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Silver is ‘sizzling’, says Merian

Silver mining stocks provide investors with opportunity as physical silver has become very cheap, according to Ned Naylor-Leyland, portfolio manager at Merian Global Investors.
Ned Naylor-Leyland, Merian Global Investors

The gold-to-silver ratio, which is the amount of silver it takes to purchase one ounce of gold, has reached around 87:1, Naylor-Leyland, who manages the Merian Gold and Silver Fund, said at a client event in Hong Kong.

“For less than 1% in the last 100 years has the ratio been this high. That is how cheap silver is relative to gold.

“That is how much the opportunity is here. This is the real sizzle.”

The attractiveness of silver has made Naylor-Leyland bullish on silver mining stocks, which now accounts for around 38% of the Gold and Silver Fund, he said.

The current allocation toward silver mining stocks is at the high-end, as the fund has investment constraints for risk mitigation. For example, in a “bullish case scenario”, the maximum limit for silver mining stocks is 45%.

“[If it’s all silver stocks], it will be too sizzly, my sausage might get burnt.”

The fund’s mandate also requires a minimum investment of 15% in physical silver and gold for liquidity (currently, it is at 19%). The maximum investment in gold equities is at 40%.

“You can think about it as a barbell approach to investing.”

The defensive model

Naylor-Leyland noted that his fund also takes on a “defensive model” during a bear market.

Under this model, the minimum investment for physical gold and silver increases to 50%, while operating mining silver and gold stocks are replaced by royalty and streaming companies, which provide financing to operating companies.

“Operating miners get crushed if you hold them through the entirety of a long bear market phase. Meanwhile, royalty and streaming companies do quite well relatively when the market is not good for gold and silver,” he said.

He did not mention, however, if the fund took on a defensive position when global markets turned sour last year.

According to data from FE, equities accounted for around 80% of the fund all throughout the period since the product was launched in 2016.

The fund returned 10.66% for the full year 2017, but was down by 20.43% in 2018. Year-to-date, the fund’s performance is still in negative territory, but just around -0.26%, FE data shows.

The fund has 41 stocks in the portfolio and only invests in companies in the Americas and Australia, where the mining sector is well-established, according to Naylor-Leyland.

“You don’t need to be in other jurisdictions [such as Asia and Africa]; we want to get rid of operating risk,” he said.

The Merian Gold and Silver Fund versus its sector in Hong Kong

Source: FE Analytics. In US dollars. Note: The fund’s blended benchmark, 50% Gold Price (XAU) and 50% FTSE Gold Mines Index, is not available on FE.


Part of the Mark Allen Group.