for gold/precious metals is relatively limited; the sources of gold/precious metals are concentrated in countries that have the potential for instability; and the market for gold/precious metals is unregulated. The Fund may also invest in foreign securities, which are subject to special risks including: differences in accounting methods; the value of foreign currencies may decline relative to the US dollar; a foreign government may expropriate the Fund's assets; and political, social or economic instability in a foreign country in which the Fund invests may cause the value of the Fund's investments to decline. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund.
 

References to stocks, securities or investments should not be considered recommendations to buy or sell. Securities that are referenced may be held in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by Tocqueville.
 

The Tocqueville Gold Fund may be offered only to persons in the United States and by way of a prospectus. This literature should not be considered a solicitation or offering of any investment products or services to investors residing outside of the United States. Please consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund.  For more complete information on this Fund, including its charges and expenses, please obtain a free prospectus by calling 1-800-697-3863 or visiting www.tocqueville.com/mutual-funds. Please read the prospectus carefully before you invest or send money. The Tocqueville Gold Fund is distributed by Tocqueville Securities, L.P.
 

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The performance assumes reinvestment of capital gains and dividends and does not reflect the redemption fee. If deducted, the redemption fee would reduce the performance quoted. Fund performance current to the most recent month-end may be lower or higher than the performance quoted and can be obtained by calling 1-800-697-3863 or visiting http://tocquevillefunds.com/.
 

The average annual total returns and top ten holdings for The Tocqueville Gold Fund ending March 31, 2017 are as follows:
 

 

*The Fund’s performance does not reflect the redemption fee.  If deducted, the fee would reduce the performance quoted.
 

Links to the most recent Top Ten Holdings and Performance.