Fund Managers Go for the Gold (Miners)

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"Most tend to be fully invested in mining shares or close to it, rather than bullion..."

Portfolio managers of gold mutual funds are trying to bolster returns in a bull market by identifying mining stocks that might outperform others, focusing on factors such as production growth and cash flow.

Most tend to be fully invested in mining shares or close to it, rather than bullion, believing this is where there is the greatest potential for further gains.

At Monday's high, the Philadelphia Gold Silver Index was up more than 50% this year, while spot gold was up 30%.

Despite the advance, mining shares still lag behind bullion prices since they are below their 2008 peaks as gold continues to hit fresh record highs, said Caesar Bryan of Gamco Gold Fund. "If gold keeps coming up, these stocks are very inexpensive."

Mark Johnson, of USAA Precious Metals & Minerals Fund, said his fund aims to perform well on a relative basis regardless of gold's direction. "Consequently, we continue to emphasize low-cost producers with strong management and good balance sheets that have growth profiles and also relatively reasonable valuations," he said.

Some junior miners have good values, Mr. Johnson said, listing Great Basin Gold, and .

Mr. Johnson also considers an opportunity as a "defensive" stock. It relies upon royalty arrangements, which means it may hold up better on any gold decline due to favorable operating margins, he said.

Joe Foster, of Van Eck International Investors Gold Fund, seeks companies likely to keep increasing production. "The companies adding value and generating growth are the ones that will command premium multiples," he said.

Mr. Foster likes , which he described as a "turnaround story" with growth prospects due to new discoveries and acquisitions.

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