Long-Term Metals Investing

Waiting for long-term gains can test your patience, whether in miners or precious and rare metals...

The LONG TERM is now shorter than it used to be, according to Encompass Fund founders Malcolm Gissen and Marshall Berol, but waiting for the big pay off scored a 137% increase in their fund in 2009.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. He has been an investment advisor since 1985 and has managed separate accounts since 1999.

Marshall Berol has been engaged since 1982 as an investment manager in San Francisco, CA. Since 2000, he has been the Chief Investment Officer of Malcolm H. Gissen & Associates, Inc. In addition, for more than 20 years, Mr. Berol has owned his own investment firm, BL/SH Financial.

Here in this interview with The Gold Report, they discuss how they choose companies for their fund, and highlight a new way to play the rare earths sector.

The Gold Report: First, congratulations on your Encompass Fund performance of 137% last year. Morningstar rated your fund very highly in 2009.

Marshall Berol: In their database of over 16,000 funds, Encompass Fund was number five for 2009, and number one in the World Stock Fund category.

Malcolm Gissen: For the three-year period, the Encompass Fund ranked in the top 1% in the World Stock Fund category. The fund is about three-and-a-half years old.

TGR: What did you see in the investment landscape last year that others apparently missed?

Malcolm Gissen: I think it's a combination of things. We continued to emphasize resource companies and some healthcare companies, the sectors that we felt would perform well. The companies that we liked in those sectors did even better than the sector as a whole. For example, last year gold was up 24%. The gold companies that we liked, and also the silver companies for that matter, mostly doubled and tripled in value in 2009.

Early in 2009, Marshall and I discussed the fact that a number of these resource companies had been battered in 2008. We felt that they were performing well. They should not have declined in 2008 and they offered an even better opportunity. We had the courage of our convictions to add to our positions and to initiate new positions in some companies in these sectors. Our investors were well rewarded for our doing that.

TGR: What do you think was the difference between 2008 and 2009?

Malcolm Gissen: In 2008, a lot of hedge funds had made money, as we had in prior years, by investing in resource companies, especially in the junior mining companies. We were pretty heavily invested in those areas in 2008. When the hedge funds had a lot of redemptions and had to come up with cash to pay their outgoing investors, the first thing they sold tended to be the companies in which they had large gains. In many cases these were the resource companies.

In the case of the junior mining companies, many of those companies' stocks are thinly traded. So when these hedge funds started simply dumping millions of shares of these thinly traded stocks in the market, a lot of the junior mining companies fell 50% to 95% in value during the second half of 2008. Marshall and I started calling these companies saying, "We don't understand. You just discovered 5 million more ounces of gold and your stock is down 15% or 20% in two days. This makes no sense."

The companies told us they didn't know what was going on, but somebody was clearly selling a lot of shares. It wasn't until about October that these companies were in New York visiting East Coast hedge funds, and learned that the hedge funds had simply dumped their stock in the marketplace. That had a very negative impact on these junior mining companies. It certainly hurt the Encompass Fund.

Marshall Berol: At that time, it was not only the redemptions that the hedge funds were getting. The hedge funds were getting margin calls. Individual investors were getting margin calls. Individual investors and the professional investors were very nervous. They were shell shocked as the second half of 2008 and the beginning of 2009 wore on. There was a tremendous amount of liquidation.

We went back and looked through the portfolio. We went through the companies we owned and assessed what the attributes were, pro and con, of those companies. We looked at their finances, their management, their projects. Then we decided to eliminate a few of the companies that we felt weren't as strong, weren't as solid. We added to existing positions in companies that we felt were solid and the prices were mismatched to what the company represented. Then when the markets started to recover in March of 2009, a number of these companies went on to perform spectacularly for the balance of 2009 and into 2010. That's what certainly contributed to the excellent performance of the fund, and what we think will continue to contribute to a positive performance of the fund going forward. Of course as we all know, and as the SEC requires us to say, past performance is no guarantee of future results.

Having said that, it is important to look at where a company has been and is and try and determine where you think it's going to go as a company and as a stock investment in the future.

TGR: Marshall, in our last interview, you said the resource investment story is not over. We're in the early innings. Where are we in the resource story today and what resources have the best investment story?

Marshall Berol: Where we are in the continuum of the story is we feel it's still early on. It's not as early on as it was a year ago, or two, or three or five years ago. Gold has gone from $275 to $300 an ounce to currently, say $1,150. In the US, it's a little off from the high reached last year of $1,220.

