Investments in cross-border commodities, energy fueled 137% return last year
The global-resources theme is as strong as ever in the scrappy, highflying Encompass Fund Ticker:(ENPCX), which is up 35% so far this year.
The top-down analysis of metals, energy and agriculture has been guiding co-manager Malcolm Gissen ever since the fund's launch nearly four years ago. Once the general themes are identified, the research converts to bottom-up stock selection of any market cap range, anywhere in the world.
The theme has been in place even longer for the $300 million asset management firm Malcolm H. Gissen & Associates LLC.
“Six years ago, we looked at countries like China, India and Brazil, and saw a tremendous need for resources,” he said. “We decided that these countries had a rising middle class and an increased demand for things like industrial metals and energy.”
Of course, back then, most investors were not focused on commodities in general, let alone precious metals such as gold and silver, both of which have spiked more than 300% over the past six years.
The fund's mandate restricts it from allocating more than 60% of the portfolio to non-U.S. stocks. But that hasn't prevented Mr. Gissen and co-manager Marshall Berol from leveraging global companies to tap into some of the most obscure developing markets.
Avion Gold Corp. Ticker:(AVGCF.PK), which has a non-exchange-listed pink-sheet stock, provides exposure to mining operations in the tiny West African nations of Mali and Burkina Faso. Avion shares, now trading at around $1.08, are up 80% from the start of the year.
On the other end of the market cap spectrum, the portfolio also includes Freeport-McMoRan Copper and Gold Inc. Ticker:(FCX), which has a $46 billion market cap.
Freeport shares, riding the wave of record-high copper prices, are up 26% from the start of the year. This is the kind of approach that enabled the co-managers to generate a 137% return last year.
The fund's category-leading 2009 performance beat the average of Morningstar Inc.'s world stock fund category by 100 percentage points.
Despite the recent powerful performance, the fund is chugging along with just $12 million under management, a figure that is way too low to hit most financial advisers' radar screens.
“Going forward, not only will the resources theme continue to work well, but we're seeing even more opportunities,” Mr. Gissen said.
A few of the next frontiers for the fund, he explained, likely will include such beaten-down sectors as natural gas and homebuilder stocks.
“Generally, we're investing in something when other people are asking, ‘Are you crazy?'” he said. “But we usually get in early, and then other people catch on and drive up the stock.”
There are times, however, when being aggressive can backfire, as in the case of 2008 when the fund declined by 62%.
“The resources sector got battered in 2008 when a lot of hedge funds had to sell out of their best-performing positions to meet redemptions,” Mr. Gissen said. “This is going to be a volatile fund sometimes, but 2008 was the worst year for the stock market in 70 years.”
The fund, which has less than 50 positions and a 20% annual turnover rate, was up 12% in 2007.
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