Global markets present tremendous opportunities to those who are able to sort out what’s meaningful from the background noise. It also means asking the right questions, fine-tuning our investment processes to uncover market mispricing and other inefficiencies and moving quickly to capitalize on them. It also means going where others don’t.
The year is less than three months old but our portfolio managers’ passports are already filling up with stamps. Since the start of the year, our analysts and portfolio managers have been to 17 conferences and research trips in eight countries and six states.
This research and travel is essential because it is one of two key types of knowledge an investor must have in order to be successful: Explicit and tacit.
Explicit knowledge is academic. It is what you can learn about a company at a Bloomberg terminal by examining its balance sheet, cash flow statements, valuation against peers and other key metrics. Tacit knowledge is personal in nature and much more difficult to obtain. It is acquired over time through first-hand observation, experience and practice.
In February, co-portfolio manager of the Global Resources Fund (MUTF:PSPFX) Brian Hicks and I attended the African Mining Indaba in Cape Town, South Africa. With more than 4,000 executives, ministers and individuals representing more than 800 international companies and 40 government delegations, Indaba is the world’s largest gathering of influential stakeholders and decision-makers in African mining. In 2010, sponsoring companies represented an estimated $1 trillion of market value.
I was honored to be the keynote speaker on the first day of the conference and Niall Ferguson, the world-renowned economics writer and Harvard professor, provided the keynote on the second day.
I’ve been attending this conference for over a decade and witnessed its growth from a few hundred people to several thousand today. It exemplifies the excitement and opportunity the continent has to offer.
In addition to Indaba, Brian and I visited operations in Zimbabwe, Mozambique and the city of George between Cape Town and Port Elizabeth, South Africa where it was a scorching 100-plus degrees outside. More regarding our trip is coming in the following weeks so stay tuned.
Ralph Aldis, co-manager of the World Precious Minerals Fund (MUTF:UNWPX) and Gold and Precious Metals Fund (MUTF:USERX), traveled to the tropical climates of Colombia and Panama to see mining efforts still in their infancy. Colombia has become a new frontier for gold mining because of its abundance of known deposits. The country’s adoption of business-friendly government policies has already triggered a boom in Colombia’s energy industry and mining may be next.
Panama might be the fastest booming country that nobody talks about and Ralph was blown away. The downtown skyline of Panama City rivals those of Dubai, Singapore and other rapidly growing cities. In Panama, Ralph stepped foot in the country’s first gold-producing mine.
Evan Smith, co-manager of PSPFX, Brian, Ralph and I attended BMO Capital Markets’ 2011 Global Metals & Mining Conference in late February. The BMO Conference, which celebrated its 20th anniversary this year, had more than 100 CEOs giving presentations and 1,200 analysts from around the world in attendance. Ralph did the investment equivalent of speed dating by holding 38 one-on-one meetings with mining executives over a three-day span—that’s more than 11 hours of meetings a day. These weren’t surface-level meetings either. Ralph’s experience and knowledge of the global mining industry allows him to get to the nitty-gritty details of how those companies are growing their reserves, production and cash flow—our three key metrics in evaluating mining companies.
On Sunday in Toronto, with frigid temperatures of 10 degrees below zero outside, I gave the keynote presentation discussing how the Love/Fear Trade is driving global demand for gold at the Prospectors & Developers Association of Canada (PDAC) Conference. This has historically been one of the pre-eminent conferences in the mining industry and this year was no different. In 2010, 22,000 participants from 118 countries attended and this year that number grew to 24,000. These analysts, consultants, investors and others come to PDAC to build relationships, share ideas and showcase their mining opportunities.
Meanwhile halfway around the world, our director of research John Derrick and Brian were surveying opportunities in Shanghai, China. The life of a globetrotter is a brutal one. After flying out early Friday morning and arriving in Shanghai at 7 p.m. local time Saturday, John and Brian only had a few hours to settle in before their day began around dawn on Sunday morning. They then spent 11 hours on a bus touring facilities and meeting with company executives around Greater Shanghai on a cold and rainy day.
Once on the ground, John and Brian heard that China’s tightening policies are having an impact but the government won’t stop until consumer price inflation (NYSEARCA:CPI) starts trending lower for a few consecutive months. Despite construction figures softening in recent months, a day of exploring all over the city unveiled the area is still booming with construction projects everywhere.
During the trip, Brian and John surveyed 12 companies ranging from miners to mobile phone makers. After some high profile blowups and instances of fraud in recent years, investors are cautious and skeptical. This means that developing our tacit knowledge by meeting companies on their home turf, listening to local investors and seeing operations firsthand becomes even more important.
That said, one thing evident from the visits is that Chinese companies are rapidly mimicking and copying U.S. business models and methods. There is still some maturation that needs to take place but it is clear Chinese companies are quick studies and are catching up with the U.S. and others very quickly.
Investors must marry the facts (explicit knowledge) with the feelings (tacit knowledge) in order to create a rich knowledge matrix. We do this by monitoring and tracking the fiscal and monetary policies of the world’s largest countries both in terms of economic stature and population. We also apply both statistical and fundamental models (explicit knowledge), including “growth at a reasonable price” (GARP), to historical and socioeconomic cycles in order to identify companies with superior growth and value metrics.
We then overlay these explicit knowledge models with the tacit knowledge obtained through first-hand observations such as the ones we’ve just discussed. Both forms of knowledge are important when it comes to investing, but it is our tacit knowledge that sets us apart from our peers, and how we strive to create alpha for our fund shareholders.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.