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Fund manager talks about his favourite stocks — and why gold will keep sinking

Senior fund manager Contango

When it comes to ASX small caps, Bill Laister is a practiced hand. Working in finance since the age of 21, he’s moved from the operating floor, up through the broking ranks, and finally, since 1990, into funds management, doing it all the “old fashioned” way, as he puts it.

“What my years of experience have taught me is that good ideas can come from many different places,” he says. “So in the microcap space, you need to talk to a lot of CEOs, finance people, and just a broad brush of people with differing levels of skills and industry involvement.”

Today, Laister is a senior fund manager for Contango, specializing in microcaps, metals, mining and gold.

He recently agreed to share some insights from the field with our Foolish audience. Simply read on to discover where Laister sees opportunity today, some of his favourite long-term stocks, and his outlook on gold prices.

What role does qualitative analysis play in your stock picking? Do you tend to be more narrative or numbers focused?

The numbers might help filter a company, or confirm what your view is, but they are just one cog in the wheel.

The smaller the company, the greater the focus on qualitative research you need, i.e. to know the track record of the key personnel and companies’ assets, etc.

Microcap investments are more driven by the bottom-up analysis — understanding what drives the business rather than the economic outlook of the global economy.

Do you tend to focus on any special situations or types of companies?

Not so much situations—more so established microcap companies with a proven track record that are looking to expand. We look particularly to those with potential to move from microcap to small cap to large cap. Generally, we target companies with a market cap between $10 million and $350 million at the time of investment.

Ours is a top-down approach, so as we move through different stages of the business cycle, we will alter the structure of the portfolio. A good example is through the super commodity cycle of the 2004 to 2011 when we were heavily weighted to anything mining related. Now currently we have a portfolio that is underweight mining, and instead very heavily weighted toward growing micro-size industrial companies, ones whose earnings and dividends are less related to global growth.

Are there any ‘deal breakers’ for you when looking at a potential investment?

Every company has a price! That said, we tend to avoid pseudo-private equity, biotech or early stage companies. Also, with mining companies at exploration stage, we wait until they have a resource that we can wrap some numbers around before we invest.

Are there any companies you’d describe as core holdings?

Some of our longer-term holdings include MacMillan Shakespeare (ASX: MMS), Austbrokers (ASX: AUB), Slater & Gordon (ASX: SGH), M2 Telecomm (ASX: MTM) and G8 Education (ASX: GEM).

What is your outlook for gold prices?

Based on our current view, we went negative on the gold price back in October of 2012, so we have been insulated against a lot of the gold price weakness and we expect it to continue to fall.

What makes it difficult to forecast is that — gold isn’t a commodity, but rather a currency, so it is more a ‘weight of money’ argument. Currently we see further selling pressure from ETFs (exchange traded funds), outweighing the lift in demand from consumers—hence we anticipate further weakness.

There are so many drivers of the gold price – inflation expectations, money supply, political and financial uncertainty, US dollar movements and falling real interest rates, to name just a few.

All of these factors contributed to the gold price moving from US$800/oz just prior to the Lehman’s collapse in October 2008 to US$1,900/oz in September 2011, largely through the purchase of ETFs. Going forward, we view those factors contributing to the increase in gold prices as the reason as why gold prices will continue to weaken presently.

The world came very close to financial meltdown in 2008 — but still, the anticipated meltdown did not happen. Despite the copious amounts of money printing around the globe, inflation remains in check.

Indeed the U.S. is talking about winding back their third round of quantitative easing! Accordingly, real interest rates are starting to rise and the US dollar is appreciating. The general fear in the market is unwinding, and hence the need to own an asset that pays no income is diminishing. Investors are effectively chasing better returns elsewhere as they are move out along the risk curve.

The big unknown is the amount of gold that is going to be released from the ETFs. As it currently stands, there is the potential for one years’ supply to come onto the market in a short amount of time.

In our view the need to hold gold has diminished and we believe gold will remain under pressure over the next six months.

What’s the most interesting trend in the ASX today, according to you?

We have seen the microcap resources companies being sold off aggressively (versus the industrials in recent months, as investors are looking for yield- and growth-focussed stocks). This has seen the share prices move well below what we would see as fundamental value… We are also avid China watchers. We send someone to China every six months to stay on top of how the economy is travelling.

So while we still remain underweight on resources… there is no doubt that there is potential money to be made if you can time the entry to a stronger Chinese economy. Naturally, we are spending a lot of our time focussed on this specific issue!

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 Motley Fool contributor Catherine Baab-Muguira has no financial interest in any company mentioned in this article.

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