Tocqueville Is Top Gold Fund Amid Plunge: Riskless Return

As bullion went from a rally to bear market over the past five years, leaving most gold funds with losses, Tocqueville Asset Management LP’s John Hathaway made money by picking promising mining stocks early.

Hathaway’s $1.4 billion Tocqueville Gold Fund gained 0.7 percent in the past five years when adjusted for price swings, the best among 15 U.S.-based mutual funds that invest in precious metals and mining companies, according to the BLOOMBERG RISKLESS RETURN RANKING. The fund produced the highest absolute returns in the group with the second-lowest volatility and was one of just four funds to make money over the period, according to the data.

Gold’s slump from a record two years ago has undone gains for many asset managers who profited as the metal surged 70 percent from 2008 to mid-2011, and has even hurt investors that have the ability to hedge, such as billionaire John Paulson. Hathaway and his team, who meet executives at two to three companies every day and on average travel 100,000 miles a year to visit mines all over the world, beat rivals by getting ahead of other investors in picking stocks such as Osisko Mining Corp. and Torex Gold Resources Inc.

“We identify the more prospective companies relatively early,” Hathaway said in a telephone interview from his office in New York. “We spend a lot of time analyzing companies and meeting with them before making an investment.”

The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns are not annualized.

First Eagle

The $1.8 billion First Eagle Gold Fund was No. 2 in the risk-adjusted ranking at 0.2 percent, combining the third-highest absolute return and the lowest volatility in the group in the five years ended Aug. 26. The $897 million Van Eck International Investors Gold Fund ranked third.

The managers of the Tocqueville Fund seek companies with mining projects in stable jurisdictions, to reduce risks in their portfolio. They also don’t trade their stocks very frequently. The turnover ratio of the fund, a gauge of how much the holdings change in a year, was 17 percent, according to the firm’s website. That compares with a ratio averaging 68 percent for all U.S. equity funds, according to data compiled by Morningstar Inc.

The Gold ETF Volatility Index has surged 66 percent this year, signaling that traders continue to expect the investment to be plagued with wild swings. Gold slumped into a bear market in June with the biggest two-day drop in more than three decades. Gold prices have plunged 16 percent this year, heading for the worst annual loss since 1997.

Paulson, Soros

The rout spurred losses for Paulson, whose gold fund tumbled 59 percent through July, according to an update sent to investors. Paulson’s gold fund climbed 35 percent in its first year of inception in 2010, slumped 11 percent in 2011, and fell 25 percent in 2012.

Hathaway’s Tocqueville fund has fared better. The fund rose 53 percent in 2010, then fell 16 percent in 2011 and declined

8.7 percent in 2012. So far this year, it declined 30 percent on an absolute basis through Aug. 26, as the 17-member NYSE Arca Gold BUGS Index of gold-mining companies tumbled 38 percent.

‘Inextricably Linked’

“The equities’ performance is inextricably linked to gold prices,” Hathaway said. “You could talk about all things that analysts talk about but finally when gold prices fall, the mining companies cannot do well.”

Hathaway, 72, has run the Tocqueville Fund since it started in June 1998. The fund is owned by Tocqueville Asset Management, a money management-firm named after 19th-century French political thinker Alexis de Tocqueville, best known for his writings on American democracy. The Tocqueville Fund returned 13 percent a year from inception through July 31, outpacing the 3.6 gain in the Philadelphia Stock Exchange Gold and Silver Index and the 4.6 percent annual increase in the Standard & Poor’s 500 Index.

The fund’s largest holding is physical gold, at about 11 percent of assets as of July 31, according to data posted on the firm’s website.

Hathaway said the team scouts out early-stage companies with promising exploration projects and buys shares before they become widely recognized by analysts and other investors. The average weighted capitalization of companies held by the fund is $3.7 billion, half the $7.4 billion for the 14 competing funds, according to data compiled by Bloomberg.

Osisko Mining

The fund bought Osisko Mining, which accounted for 3.5 percent of Tocqueville’s holdings as of July 31, in 2006 when the shares were trading at 50 cents. The stock has since surged almost 11-fold to $5.44 as of August 27. Osisko, based in Toronto, was founded in 1998 and began production in 2011.

“This was one of the companies which we invested in at a very early stage,” Hathaway said. “The management delivered on their exploration idea.”

Hathaway’s fund bought shares of Toronto-based Torex in 2010 when the company acquired the Morelos Gold Project, which has since become its flagship exploration project. Since the first quarter of 2010, when the Tocqueville fund first bought shares of Torex, the stock has surged 72 percent.

Many of Hathaway’s picks, including Andean Resources Ltd. and European Goldfields Ltd., were acquired by larger miners, creating some of the biggest gains for the mutual fund over the past five years.

Andean Resources

Andean Resources, a Perth-based miner, agreed to be bought in September 2010 for $3.5 billion by Goldcorp Inc. of Vancouver. The bid topped a rival offer from another Vancouver firm, Eldorado Gold Corp. Both firms coveted Andean’s Cerro Negro project in Argentina. Andean was the second-biggest contributor to the fund’s performance over the past five years, according to data compiled by Bloomberg, topped only by Randgold Resources Ltd. of the Channel Islands.

Another Hathaway holding, European Goldfields, agreed to be acquired for $2.4 billion in December 2011 by Eldorado. The price was 31 percent more than the stock’s closing price two weeks earlier when European Goldfields said it had received takeover offers.

The fund has also put 4.7 percent of assets in Franco-Nevada Corp., a Toronto-based company that collects mining royalties. Hathaway, who has owned shares of Franco-Nevada for 10 years, likes the company’s ability to generate cash flow and the fact that it is not capital-intensive. The stock, which has more than doubled over five years, was the sixth-biggest contributor to the fund’s results over that stretch.

“In the long run it’s about making the right choice and I would think gold equities are becoming increasing attractive now,” Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City, said in a telephone interview.

Roller Coaster

Hathaway has run the fund at a time when gold went on a roller-coaster ride. It climbed from an average of $872.25 an ounce in 2008 to an all-time high in 2011, driven by fears that the extraordinary stimulus provided by central banks around the world would lead to inflation and the loss of confidence in major currencies. The precious metal jumped 70 percent from the end of December 2008 to June 2011 as the Fed bought more than $2 trillion in bonds to bolster the economy.

Gold prices, which rose to a record $1,921.15 an ounce in September 2011, slumped to $1,180.50 an ounce in June as some investors lost faith in the precious metal as a store of value and amid concern that the Federal Reserve will slow the pace of the stimulus. Prices have recovered since then on physical demand from Asia.

In his letters to investors, Hathaway regularly makes the case that gold has a bright future.

‘Sound’ Thesis

“We believe the premise for investing in gold and gold mining shares remains sound,” he wrote in an April 30 letter. “Paper currencies appear to us to be more at risk of losing their purchasing power than at any time since the commencement of the gold bull market in 1999.”

The collapse in gold has hurt mining companies including Barrick Gold Corp., the world’s largest producer of the metal, and Goldcorp, the biggest producer by market value. Gold mining companies have announced at least $26 billion of writedowns in the past two months.

Jamie Sokalsky, chief executive officer of Barrick, said Aug. 1 that valuations for gold-mining companies probably “can’t get much lower.”

Even after gold’s decline, producers are trading close to their cheapest relative to the metal in at least 29 years, according to data compiled by Bloomberg. Gold has rebounded 20 percent from a 34-month low in June as lower prices boosted demand for jewelry, coins and bars.

“You have corrections in every market and now it looks as if it’s been overdone on the downside and gold is starting to find its footing,” Hathaway said in the interview. “I continue to remain bullish on gold.”

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