Flexible Plan Investments recently partnered (as sub-advisor) with Advisor Preferred to launch The Gold Bullion Strategy Fund (QGLDX), the industry's first gold bullion fund offered to retail investors through a mutual fund product, which 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," said Jerry Wagner, who founded Flexible Plan Investments as an RIA over 30 years ago.
According to the fund's May prospectus, its 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 he has observed that a large number of financial planners have voiced the opinion that their client portfolios need to include an allocation to gold that can range between 5% and 20% of a portfolio, depending on the client's suitability level.
Many advisors, however, view the incorporation of gold into an investment portfolio as a fad, driven by a blind search for alternative investments with low correlation, and in part driven by the run-up in gold prices over the past several years. Many advisors also believe that high-cost funds, of whatever type, cannot be justified when low-cost and similar alternatives are available.
Cathy Curtis of Curtis Financial Planning said she always aims to stay within the 1% range when it comes to fees for her clients, noting that she wouldn't even recommend gold in the first place. "If I were going to use a gold strategy I would use an ETF that charges less in fees," she said. "I don't think gold is a good addition to a portfolio because there are too many factors that influence its price, and if I don't understand something I won't invest in it," she said, echoing recent comments from Federal Reserve Chairman Ben Bernanke. In late July, Bernanke indicated his general confusion with gold prices. "Nobody really understands gold prices and I don't pretend to understand them either," he told the Senate Banking Committee in response to a question on why gold prices have been volatile.
Also, to the simple explanation that the QGLDX has a higher expense ratio than ETFs offering a similar strategy, the interest from individual investors has waned as the asset class has come down from its highs and volatility has increased. Historically, Curtis said, 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 explained.
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 was gold," said Curtis. Her client was not happy when her gold holdings declined over 35%.
Within the institutional world, in May 2012, a Japanese pension fund allocated to gold through an ETF, attempting to escape being hit by the troubled domestic and global economies. Yoshisuke Kiguchi, chief investment officer at the fund, had said that the move was to escape sovereign risk. Kiguchi said the pension fund trustees had been convinced of this investment decision as over the long term, gold could result in being one of the "safe currencies."
Today, Curtis explained that even the most sophisticated institutional investors question the value of gold and believe there are much better diversifiers.
Flexible Plan Investments' Wagner explained that when the fund launched in July, gold prices were down about 35% from their all-time highs. While he said he expected some reluctance among investors to allocate to a long-only, gold bullion fund in the face of price declines, he said 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."
But 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 explained, highlighting that his firm's 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 LPL's 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 said.
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. With mutual fund investors used to 1099 reporting, Wagner said he wanted to create a commodity-based fund with this type of reporting specifically with gold.
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 that's higher than the market value percentage, you need to have a high conviction," said Jim Cahn, chief investment officer of Wealth Enhancement Group. "But investors usually don't have that understanding and conviction with gold."
If anything, investors should allocate to a broader-based commodities or currency fund for diversification purposes. "There's no way of telling if gold is reasonably priced, and it's very volatile," said Ron Rhoades, program chair of the financial planning program at Alfred State College and a fee-only financial advisor. While he admits the benefits of having good diversifiers in client portfolios, the fact that gold has a low correlation to stocks doesn't mean it's a good diversifier. And over the last 100 years, its return has been "negligible," he said.
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' Gold Bullion Strategy Fund is a rip-off within a lousy asset class. "It's a speculative, high-cost investment product; I wouldn't recommend it to a single client."