If you're in Europe and you're looking at gold in the context of euros, gold has hit new highs. That's the same with various other currencies of the world. We feel that's going to continue. We feel there are various reasons why it will continue for gold and silver. Silver has some of the same attributes as gold in that it's a precious metal and it's looked at as a monetary metal. But silver also has its industrial uses. That's a major component with what happens with silver.

We continue to like copper and some of the other base metals. We continue to be very positive on some of the commodities involved in the energy complex, particularly uranium and coal and to a lesser degree oil and natural gas. Oil and natural gas march to their own drummer, if you will. These other commodities, the precious metals, the base metals, we feel certainly have further to go on the upside. If the next question is how far and how high, we wish we knew. We don't have a good enough crystal ball to say. We would say that we're still in the earlier innings of the ball game, if you want to use that sports metaphor.

TGR: Are you saying that's specifically about gold or do you see that across the entire resource sector?

Marshall Berol: It's certainly gold, but basically along the entire resource sector. With regard to the commodities, the base metals, the industrial metals, it's also dependent, particularly in the shorter term, on the economies of the world. It's the US economy. It's Europe. It's Asia. It's China. You're not going to have copper continuing to go up, as it has over the last number of months, unless the economies of the world continue to improve. We think that's going to happen. It doesn't happen in a straight line. There are fluctuations and there's volatility.

If you look out a period of time, and by that I'm talking about 6, 12, 18, 24 months, yes we remain positive. Our outlook is based on a longer-term investment. We are looking for capital appreciation. We are not traders as such. We are not looking for short-term movements. Although we are aware of them and conscious of them, what we're looking for, both for our individual client accounts and for the mutual fund, is long-term capital appreciation.

TGR: Haven't some investors gotten impatient waiting for the long term? In other words, is the long term shorter now than it used to be?

Malcolm Gissen: The long term is definitely shorter that it used to be. The markets are far more volatile. You have far more information available. You have many more individuals with all the information at their computers who are day trading. You have hedge funds and private equity funds controlling enormous amounts of money that have a profound impact on the market. All of this has tended to force investors to shorten up their horizons. The long term used to be 5 to 10 years, now it's probably 3 to 5 years.

TGR: Has that changed the way you manage the fund in that case?

Malcolm Gissen: Yes, it's changed the way we manage money both for the fund and for individual clients. We had to make that change because of the volatility in the marketplace. We have to respond to that. We have to be aware of it. It enters into the way we operate, the way we invest.

Marshall Berol: Having said that, we're still looking to invest for the long term for capital appreciation. What it does change is that instead of having a 5- or 10-year horizon, as Malcolm said, you shorten that horizon to 2, 3 or 5 years. You also need to be more constantly aware of what the markets are doing and what's happening with a particular company and the stock of that company so you can react if you feel it's warranted.

Investors, particularly individual investors, but certainly professional investors as well, are human beings. Too many investors are acting too quickly because of the ease with which you can buy and sell equities these days. They're acting too quickly. They're pushing a button to buy or to sell before getting the full amount of information they probably should be utilizing. Having said that, that's the market we're in. You have to be aware of that and you try and take advantage of that.

TGR: Given that the long term has gotten shorter, how does that affect when you're investing in resource companies? In other words, do you steer clear of companies that are just in the exploration mode and stick only with producers?

Malcolm Gissen: No, we don't. We invest in a good number of exploration companies. Some will not go into production without a joint venture or acquisition of the company.

Marshall Berol: Because we anticipate that they may be bought out and somebody else will take it into production.

Malcolm Gissen: Or they don't want to get into production. A change for us is that we may be more apt to take profits than 5 or 10 years ago. For example, a good number of the resource companies in which we are invested have soared 200% to 400% in one or two years. We may still like the company and believe it has further appreciation potential, but nowadays we might consider selling part of the position in order to realize the large profits we attained. In other words, we will be taking some money off the table even though we might think that company has a bright future and the stock could go higher. That's one of the ways in which our style, our methods, have changed as a result of the shorter-term focus and view that many investors have.

TGR: Now when you're looking at those companies, are you looking for ones that are likely acquisition targets, or is that just a hope that that's going to happen?

Malcolm Gissen: That's a hope that it'll happen. We don't like to rely on the fact that this company is likely to be acquired because too many things can happen. That should not be a determining factor in our decision to invest. We're investing in companies that we think on their own will continue to increase shareholder value. A company that we think has excellent management and excellent prospects on its own. In the back of our minds, we're aware that this company would be a very attractive acquisition target for certain larger companies and that might happen. If it does, that's just a bonus. This would be in addition to the excellent returns we expect to get based on the fundamentals of that company itself.

TGR: Great, thank you both for your time today.

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