Investments

Our investment Strategy

Our investment strategy comprises three different, but complimentary, elements: value, global and resources. 

As with all money managers we seek to provide our clients with good returns at an acceptable level of risk. We believe we can do that by searching for undervalued assets around the world, as well as by employing asset classes (such as resources) that have an ability, at times, to move contrary to the broader market.

Obtaining such returns depends not upon following the paths and ideas already well trampled by “the herd”, but rather by endeavoring in an imaginative and intuitive fashion to unearth opportunities where others see only risk and uncertainty.

Whether our strategy leads to buying an overlooked holding company in Europe or a Canadian junior gold producer, we always ask ourselves the following question: if we buy this investment, does it improve the portfolio? If the answer is “yes”, it can only be because we satisfy ourselves that the new holding either contributes significantly to reducing the risk in the overall portfolio, or that it presents an exceptional value opportunity – or, preferably, both.

“Me too” investing is, almost by definition, the path to average performance at best. The possibility of better-than-average results can only exist by following disciplines not generally employed by the investing masses. Our contrarian strategy with its three elements is precisely such a discipline.

account types

GOLD ACCOUNT

Allocation

Investors seeking to diversify their overall portfolios and assume above average risk may consider our Gold Account. This account seeks to maximize gains by carefully selecting gold and precious metal investments, globally, with above average return potential.

Overview

Investors place some of their assets into gold and gold mining stocks for various reasons.

• Gold can act as a hedge on other financial assets (particularly stocks and the dollar)
• Gold stocks can provide leverage to gold
• Junior stocks in particular provide opportunities for above-average shorter-term gains

The leverage of gold stocks can work on the downside as well as the upside. In any event, gold stocks—even the most established and most conservative—tend to be volatile compared with other asset classes. Therefore, it is appropriate for investors to devote only a relatively small part of their overall assets to this sector, to the extent they are comfortable with volatility.

Gold Looks Attractive Now

At this time, gold has been consolidating after a big move up. There has been increased investment demand, both from institutions and central banks around the world, fueled by concern about the dollar and other currencies, as well as buying as a hedge against the broad stock markets.

Counter-intuitively, the Federal Reserve’s start to tightening may mark the turn in gold. In previous tightening cycles, gold has fallen ahead of the Fed taking action, while it was discussing raising rates, but once it starts, the market realizes that the action is too little too late. This has been the pattern for every tightening cycle since the 1990s. The same happens, in reverse, with the dollar. On average, the dollar moves sharply higher for months ahead of tightening, only to fall once the Fed starts to hike rates.

Gold is inexpensive relative to other financial assets. And the major gold miners are selling close to two-decade low valuations on many metrics, including price to reserves, to production, and to cash flow. So as gold moves up, the stocks have the potential for leveraged gains as they close the valuation gap. On a price-to-cash flow basis, for example, other than the last quarter of 2018, the gold stocks have never been less expensive than they are today. For most of the past 35 years, the senior stocks have traded at multiples two to three times where they are trading today. When investors return to the sector, the stock could see outsized gains. Selectivity is critical in this sector, however. Gold stocks are as idiosyncratic as any sector, meaning that the stock of one company can perform very badly even when the sector overall is performing well (and vice versa). So it’s important to choose stocks carefully, even among the major miners.

Junior Companies Particularly Attractive

Though the major producing gold stocks represent good value relative to gold, we also like other groups within the gold sector. The royalty companies have a low-risk business model. They have plenty of leverage to gold in a bull market. And there is even greater potential in many of the junior producers and exploration companies. As producers find it ever more difficult to replace the ounces they mine with new reserves, they are increasingly turning to mergers and acquisitions of companies, and buying into deposits owned by junior producers and exploration companies. Such companies, if they make a discovery, stand to see stock prices go up by a multiple, and we are constantly looking for attractive candidates. But it is all the more important to be selective in such companies, since exploration companies need to raise capital constantly just to keep going. We focus on companies with cash to sustain their exploration efforts, strong management, and a business model that minimizes cash expenditures (including the so-called prospect generators and royalty companies).

