A wise man once said that "a gold mine is a hole in the ground with a liar on top," referring to the fact that the industry frequently overstates the prospects of its potential finds. That may be the case here.

Though the value of gold and silver has generally increased over time, the metals and mining industry is defined by frequent booms and busts. Many mining mutual funds and ETFs, including the Vanguard Precious Metals and Mining Fund (VGPMX 1.01%), have mixed records of harnessing these price swings for a profit.

Vanguard's actively managed precious metals fund has been a star in many years, but a laggard in many more, and it has a questionable record of performance.

Closeup of big gold nugget.

Image source: Getty Images.

An actively managed Vanguard fund

This fund is one of a handful of Vanguard's actively managed funds, and is sub-advised by M&G Investment Management. Its active managers seek to outperform by investing in companies that have ties to metals and mining, listing "exploration, mining, development, fabrication, processing, marketing, or distribution of metals or minerals" as business activities that would qualify a stock for inclusion in the fund.

Managers have a lot of freedom in how to run the fund. Notably, the fund can invest up to 100% of its portfolio in foreign stocks, and its prospectus allows for the fund to invest up to 20% of its assets in gold, silver, and other precious metals bullion and coins.

The fund is generally highly concentrated in its best ideas, and invested most heavily in small- and mid-cap stocks. Although the fund held 71 stocks at the end of July 2016, the 10 largest stocks made up more than 40% of its assets.

Nearly 91% of its assets were invested in foreign stocks, with stocks listed in Canada (62% of the portfolio) and the United Kingdom (18.8% of the portfolio) leading its foreign exposures; the United States is the third-largest country exposure, at 9.2% of the portfolio.

A better fee structure

One of the most interesting things about the Vanguard Precious Metals and Mining Fund is that it charges a fee on a sliding scale, based on the fund's performance relative to the S&P Global Custom Metals and Mining Index. Since the fund has underperformed its benchmark, the advisory fee was reduced by a performance adjustment of 0.02% of assets in 2016. If performance were better than its benchmark, fees would have been increased.

The underlying goal of any performance-based fee is to incentivize good performance. Performance is mixed, as the fund has lagged its benchmark significantly over 10 years, while putting up only small spurts of outperformance.

There was a management change in November 2013, and thus performance since that date (as of August 2016) can be attributed to the current managers who remain on board.

The one bright spot is that total expenses -- 0.35% of assets in the fund's most recent fiscal year -- were a fraction of the 1.45% annual expense ratio of the average mutual fund in its industry.

Low expenses can't save all funds, however. Note that the fund lagged the performance of its benchmark over the five- and 10-year periods ending December 31, 2015.

More reasons to avoid than buy

Over periods spanning decades, metals and mining companies have been significant underperformers. The authoritative book Valuation: Measuring and Managing the Value of Companies lists metals and mining companies 22nd out of 27 industries for returns on invested capital, over a period spanning 1965 to 2007. During that same period, gold prices rose from $35 per ounce to more than $700 per ounce, a tailwind that theoretically should have led to excellent returns for investors.

While past history is no guarantee of future performance, it remains true that commodities and the companies that produce them are prone to volatile performance. Investment returns are therefore more closely related to your ability to time the peaks and troughs of gold and silver prices than to picking great stocks.

Those who wish to speculate on commodity prices might prefer to invest in commodity ETFs that track the price of metals, or gold or silver mining ETFs, which offer exposure to specific corners of the industry. Those who wish to invest rather than speculate are probably best off staying away from sector-specific funds altogether. Though it may be alluring to own part of a gold mine, the booms and busts in the industry have been mostly a bust for buy-and-hold investors.