Flexible Plan Investments recently partnered (as sub-advisor) with Advisor Preferred to launch The Gold Bullion Strategy Fund (QGLDX), the industrys first gold bullion fund offered to retail investors as a mutual fund. It began trading at $25 per share on July 8.
Bloomfield Hills, Mich.-based Flexible Plan Investments provides the independent broker dealer and RIA channels with managed accounts for their customers, offering more than 100 strategies for investors. Up until now we have not been able to offer any gold strategies for investors that either do not want to use, or do not have access to, ETFs, says Jerry Wagner, who founded Flexible Plan Investments as an RIA over 30 years ago.
Wagner says that active trading can be another risk management tool for advisors. They use it like diversification to seek to control the volatility of their portfolios, he says.
Wagner also notes that when the fund launched last month, gold prices were down about 35% from their all-time highs. While he says he expected some reluctance to a long-only, gold bullion fund in the face of price declines, he says that on a historical basis (since 1976), buying after such a decline has actually been a smart move with limited downside. And as it turned out we have only had four or five down days since the fund was offered.
Still, many advisors view the strategy as overly expensive and unnecessary.
Ron Rhoades, program chair of the financial planning program at Alfred State College and a fee-only financial advisor, highlights that he sees the use of gold in a portfolio as a fad, driven by a blind search for alternatives with low correlation, and in part driven by the run-up in gold prices over the past several years. Moreover, many RIAs also believe that high-cost funds, of whatever type, cannot be justified when low-cost and similar alternatives are available. All of which begs the question: Will this new gold strategy find a fan base?
According to the funds May prospectus, the net expense ratio for QGLDX is 1.55% (the average mutual fund expense fee is around 1.4%). In comparison, the net expense ratio of GLD a widely traded ETF that tracks gold bullion -- is 0.40%. In regards to the recommended allocation to gold, Wagner said some financial planners have said that it can range between 5% and 20% of a portfolio, depending on the clients suitability level.
In regard to fees, Cathy Curtis of Curtis Financial Planning says she aims to stay within the 1% range, noting that she wouldnt recommend gold to her clients in the first place. If I were going to use a gold strategy I would use an ETF that charges less in fees, she says. I dont think gold is a good addition to a portfolio because there are too many factors that influence its price, and if I dont understand something I wont invest in it, she says. Shes in good company. Even Federal Reserve Chairman Ben Bernanke has said gold can be complex as in investment. In late July, Bernanke indicated his general confusion with gold prices. Nobody really understands gold prices and I dont pretend to understand them either, he told the Senate Banking Committee in response to a question on why gold prices have been volatile.
Indeed, Curtis notes that interest from individual investors has waned as the asset class has come down from its highs and volatility has increased. Historically, Curtis says, most of the interest in gold came from investors who felt that economic calamity was close at hand or who wanted a hedge against rising inflation. Neither of these scenarios has played out, she explains.
Gold has been widely perceived by so-called gold bugs as a diversifier and a safe haven among all types of investors. "At one point, I had a client whose previous advisor was managing her money and had a large allocation to gold as the advisor thought the global economy was falling apart, and that the only asset class that would hold its value is gold," said Curtis. Her client was not happy when her gold holdings declined over 35%.
Today, Curtis explains that even the most sophisticated institutional investors (often dubbed the smart money) question the value of gold and believe there are much better diversifiers, such as investing in a broader-based commodities fund.
The question remains: Why would advisors and their clients benefit from allocating to gold through a pricy investment vehicle?
There has never been a gold mutual fund for non-ETF investors and many investors do not have access to ETFs, especially at 401(k)s, 403(b)s and on variable annuity and variable universal life platforms, Wagner explains, highlighting that his the firms biggest challenge will be in getting the word out that it is now available to financial planners. We hope they will see the diversification properties of the metal for their clients, as well as to the legions of gold bugs who value the metal for its utility in times of economic and political disruption.
According to Wagner, many investors prefer a non-transaction fee investment vehicle, explaining reasons behind the popularity of Schwab Non-Transaction Fee and LPLs Strategic Asset Management mutual fund trading programs. Over a billion dollars of Flexible Plan Investments client assets are invested NTF at Trust Company of America, but Trust Company of America charges a transaction fee for ETF trading. When you do the math any trading beyond once a month frequency generates more fees in an ETF than in a no-load mutual fund, taking into consideration expense ratios, bid ask spread, slippage and commissions, he says.
In addition, among ETFs, it is common practice for commodity vehicles to be organized in a manner that generates K-1 tax reporting instead of the traditional mutual fund reporting mode the annual 1099 form. Drawing upon their frustrating experience with K-1s and limited partnerships, according to Wagner, many investors and advisors shy away from vehicles that report with K-1s. With mutual fund investors used to 1099 reporting, Wagner says he wanted to create a commodity-based fund with this type or reporting specifically with gold.
Do the Benefits Outweigh the Negatives?
Despite the appeals of diversification amid a turbulent economy, many advisors believe that gold is a lousy investment in the first place. Gold makes up only 2% of investable assets globally and when investors allocate to gold, they usually allocate more than that percentage. If you allocate to an investment thats higher than the market value percentage, you need to have a high conviction, says Jim Cahn, chief investment officer of Wealth Enhancement Group. But investors usually dont have that understanding and conviction with gold.
If anything, investors should allocate to a broader-based commodities or currency fund for diversification purposes. Theres no way of telling if gold is reasonably priced, and its very volatile, says Rhoades. While he admits the benefits of having good diversifiers in client portfolios, the fact that gold has a low correlation to stocks doesnt mean its a good diversifier. And over the last 100 years, its return has been negligible, he says.
As of today, QGLDX is the lowest cost and only way to participate in the daily price movements in gold bullion within the traditional mutual fund arena. But the bottom line, according to Rhoades: Flexible Plan Investments Bullion Strategy Fund is a rip-off within a lousy asset class. Its a speculative, high-cost investment product; I wouldnt recommend it to a single client.