Below article pretty much sums up where BDR is at. F...king scandal alright.
Hopefully we can recover after this is over.
It has been variously described as “the single greatest wealth destruction event in index history” and a “f..king scandal of the highest order”.
The decision by New York-based Van Eck to dramatically restructure its exchange-traded fund of junior gold stocks has had massive ramifications for the share prices of Australia’s gold producers over recent months, with savvy investors gleefully taking advantage of Van Eck’s shift in strategy and positioning themselves to profit from the change.
The net result is estimated to have cost Van Eck hundreds of millions of dollars in lost value, while the CEOs of the gold producers smashed by the situation have been left to lament their powerlessness over the direction of their share prices.
It highlights a potential problem when increasingly popular index-tracking ETFs get too big relative to the sector they are supposed to track.
In the case of Van Eck’s gold juniors index, the fund known as the GDXJ had swollen to the point that it was bumping up against 20 per cent ownership levels in many of its stocks, putting it at risk of breaching takeover limits.
Van Eck’s solution, announced in April, was to rewrite the rules that decided which miners could be included in the $US3.7 billion ($4.9bn) index. Previously, miners would be excluded if their market capitalisation went above $US1.6bn. Instead, that upper limit was increased to $US2.9bn.
It did not take long for the market to figure out what the changes would mean for individual stocks. Shares rose in the bigger miners that would now be eligible, such as Evolution Mining and Northern Star Resources, as traders anticipated that Van Eck would be compelled to buy the stocks.
Similarly, traders sold positions and started shorting the smaller miners, knowing that Van Eck would also need to sell down its holding to make room for those bigger parties.
According to one fund manager, the market moves in anticipation of the Van Eck rebalance have cost the fund more than $US300 million in value as it buys and sells shares in miners that have already had their prices inflated or deflated by investors anticipating the fund’s moves.
John Ellis, the investment manager at Hong Kong-based APAC Resources, has been watching the situation closely.
“In the lead-up to these index changes everyone can do the maths and see what they’ve got to buy and what they’ve got to sell. Deletions get sold off in advance so the GDXJ sells at depressed prices, and additions get bought up in advance so they buy at elevated prices,” Ellis tells The Weekend Australian.
“Technically, they are tracking the index, but all the front running can mean such a huge amount of value destruction.”
The problem with the Van Eck index, he says, is its scale relative to the market for junior goldminers.
“Resources aren’t a big part of global markets to start with, and now you’re talking about gold, and not just gold but junior goldminers,” Ellis says.
“So it’s a tiny sector, yet this is one of the world’s five largest equity ETFs by assets. It’s become the tail wagging the dog.”
Van Eck’s gold fund has been something of a victim of its own success.
Investors will often want a small exposure to gold as part of a balanced portfolio, but the sector’s volatility and its specific technical aspects — a quirk in geology or metallurgy can be the difference between a successful mine and a failure — adds to the appeal of investing in an ETF like Van Eck’s GDXJ.
Kris Walesby, the head of ETF Securities, says the history of the gold sector as a “high-risk, high reward” industry means it is ideally suited to ETFs.
“A lot of investors want exposure but don’t want that single-stock risk. That’s the premise of all ETFs, but for goldminers it is particularly relevant.”
The scale of the Van Eck fund compared to the junior gold market had reached a level where it could change the direction of the market through rebalances.
“The original reason for ETFs was to track the market, not to move the market,” Walesby says.
The Van Eck rebalancing is due to be wrapped up by the middle of this month. In theory, shares in affected companies should start to track back towards their true value, which should bring some relief to those miners who have seen their share prices hammered.
But for those miners already under pressure coming into the rebalance, the timing of the Van Eck selldown has been particularly unwelcome and unhelpful.
The frustrated managing director of one of the goldminers, who did not want to be named, described it as a “f..king scandal of the highest order”.
The juniors were beneficiaries of the fund’s success when it took its original positions and grew its holdings, but the last few months have been a strong reminder that the fund can cut both ways.
Another managing director, Westgold Resources chief Peter Cook, laments that the Van Eck changes have become the dominant influence on the company’s share price.
“The reality is that what you do in your normal day job bears no reference to the market,” he says.
“Van Eck is so big, and the weight of their entries and exits into stocks is above what stocks in our market can bear, so they have the propensity to create a lot of volatility.”
For some in the industry, seeing Van Eck shoot itself in the foot with the rebalance has brought a bit of schadenfreude.
Unlike traditional fund managers, which will often employ industry specialists such as geologists and engineers to develop an informed view about which stocks to buy and sell, the investments of Van Eck’s gold funds are determined solely by the fluctuations of share prices.
“I’m extremely negative on ETFs,” Cook says. “They don’t put anything into the industry, they don’t employ geologists and explorers, they don’t invest in gold directly, they’re just a basket.
“They live off it and they don’t put anything back.”
Compounding the problem for Van Eck was the fact its big positions in individual miners often swamped the average daily trading volumes. TD Securities analyst Peter Haynes, the man who described the Van Eck rebalance as “the single greatest wealth destruction event in index history”, noted early on that the implied sales volumes of Van Eck’s stakes in the likes of ASX duo Ramelius Resources and Silver Lake Resources represented almost four weeks of average volumes.
A spokesman for Van Eck declined to comment.
As the rebalancing enters its final days, investors are preparing to take advantage of the potential bargains that have been washed out by the Van Eck selling. “It’s a short-term technical trading issue and I can’t help but feel the market’s probably oversold some of these GDXJ downweights,” Ellis says.
“Aussie dollar gold is near five-year highs and some stocks are near 12-month lows.”
BDR Price at posting:
21.0¢ Sentiment: Buy Disclosure: Held
