MERCURY'S Gold & General fund had the highest one-year return among commodity funds last year at 23.9 per cent, boosted by its heavy exposure to the South African gold sector. The winning fund has about US$525 million (about HK$4.05 billion), including US$300 million in the second ranked fund, Mercury's International Gold & General fund. The International fund invests in the sterling-denominated Gold & General Fund but is denominated in US dollars. Julian Baring, a director of the funds' manager, Warburg Asset Management, said the Gold & General Fund had almost 50 per cent of its assets in South African gold stocks, with the rest mostly in Australia, Canada and Russia. 'There has been some quite interesting stock picking,' Mr Baring said. Big positions were taken in South African shares such as Western Areas, South Deep, East Vaal and Harmony, which all doubled in price. The world gold price actually fell during the year, from US$390 to US$383 an ounce and world gold indices fell with it. But South African miners ended the year receiving more rand for their gold than at the start because of favourable movement between the commercial rand and the US dollar. The financial rand, which foreigners must use to buy South African shares, also moved in favour of foreign fund managers, from 4.28 to the US dollar at the beginning of the year to 4.06 at the end. Some South African stocks also benefitted from an inflow of foreign funds following the election of Nelson Mandela, as president, which led to the US removing investment barriers. The investment climate this year had been 'much more difficult', Mr Baring said. 'The gold price has fallen and there has been a large fall in all the indices. The great thing is this fund is down by less than the indices, so it has outperformed on the way up and on the way down.' Mr Baring, the former head of James Capel's mining stocks department, said investors should limit exposure to the volatile gold sector to about 2.5 per cent of portfolios. He took what he described as a 'common-sense approach' to investment in the sector. 'People have been trying to predict the future gold price since God was a little boy, and it is impossible,' he said. 'All you can say is that gold, as money, over a long period has tended to hold its value better than other forms. 'So, when gold is cheap relative to its long-term purchasing power, it is time to buy.'