The Case for Owning Gold

Thomas Kertsos is a portfolio manager and senior research analyst at First Eagle Investment Management. He joined First Eagle’s Global Value team in May 2014 as a research analyst covering precious metals and marine transportation. In March 2015 he was named an associate portfolio manager of the First Eagle Gold Fund, and in March 2016 he became a portfolio manager of this fund. Prior to joining the firm, Thomas spent six years as an associate analyst covering precious metals and mining in the Global Research Group of Fidelity Management & Research.

Thomas Kertsos

As of June 30, the First Eagle Gold Fund (SGGSX) has returned 5.37% since its inception, on 8/31/93. That is 645 basis points better than its benchmark, the FTSE Gold Mines Index (-1.08%).

Tell me about the mandate for the First Eagle Gold Fund (SGGDX). What are the portfolio-construction and risk-management processes?

We have a distinct philosophy on gold at First Eagle. We believe that gold has unique risk-reward characteristics to be able to potentially preserve value in real terms in the long-term and provide diversification and resilience for a portfolio. We use gold as a potential hedge. We don’t own gold to speculate on its price in the next six to 12 months. We don’t forecast the price of gold.

In terms of our specific mandate, our benchmark is the FTSE Gold Mines Index and we seek to outperform both that and the gold bullion price through the market cycle. We also seek to realize absolute returns through the cycle.

In terms of the portfolio-construction process, we own gold as a potential hedge, not only through gold bullion but also through gold mining companies. We actively manage the allocation between gold bullion and gold mining companies in the following way. If we can find undervalued gold mining companies we will invest in them. But to the extent that we cannot find cheap enough equities, then we tend to keep our client’s capital in gold bullion until such opportunity presents itself.

We have an analytical investment process and we look for four key attributes in the gold mining companies we own. First, we look for valuation. Second, and very importantly, we look for resilience. Third, we look for growth, and fourth, we look for duration and long-term mine life.

Since we view gold as a potential hedge, the most important part of our stock picking and portfolio construction process is our focus on resilience and risk-management. We look at what can go wrong with the specific company. We analyze every security and try to determine how low the gold price has to go to create a financial problem for that specific company. In order to test this resilience, we will look closely at the balance sheet, the cost structure, the quality of the assets and specific technical and political risks. Among other things, we analyze the track record of the management team and assess the operational execution risk, to see if the management can operate effectively and minimize the capital allocation risk. We want to see that the management team has a good track record in operational execution and in making good capital-allocation decisions, and is also conservative in its financial management.

We are constantly asking what can go wrong with any specific company.