Why one small fund is gearing up...
WHEN MARKETS are highly volatile running a small fund like the Magna Opportunity Fund requires nimble management.
In this interview with The Gold Report, Bo Chew tells us how he does it and what criteria he uses to select his fund's investments.
The Gold Report: The CBOE VIX Volatility Index was all over the map in 2011. Your Magna Opportunity Fund is capped at only $20 million (M) with a goal of producing exceptional returns by trying to be nimble within the market. Can you explain how you plan to achieve this when a lot of the larger and more diversified funds try to just stay even?
Bo Chew: With this particular fund we expect to deliver very high returns by being concentrated in about 30 holdings where each position has a realistic potential to increase 100% within 12 to 24 months. The basic premise is buying companies that are undervalued, have great people, offer huge upside and have important catalysts in the next 6 to 12 months. Unlike large funds, we can take advantage of really beaten down companies or less liquid opportunities.
TGR: I'm assuming that in most cases you're probably going to be buying the stocks rather than playing options. Right?
Bo Chew: Yes. We have two options currently. We try and buy them when we see them, in this case at multi-year lows, where we believe that the company is strong and its share price will recover.
TGR: How far out are the options?
Bo Chew: Two years.
TGR: Are you also buying physical metals or just equities and options?
Bo Chew: Generally we stick with equities and options. We do try to maintain about 10% cash and also we have the ability to leverage 25%. That gives us a lot of room to take advantage of opportunities. From time to time, we'll trade 10% in silver or gold exchange-traded funds.
TGR: Do you have a preference for how you weight your portfolio between the various sizes of companies?
Bo Chew: We tend to prefer the small caps and like the mid-caps as well. The challenge with large caps is that in most cases I can't realistically see a stock increasing 100% within 12 to 24 months unless it's something that is really beaten down and misunderstood.
TGR: You can always play the options on the large caps if you can hit the right timing.
Bo Chew: Correct.
TGR: Turning to junior stocks, 2011 was a pretty dismal year. Are you expecting that 2012 will be a breakout year for them?
Bo Chew: That's a good question. The juniors are definitely quite undervalued. We do expect 2012 to be a good year as merger and acquisition activity picks up. However, it doesn't really need to be to help our performance because catalysts in the next 6 to 12 months with our stocks can push the prices up.
TGR: So, you're looking for specific catalysts that are independent of what the general market is going to do?
Bo Chew: Yes. I'm looking at companies that are advancing projects through to prefeasibility or feasibility or derisking as they ramp up toward production. We try to buy at the point in the resource company cycle where there's less risk. Often, that means buying early while the story is being formed and there isn't a lot of exposure. We also buy after a company has largely derisked the project and it's within one or two years of production. Sometimes we also buy when a company has disappointed but it's still a good company with an intact story.
TGR: How do you decide when you want to sell?
Bo Chew: The sell decision is based on one of the four buying criteria—value, catalysts, great management and upside potential—breaking down. Often we'll sell a stock when it's run up because there's no longer value, or when key people leave and we feel that materially impacts the ability for the company to move projects forward or when there's an absence of near-term catalysts.
TGR: Just looking at the price chart will give you a good indication of how much longer you might want to hang on.
Bo Chew: That's true. Often you have to give the markets time to tell you whether you're right or wrong.
TGR: Do you see any developing opportunities that are still in the early and more speculative stages that might be places for people to get into at this point?
Bo Chew: I think there are a couple of areas. One would be commodities that are less common or less mainstream, like graphite or tungsten. Also, companies that are less followed could be great opportunities, because with less news there's very little hype and very little trading, leading to potentially depressed levels. There are many great opportunities, but you have to do your research.
TGR: What would you like to leave with our readers as far as how they can best profit in the current investment environment?
Bo Chew: We have a volatile investment environment so it's important to keep a certain amount of cash available to take advantage of opportunities. At the same time you have to take your profits when things do go up. Resource investing is inherently risky as only a small percentage of deposits ever become mines. But, you'll have greater success focusing on high-quality projects with a lot of blue sky run by excellent people who have financed, built, joint ventured and sold mining operations. These companies can reward shareholders in today's very difficult environment.
TGR: That's a good investment philosophy with useful guidelines to follow.
Bo Chew: Thank you.
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