Academics and market watchers alike have long debated the relative
merits of active versus passive management. We approach the issue from the
perspective of a practical investor, recognizing the need for both management
styles. We believe that there are segments of the market where either active or
passive management can offer a distinct advantage, but in gold and precious
metals mining equities, we favor an active investment strategy.
Our team’s active
approach seeks to benefit from several unique characteristics of the gold and
precious metals mining sector. Those characteristics include the operating dynamics
of the sector, the volatility of the asset class, and the potential advantages
to be gained from fundamental research. The precious metals sector is highly
dynamic at the operating level. Miners do not set prices for the metals they
produce, the market does. Because miners are price takers, a key driver of their
stock price performance is how well they operate their underlying asset base. Doing
this well encompasses having high production efficiency plus an ability to find
and grow reserves, build and expand mines, and produce metals profitably. We
believe companies that can execute on these objectives have a greater chance of
delivering outperformance. Active managers have the flexibility to overweight companies
that they believe offer the best risk-adjusted opportunities and underweight the
companies that they consider to be potential laggards.
Furthermore, gold and precious metals equities are volatile assets, as companies’ stock prices can be subject to wide swings. In illustration of this, the returns on the Philadelphia Gold & Silver Index have had nearly three times the annualized standard deviation of US equities and twice the standard deviation of gold bullion over the past 10 years.1 It is important to note that active managers can adjust position sizes or exit holdings in response to changes in fundamentals, valuations, and corporate actions.
Our fundamental research
in the gold and precious metals mining sector addresses both the top-down and
bottom-up factors in the metals sector that can influence corporate
performance. From a top-down perspective, regional risks are inherent in the
sector. Miners are constrained by the opportunities that geology presents them–and
that often translates into operating in remote areas of the world where metal deposits
are located. Miners are also subject to potential changes in host government
regulations, including licensing, taxes, and environmental rules. Additionally,
some miners may have a portion of their operations in less stable regions or
countries, a circumstance that can create a wider dispersion of potential
outcomes. At the company level, miners often face challenges such as securing
the equipment, water, electricity, and personnel needed to conduct operations
effectively and efficiently. We assess these factors and make informed decisions
about the potential risks, favoring regions and companies that appear to be the
most promising while avoiding regions and companies that could have negative
Invesco Listed Real Assets team, which oversees our gold and special minerals
strategy, favors an active investment management approach in the mining
space. A significant percentage of
active managers in the sector have been able to outperform the benchmark for
this strategy, the Philadelphia Gold & Silver Index (XAU Index). In this regard, 42% of active managers
outperformed the XAU Index over the three-year period ending 9/30/19, 78%
outperformed over the last five years, and 97% outperformed over the last 10
Figure 1: Gold and precious metals mining equities—passive performance
Oppenheimer Gold & Special Minerals Fund (OPGSX)
provides an actively managed approach to the gold and precious metals mining
sector. Portfolio manager Shanquan Li has managed this strategy since 1997, a
lengthy tenure that makes him one of the most experienced managers in this
space. Shanquan’s investment approach encompasses detailed top-down analysis
combined with rigorous bottom-up company research.
Learn more about the
Oppenheimer Gold & Special Minerals Fund.
Bloomberg L.P., as of August 30, 2019
Morningstar, as of August 30, 2019
Blog header image: Neal Pritchard / Stocksy
As with any comparison, investors should be aware of the
material differences between active and passive strategies. Unlike passive
strategies, active strategies have the ability to react to market changes and
the potential to outperform a stated benchmark. Other differences include, but
are not limited to, expenses, management style and
liquidity. Investors should consult their financial adviser before
US equities are
represented by the S&P 500 Index. An investment cannot be made directly
into an index.
Gold & Silver Index is an index of 30 precious metals mining companies that
are traded on the Philadelphia Stock Exchange. Index performance includes total
returns. The index is unmanaged, includes the reinvestment of dividends and
cannot be purchased directly by investors. Index performance is shown for
illustrative purposes only and does not predict or depict the performance of
any fund. Past performance does not guarantee future results.
In general, stock values fluctuate,
sometimes widely, in response to activities specific to the company as well as
general market, economic and political conditions.
Derivatives may be more volatile and
less liquid than traditional investments and are subject to market, interest
rate, credit, leverage, counterparty and management risks. An investment in a
derivative could lose more than the cash amount invested.
Fluctuations in the price of gold and
precious metals may affect the profitability of companies in the gold and
precious metals sector. Changes in the political or economic conditions of
countries where companies in the gold and precious metals sector are located
may have a direct effect on the price of gold and precious metals.
The risks of investing in securities
of foreign issuers, including emerging market issuers, can include fluctuations
in foreign currencies, political and economic instability, and foreign taxation
Because the Subsidiary is not
registered under the Investment Company Act of 1940, as amended (1940 Act), the
fund, as the sole investor in the Subsidiary, will not have the protections
offered to investors in US registered investment companies.
The fund is non-diversified and may
experience greater volatility than a more diversified investment.
The fund is subject to certain other
risks. Please see the current prospectus for more information regarding the
risks associated with an investment in the Fund.