HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. Making a return visit with me here today is Marshall Berol, the co-portfolio manager of the Encompass Fund. Marshall, thank you very much for coming back on the show.

Marshall Berol, co-portfolio manager, Encompass Fund (Berol): My pleasure, Mike. It’s always good to be with you.

Norman: Well, give us your overview here. We had you on a while back. I know your fund is heavily invested in raw materials. It was, at one time, the top-performing fund of world equity funds, correct?

Berol: Correct.

Norman: Out of a universe of 800 world equity funds, your fund, heavily loaded with natural resource plays, was the No. 1-performing fund.

Berol: Right. 2008, as everybody I’m sure remembers, was not a good year for the stock market.

Norman: No.

Berol: It wasn’t a good year for any company.

Norman: Just about any.

Berol: And the Encompass Fund, in 2009, though, came back strongly. We were up 137 percent and followed in 2010 up 60 percent. And so, for the three years ended 2011, even though the end of 2011 wasn’t all that good, we were the No. 1-performing world stock fund according to Morningstar on a trailing three-year basis. And we’re still up there in the top 2 percent. And we do invest in a lot of resource companies.

The Encompass Fund was set up to invest anywhere. We invest in any areas that we think are attractive. We’ve thought resource companies were attractive when we started the fund almost six years ago. We still think they're attractive: the precious metals, the industrial metals, some portions of the energy complex.

Norman: So how has the fund performed since that high watermark, that peak? It’s trailed off a bit, hasn’t it?

Berol: Well it trailed off at the end of 2011 when, again, the overall market was flat. But a lot of the resource company stocks went down the latter part of 2011, as did other companies where there was liquidations tax-loss selling. For the first quarter of this year, the fund was up 18 percent. And we’re still nicely ahead for the year-to-date.

And we are very optimistic that the areas that we’re invested in — gold and silver, copper, other industrial metals such as antimony and various parts of energy, oil, coal, uranium — are going to continue to do well over the long term. And we’re long-term investors; we’re not a trading fund.

Norman: OK. So this period now of consolidation or correction … we saw precious metals hit highs last year and trail off, we saw copper prices come down. They’ve rebounded a little bit. We see coal prices coming down very sharply. Steel prices have come down. I guess you would view this as a correction in a longer-term trend?

Berol: Yes, or a consolidation. I think if you look at gold and silver, it’s more of a consolidation and a correction, if you will. That’s terminology. But the fact of the matter is, there are a variety of reasons that gold went up — and it’s gone up for the last 11 years — and basically none of them are solved.

Norman: Like what?

Berol: There's still geopolitical problems. There's still debt problems. There's still deficit problems. Europe comes and goes being in the headlines. And they're making some progress. But their problems aren't solved. We still definitely have debt and deficit problems in the United States. Gold is still attractive.

Norman: Well, what kind of problems? If you look at the debt, which is now above $15 trillion, it has gone, in 1980, from $800 billion to $15 trillion, almost a twentyfold increase, and interest rates have gone from 20 percent to zero. And the stock market has gone up. We’re in a rebound economically. We see the economy back to growth.

I keep hearing “there's problems, there's problems.” But when you look at other barometers of these so-called problems — equity performance, GDP, inflation, interest rates, even the dollar — if you look at the dollar index, which is a measure against a basket of currencies, it’s up from where it was in 2008.

Berol: They are up because, with the problems, there's still some modest growth in the United States. We would like to see better or more, but there's modest growth. And there is still very good growth in other parts of the world. When the headlines are that China’s growth is slowing, they're talking about from 8.7 percent to 8.5 percent. And that’s off of a larger base. So you need to take it in context.

Norman: Yeah, but it went from 12 percent to 8 percent, right? That’s a 30 percent reduction in its GDP. That would be like us going from 2 percent to about 1.4 percent or 1 percent, something like that; that’s a significant reduction.

Berol: It is a significant reduction. But it’s off of a larger base, that reduction. And the growth is still there. China is still using copper. Yes, you can say copper has gone from $3.90 to $3.70 or $3.60. But that’s up from 70 cents, if you want to go back 20 years. And it has stayed up. Oil is up. The one commodity that is really down, and will come back, but who knows when, is natural gas. And so the fund is invested to a very minor degree in natural gas.

But you talk about gold; gold is a storehouse of value. People have bought gold for 6,000 years; we know that, we hear that. Bu, only for the last three years have the central banks been net buyers of gold. For the previous 20, they were net sellers of gold — the central banks, the IMF. Now they're net buyers. People want to own gold. The increasing numbers of consumers, the middle class in China and India, who have a culture of owning gold, wanting to own gold, have more money and are buying gold.

And so we think that gold is going to continue to go up. Yes, there are fluctuations. But it’s also a supply/demand situation. It is increasingly difficult, whether it’s gold or silver or anything — oil, uranium, copper — to find it, to get permitted, to deal with the environmental issues, to deal with the local peoples, and to get into production and to increase production of any of these commodities. And that has led to more difficult supply situations while demand is growing.

Norman: I want to switch back to natural gas; that’s very interesting to me — trading below $2. Why wouldn’t you be really aggressive here? You're saying we’re taking a small position in natural gas. But like when would you really commit to it? When it goes back up to $5?

Berol: No, no — long before $5. It looks like it got below $2, $1.98 or $1.95 or somewhere in there, and it looks like it’s trying to establish a base. And that’s going to take it time. It’s going to take production coming off. The drilling rig count is down. Some of the smaller companies are going to start closing in production because they can't afford to keep production and the banks aren't going to let them afford to keep it.

So at some point — you say, when? That’s the unknown, the big unknown. You don’t wait until it goes up, but you wait until at least it's bottomed. We have, over the last several years, gone back into natural gas, found out we were too early, got back out. The timing is very difficult, but somewhere in here is going to be the bottom, which you will realize when you look back.

Norman: It reminds me of 1998: oil prices at $10 a barrel; big articles in The Economiston how oil is going to stay in single digits for years and years to come. Or back in the mid-90s, when gold was at $250/oz: Nobody wanted to touch it.

Getting back to your example of the central banks, I don’t know if you want to use that example, because they were big sellers. Now they're big buyers. So I don’t know, timing-wise, if they're that savvy. But I hear what you're saying.

Anyway, I guess you see the outlook as that this is a great time right now. We’re having this consolidation in raw materials. It’s been happening since last year. But people should really get the exposure now, right?

Berol: They should get the exposure. If they don’t have any, start to get exposure. You don’t have to be 100 percent in or 100 percent out. But put a portion in — 25 percent, or a third. And get a portion. If it goes a little lower, put some more money in. If it goes higher, you're in at a lower average price.

And these are the times. It’s more difficult when a market’s down to be invested. That’s the time to be invested.

Norman: I totally agree.

Berol: Not buying at the high, then getting disappointed and selling at the low, which, unfortunately is …

Norman: … what a lot of people do.

Berol: Yes. And it’s not the way to do it.

Norman: Right. Marshall Berol. Thank you very much.

Berol: Thank you.

Norman: That’s it for now, folks. This is Mike Norman signing off. We’ll see you here next time. Bye-bye.