A New Change to Our Gone Fishin’ Portfolio

The Gone Fishin’ Portfolio – a simple but sophisticated investment system based on a Nobel Prize-winning strategy – is The Oxford Club’s most conservative portfolio.

Yet $100,000 invested in the portfolio at its inception in 2003 – with dividends reinvested – was worth $373,981 through the end of last year.

However, as several Members have noted, Vanguard recently restructured one of the funds in the portfolio.

The Vanguard Precious Metals and Mining Fund (VGPMX) has a new name and a new objective.

It’s now the Vanguard Global Capital Cycles Fund, although the symbol is the same. Its new benchmark is the Spliced Capital Cycles Index. And it has a new manager: Wellington Management Company LLP.

The new fund still offers exposure to the precious metals and mining industry but is far more diversified.

The old fund invested at least 80% of its assets in shares of U.S. and foreign companies in the mining industry. It also invested up to 20% of its assets directly in gold, silver and precious metal coins.

The new fund, by comparison, will invest at least 25% of its assets in the metals sector and up to 75% in other natural resource companies and infrastructure-related firms, including telecoms and utilities.

(The new fund’s expense ratio remains low at 0.37%, negligibly higher than the old one’s 0.36% expense ratio.)

When Vanguard first announced the change, critics came out of the woodwork to claim that the company made the change because gold is out of favor – it peaked at $1,917.90 an ounce in August, 2011 – a clear sign that this is the bottom for gold.

Not so fast.

Vanguard doesn’t follow fads or try to make money off investors. It’s a not-for-profit corporation. The fund family is owned by Vanguard shareholders themselves and is run entirely for their benefit.

Vanguard did not change the Precious Metals and Mining Fund’s investment objective because gold is less popular today.

Indeed, when gold was streaking higher eight years ago, Vanguard closed the fund to new investors because it became increasingly difficult to put massive inflows of cash to work in the tiny gold equities sector.

According to the World Gold Council, approximately 168,300 tons of gold have been mined over the course of human history. If that were melted down and cast into a cube, it would measure just 67.8 feet per side.

Likewise, the total value of all globally traded gold and silver mining companies is just a tiny fraction of the market capitalization of a single large company like Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT) or Amazon (Nasdaq: AMZN).

Moving large sums into and out of the sector is tricky indeed – and can easily move prices up or down.

Vanguard’s official reason for changing the fund’s objective was to stabilize the fund’s performance and seek broader opportunities for growth.

But it also didn’t want to manipulate or distort the limited universe of publicly traded mining shares.

I’m fine with this decision. Gold shares are just 5% of the asset allocation in our Gone Fishin’ Portfolio. (And it will become an even smaller part given this Vanguard fund’s new objective.)

For those who want to have more exposure to gold and mining shares, there are other mutual fund alternatives available, including Fidelity Select Gold Portfolio (FSAGX), U.S. Global Investors Gold and Precious Metals Fund (USERX) and Tocqueville Gold Fund (TGLDX), although all have substantially higher expenses than Vanguard.

I also created an exchange-traded fund (ETF) version of the Gone Fishin’ Portfolio. A long-standing component is VanEck Vectors Gold Miners Fund (NYSE: GDX).

This is an ETF with significant advantages over open-end mutual funds:

• It has good liquidity, with assets of $8.6 billion.
• It has a lower expense ratio than the vast majority of gold mutual funds.
• It can be traded continually throughout the trading day.
• The shares are highly tax-efficient.
• And, unlike gold mutual funds, it will not change its objective or close to new investors.

The fund’s benchmark is the NYSE Arca Gold Miners Index (GDM). The ETF owns all of the world’s leading gold and silver mining companies.

That means you can capture the performance of the entire sector with a single, well-diversified investment. And the annual expense ratio is 0.53%.

Here’s the bottom line…

The Vanguard Global Capital Cycles Fund will remain in our Gone Fishin’ Portfolio.

However, to better track the performance of our original asset allocation – with a full 5% exposure to precious metals mining shares – we will use the ETF version of the portfolio to track future performance.

I will have a full report on the Gone Fishin’ Portfolio’s annual returns – both this year’s and since inception – after December 31.

Good Investing,

Alex

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