The company says that precious metals such as gold provide diversification, protection against currency devaluation and is useful as a safe haven during market turmoil. Demand for precious metals is rising while supply is constrained and rising production and extraction costs look likely to support prices.
However, precious metals cannot be held directly in a Ucits fund but the structure is attractive to investors because of the transparency, liquidity and regulation it provides. The solution offered by Castlestone is the Aliquot precious metals Ucits fund. This provides exposure to the asset class within the Ucits rules by tracking the prices of seven metals that make up the Barclays Capital Diversified Precious Metals index, which was created specially for Castlestone.
The index is tracked using a derivative contract called a swap. This is where the fund manager enters into an agreement with an investment bank to swap the returns of an investment portfolio that may be completely unrelated to the index for the returns of that index. If the fund manager’s investments underperform the index, the investment bank – or counterparty – makes up the difference. If the fund manager’s investments outperform the index, the excess return goes to the counterparty because the returns on the index will be covered.
This strategy enables the Castlestone fund to provide exposure to metal prices, which the firm says has shown better returns historically than precious metal equity funds. The new fund also hedges currency to reduce the impact of fluctuations in exchange rates.
However, some investors and IFAs may still be wary of the synthetic replication of the index through a swap, given the criticism that swap-based exchange traded funds have recently received.
Access to physically backed precious metals through exchange traded commodities could provide an alternative, but these investments are not Ucits compliant and some will expose investors to currency risk.