How does a senior portfolio manager go about constructing a portfolio in the current environment? We sat down with Jason Mayer at Sprott Asset Management to find out.
“My strength is as a stock picker, so I am always looking for stories that are going to be exceptional,” Mayer says. “I wouldn’t say that I disregard the current environment, but my aim is to find stocks that are going to grossly outperform their peers over a cycle.”
Mayer focuses solely on resources, and for the part of the portfolio that he controls he’s always in search of exceptional names, whether that be a gold company, a base metals company, an oil and gas company or a fertilizer or chemical company.
The other part of the portfolio is run by one of Mayer’s partners, who is more technically driven and rotates the portfolio construction based on how the market moves. Mayer decided to design the portfolio management in such a way (50% stock picker, 50% technical) because of the attitudes of modern clients and how they’re impacted by the financial media. “The problem with today’s clients, especially people who purchase mutual funds, is that everyone is so plugged-in and so short-term focused,” Mayer says. “So, when I first tell someone my vision they may think it’s great, but when they start seeing some volatility or have a bad six months, they’ll want to abandon the strategy."
The other reason that Mayer doesn’t run the portfolio on a purely stock picking basis is because it’s tough to find ways to populate the portfolio while also maintaining a reasonable amount of diversification. “The 50% of the portfolio that I control is willing to digest and absorb volatility but the other 50% is designed to mitigate the portfolio and pick up on the beta trends that present themselves, which will hopefully enable clients to endure tough periods,” he says.
So, what ‘stories’ get Mayer’s interest; how does he make his stock picks? “I think a lot of portfolio managers have a single model, so they screen for one particular thing,” he says. “What will pique my interest is different buckets, buckets being event-driven, changing fundamentals, or value, which can be either NAV driven or cash flow driven.”
Selecting stocks based on their cash flow is a deciding factor for many portfolio managers operating in the resource arena. “This is predominant, especially in the oil and gas space in the current environment, where companies have been really capital constrained,” Mayer says. “Those companies may own an asset with incredible amounts of activity, yet be trading at a fraction of their full development value, which creates opportunities. Just because they don’t have access to the capital that will help them execute a program to start crystalizing that value, it doesn’t mean the value is not there.”
After two years of being grossly undersupplied, the oil market is starting to rebalance, almost regardless of what OPEC is doing, according to Mayer. “When you couple that with all of the effienciy gains companies have been forced to generate because of the low price environment, we’ve seen some good gains,” Mayer says.
Mayer has also seen the natural gas market come back from the dead. “People don’t know that, fundamentally, 2015 was a record year for natural gas if you ex
the weather,” Mayer says. “If we get a normal winter, with this record demand outside of weather, we could see prices spike. The investment community has completely ignored what natural gas could mean from a cash flow perspective so that could have a real impact. It’s improved and could be very interesting.”
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