Vanguard Fund Misses Gold Rally

The firm's Precious Metals & Mining fund has barely budged since the start of the year.
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The the record-breaking rally in gold prices so far this year should have made making money in the precious metals space easy, especially for seasoned professional money managers.

And it has, but not for all of them. One specialty precious metals mutual fund in particular, has lagged -- the $4.6 billion

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Vanguard Precious Metals & Mining fund.

In the calendar year through Jan. 10, while returns for the rest of the mutual fund group rolled in, Vanguard's fund stayed pretty much flat, up a paltry 0.3%.

That's in part due to the questionable strategy of mostly avoiding gold stocks, a strange thing for a specialty precious metals fund. Bad luck in Africa's platinum patch also had a dragging effect.

The average precious metals fund gained 11.5% during the first seven trading days of 2008, with the pack's leaders bringing in even more, all fueled by the rising value of gold. Bullion prices started the year around $840 an ounce, but have since shot up to near $900 on continued worries about the strength of the U.S. economy.

The $178 million

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ProFunds Precious Metals UltraSector , which tracks a sector index, topped the list with a return of 14.8%, closely followed by the $1.1 billion

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American Century Global Gold with a gain of 13.6%.

Vanguard's approach of focusing on the broad minerals sector rather than the gold group is perhaps at odds with what most mutual fund investors in the precious metals space want, and that's exposure to gold.

"In Vanguard's gold fund case, you are a general mining fund masquerading as a gold fund," says Frank Holmes, manager of the $192 million

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U.S. Global Investors Gold Shares, which grew 13.6% so far this year. "That's not what investors are looking for when they are buying a gold fund."

Technically, Vanguard can point to the fund's title, "Precious Metals & Mining." And the fund's manager can point to a five-year compound annual growth rate of 35%. Historically, it has been focused toward industrial metals and minerals, which for much of the last few years has been

a winning strategy.

But still, Holmes has a point. The holdings at the firm show a divergence away from what most people would likely want in their "precious metals" fund.

The top 10 holdings included only one gold stock,

Barrick Gold

(ABX)

, according to recent data presented on Vanguard's Web site.

Other big holdings included energy firms

Peabody Energy

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and

Consol Energy

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, as well as

Imerys

and

Eramet

, both France-based mineral companies.

Such stocks tend to be sensitive to economic activity and so weakness in the overall U.S. economy would likely put a damper on share prices. That's a contrast with gold values, which often rally as the economy weakens and the value of the greenback falls.

The other holdings in Vanguard's top ten include platinum companies

Lonmin

,

Anglo Platinum

and

Impala Platinum

, which come with their own unique issues.

Again, technically platinum does count as a precious metal. But in reality its main use is as an industrial material in the manufacture of catalytic converters. It's very sensitive to overall global economic activity.

However, currently there is another problem with Africa's platinum patch -- declining production, in large part caused by safety problems at some mines, explains Peter Ryan, a platinum market expert at London-based specialty consulting firm GFMS.

"Everybody has had production issues," he says. What that's meant has been rising platinum prices, offset by lower production, leaving shares prices relatively static.

Vanguard's fund manager Graham French was unavailable for comment, but a spokesperson for the company said it was unwise to look at returns over such a short period.