When Malcolm Gissen explores a potential investment, sometimes an ambulance accompanies him.
That was the scene in November 2009, as Mr. Gissen and his co-manager at the Encompass Fund, Marshall Berol, visited a mining operation 14,500 feet up in the Andes in Peru. At that altitude, where headaches and breathing challenges are common, it's best to have a medical team along.
“We feel that it's essential that we see these projects and get to know both the executives and the employees, including local people,” Mr. Gissen said of his trek up the South American mountain range. “You're not comfortable. But it's part of the work we do, and it sets us apart from other mutual fund managers.”
The Encompass Fund [ENCPX] achieved a 137% return in 2009 and a 60% return in 2010 to rank at the top of the Morningstar Inc. international-equity category. Its strategy revolves around investing in metals, energy and commodities, such as the five billion pounds of copper and the 30 million ounces of gold that were the target of the Andes mining operation.
Over the nearly five years of the fund's existence, Mr. Gissen has implemented an approach that he said was mostly absent in the industry. He thought that mutual funds that had to adhere to certain categories, such as value or small-cap, were limited in what they could do for investors.
The Encompass Fund is designed to be agile. Mr. Gissen and Mr. Berol can take it wherever they believe the market is fertile.
“If we had a fund that could invest anywhere we want to go, we would have a fundamental advantage over other mutual funds,” Mr. Gissen said.
Since its inception, the fund, which has $30 million in assets under management, has concentrated on commodities that are sometimes found not just in far-flung places, but also in regions with geopolitical risk.
Most Encompass investments are in companies that are based in North America but involved in global mining operations. For instance, Avalon Rare Metals Inc. in Toronto Ticker:(AVL) processes rare earth metals. Within several years, it hopes to mine them at home. But for now, about 95% of these commodities are found in China, where the government is instituting stricter export controls.
Another Encompass holding, Dacha Strategic Metals Inc. of Toronto Ticker:(DCHAF), acquires rare earth metals from China and warehouses them for sale to companies around the world.
Although the temperament of the Chinese leadership is difficult to predict, rare earth commodities likely will be in demand for the foreseeable future because they are central to manufacturing high-tech gadgets such as cell phones and computers.
Other obscure metals in which Encompass companies do business — vanadium and manganese — strengthen steel, which is the foundation for infrastructure projects that target burgeoning global middle-class populations.
Other commodities central to the Encompass portfolio — uranium and oil — are household terms that have a direct application to energy production.
Of course, Encompass invests in gold, whose popularity is growing not only as an addition to currency reserves in Mexico and China but also as a consumer item.
Encompass has no plans in the short term to change its investing strategy. “The need for commodities, the use of commodities, is going to continue to grow,” Mr. Berol said.
The Encompass Fund, however, is down about 5% so far this year and will have trouble matching its recent success, according to Kipley Lytel, managing partner at Montecito Capital Management. Gold and energy investments, for instance, are coming off recent highs.
“The lion's share of the return for their top three holdings has been realized,” Mr. Lytel said. “They're not going to get their historic returns of 2009 and 2010.”
Mr. Lytel also noted that investing in Mr. Gissen's and Mr. Berol's fund is not for the faint of heart — something they acknowledge.
“What they're doing is risky,” Mr. Lytel said. “They're going for the high-octane, volatile returns.”
E-mail Mark Schoeff Jr. at [email protected].
