Investment managers share their views...
MALCOLM GISSEN founded Malcolm H. Gissen & Associates Inc., an investment advisory firm, in 1985. Mr. Gissen's management experience has focused primarily on investments in publicly traded companies.
Marshall Berol has been engaged as an investment manager in San Francisco, CA since 1982. Since 2000, he has been the chief investment officer of Malcolm H. Gissen & Associates, Inc. His investment management experience has focused primarily on investments in publicly traded companies.
In this interview with The Gold Report, Gissen and Berol discuss their long-term investment philosophies.
The Gold Report: Malcolm and Marshall, the Republican Party and the Obama administration are at a stalemate over how to tackle America's $1.4 trillion deficit. The problem has rating agency Standard & Poor's threatening to lower America's top-notch credit rating unless a solution is reached soon. A similar stalemate could happen again in a few weeks when Congress votes on whether or not to raise America's debt ceiling above $14.3 trillion to avoid defaulting on existing loans. Is partisan politics in America threatening America's long-term financial security and, ultimately, driving up the Gold Price?
Malcolm Gissen: Absolutely. We are concerned that such hostile environments in state capitals and in Washington D.C. have made it very difficult for Democrats and Republicans to work together for solutions that benefit all of us. It seems everything is about getting elected and re-elected instead of doing what's best for the country.
We believe this factor will continue to drive up the price of gold and silver. The stalemate over the budget, both in various state houses, and in Washington, has so polarized our country that we believe it's having a detrimental impact on markets.
All of this plays well into hard assets because when people are worried about their economies, inflation and their own lifestyles, they tend to invest in hard assets. And this is something we've taken advantage of with the Encompass Fund and our client accounts.
Marshall Berol: While Malcolm and I often agree on investment philosophies and style, we have somewhat differing views on political issues. But I certainly agree with him that party politics are negatively affecting the people and country and that it's one of a number of aspects driving up the gold price.
TGR: Gold recently climbed past $1,500/oz. Do you believe further upward momentum could be curtailed by the inevitable "sell in May and go away" sentiment?
Marshall Berol: It could be, but the emphasis would be on "could." If so, it would be a short-term effect. We remain very positive about the upward trends for gold and silver on a longer-term basis and that's 6 months, 12 months and further out.
There could be some correction over the next few months and it could be related to sell in May and go away, or it could be the summer doldrums. More likely there would be some profit taking due to the fact that gold is now over $1,500/oz.—a new all-time high and silver is roughly $48/oz. and also approaching a new all-time high.
Our experience in managing the Encompass Fund and individual client accounts over many, many years is that, when a concept or theory becomes well known, it often doesn't continue to work. Sell in May and go away is certainly in the forefront of people's thinking this year and probably the last couple of years. It very well could be that, because it is foremost in people's consciousness, it's not going to happen.
Malcolm Gissen: We invest in a number of junior mining companies, including precious metals juniors. The companies the Encompass Fund invests in tend to be those making lots of progress. They're exploring, drilling, moving toward production and enhancing their value. There's a stream of good news that's coming out of these companies and that moves the stock price regardless, almost, of what's going on in the markets.
As these companies make terrific progress, the Encompass Fund believes they will be rewarded in the marketplace. We don't invest more or less in gold companies based on the time of the year; the Encompass Fund invests in outstanding companies that we believe are making progress.
TGR: How much is your fund up so far this year?
Malcolm Gissen: The fund is up about 3% this year. Morningstar puts the Encompass Fund in the World Stock Fund category and for one year, the category was up 14.17%. As of March 31, 2011, the fund was up 51.5%. It's very unusual for a fund to outperform its category by more than 1, 2 or 3 percentage points. So, to outperform by 36% is very unusual. Over three years (to March 31), the Encompass Fund has gained a 19.6%-per-year average annual return, compared to about 1% for the World Stock Fund category.
TGR: And to what do you attribute that?
Marshall Berol: The fund is set up as a no-load mutual fund on a go-anywhere basis. We can invest in companies of any size. We can invest domestically or internationally, and we do; we can also invest in any industry or sector. While we've focused on gold and resource companies since we launched the fund in June 2006, we're not solely a resource or gold fund. We have holdings in other categories.
We're stock investors — we don't use futures. It's the focus on the resource companies that has enabled the Encompass Fund to perform so well because the gold and silver stocks and rare earth elements (REE), copper, uranium, coal, gas and other commodities are doing very well.
Malcolm Gissen: We have four people here who are involved in sourcing ideas, doing research and monitoring the positions in the fund. All of us have a minimum of 15 years' experience and a few of us have 25 years' experience. Over the last 10 years, we've formed relationships with brokerage firms doing business around the world.
Those relationships not only provide us access to outstanding analysts and their best ideas, but it also brings us opportunities for private placements in companies on very attractive terms. These are companies that have very high growth potential; thus, we provide exposure to sectors and companies that very few, if any, other American mutual funds provide.
TGR: Indeed. As Marshall said, your fund is heavily weighted toward resource companies and particularly junior explorers seeking economic concentrations of hard assets like gold, silver, oil and gas or uranium. These small segments of the market are currently outperforming the broader market, but how long do you think that's going to continue?
Malcolm Gissen: We live in unusual economic times, and we believe the explosive growth we're seeing in developing economies will likely continue for the next 10–20 years. This growth requires enormous amounts of resources whether they be energy, precious or other metals; and as a result, we believe that resource companies should perform very well over the longer term.
Marshall Berol: Historically, the small caps have outperformed the large caps. We're investing for the long term and our experience has been that the smaller companies — the mid-cap, small-cap or micro-cap companies—are more likely to have that long-term growth than are large companies. A large company is more stable but it's less likely to have the kind of growth that we think can be obtained with smaller companies. We do have positions in some larger companies, but we tend to lean toward the small-cap and micro-cap companies. And with a smaller company, we find that it's valuable to have met and sized up management.
TGR: It's also a matter of reducing the risk because, if you meet and get a good sense of management, you go into that investment with a greater feeling of security.
Marshall Berol: That's very true, and each of the four of us involved in portfolio decisions has a good amount of experience in meeting with companies. We feel it's very helpful in determining whether or not to invest in a company, or whether to sell some or an entire position in a company after we've invested. We also believe in doing site visits to the projects of the various companies in which we're invested or interested. We find it's very helpful to meet not just top management, but also the people involved in exploring the project or running the mine.
TGR: As we all know, Japan suffered a major earthquake and tsunami and a lot of its manufacturing has been affected. How has that affected companies that do business in Japan?
Marshall Berol: The situation in Japan is tragic and it's extremely unfortunate, but it's not going to affect Japanese manufacturing on a long-term basis; it's a shorter-term situation. Another aspect of Japan's earthquake and tsunami is the aftereffect on uranium stocks. We have since added to Encompass' positions in uranium stocks we already own and initiated some positions in other uranium producers because those stocks effectively went on sale.
TGR: What do you think is the next milestone for gold? And will we reach it in 2011?
Marshall Berol: The next milestone is further all-time highs. At the Encompass Fund, we've invested in certain gold companies and added various others for the last several years while people were saying things like, "It's a bubble," "It's a top" or "It's not going higher." We didn't believe that was the case and we still don't think that's the case regardless of whether pundits gave it a $1,500/oz. price target. We're there and now they're talking about $1,600, $1,800 or $2,000/oz. gold. We'll likely get to those amounts, we just don't know when. It is very difficult to put any specific price on it. So, at this point, we'll continue to stay tuned and invested. We're holding a larger amount of cash now than we often do — around 30%. And we're looking for opportunities to put that cash to work.
TGR: Thank you for talking with us today, gentlemen.
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