Conservative or Aggressive?

Gold accounts vary depending on an individual client’s goals, whether to insure a portfolio or maximize gains. In addition, other circumstances and objectives can come into play (whether we manage money in other sectors for the client, as well as the client’s age and circumstances). Larger accounts tend to have more juniors than smaller accounts—offering more opportunity for spectacular gains—since a larger account can tolerate the risk from any single investment more than can a smaller one. We also tend to trade more in larger accounts, often trading around a core holding.

What is in the Gold Account?

In our gold accounts, we are open to the entire horizon of gold and precious-metal investments. Unless instructed otherwise, gold accounts may include silver and other precious metals, as well as exploration companies in a range of resources. Silver is often a significant component of accounts. Although its supply and demand characteristics are different in important respects from those of gold, it is also a monetary metal and responds to the same factors as gold. The “poor man’s gold” can have more explosive, if shorter-lived, moves in a strong bull market.

Juniors and Seniors

Typically, we hold a core position in the top royalty companies; the best of the senior producers; a selection of better quality second-tier companies that may grow over the medium term, or can be potential takeover candidates; and exploration companies. Now, with the best of the seniors still undervalued, we are holding more of the large miners than normal. In addition, we aim to trade around our core holdings, adding to the best positions on any declines, and trimming on rallies. In gold accounts more than others, we will frequently buy special situations for short-term trades. Given the volatility in this sector, we tend to be somewhat more active than in other account types. In a dedicated account (e.g., “gold” account) unless otherwise instructed, we tend to be more fully invested than in other accounts, raising significant amounts of cash only in exceptional circumstances. Currently, we are fully invested given low valuations and our outlook for gold, and have been increasing allocation to second-tier producers which we think will be among the winners in the period ahead.

Top Holdings

As of January 2022

Barrick Gold Pan American Silver
Franco-Nevada Fortuna Silver
Agnico-Eagle Orogen Royalties
Osisko Gold Metalla Royalty
B2 Gold Midland Exploration

NOTE: This “allocation sheet” is intended to provide an idea of what a new account in this category might look like, based on current largest holdings and what we are currently buying. The 10 stocks listed are not necessarily our current largest holdings, nor would a new account necessarily include all these positions. The composition of the portfolios will vary for individual clients and is subject to change at any time at the manager’s full discretion. Prepared on January 23, 2022 for potential clients.

RESOURCE ACCOUNT

Allocation

Investors seeking to diversify their overall portfolios and willing to assume above average risk may consider our Resource Account. This account seeks values across a broad range of resources including paper and pulp, coffee and tea, palm oil and rubber, water, metals, minerals and oil and gas. Due to the cyclicality of resource markets, different commodities may dominate the account at various times.

Overview

Resources are an essential component of life. Everything we use every day is either grown or mined. There is a secular trend towards higher demand, with growth in Asia and other “emerging” areas. China is a dominant consumer of many commodities, including oil and copper (#1 in the world in both). Demand, though trending higher, can be volatile, while supply can be particularly erratic.

Because of both supply and demand patterns, resources are extremely cyclical, providing opportunities for significant gains as well as risks. An investor should be prepared for considerable volatility which is inherent in this sector.

Our Resource Accounts can invest in the broad range of resources. At most times, the emphasis will be on producers of the metals, as well as quality exploration companies. Because of the cyclicality of resource markets, at various times, different commodities may dominate an account. We were underweight oil and gas for some time, for example, before stepping back into the sector.

Outsized gains can only be achieved if one is prepared for this. The long-term factors remain intact. Demand from China and other industrializing nations will continue to grow, while there remains a paucity of major new projects for many metals after a brief period from 2011 to 2013 that saw a flurry of new mines. Now, as economies begin to emerge from the economic restrictions of 2020, demand has picked up again, with a particular emphasis on resource required both for infrastructure, and for electrification (of the power grid and of vehicles). We are emphasizing these resources, particularly copper, nickel and silver, in addition to gold. We are also building positions in oil & gas.

Top Holdings

As of January 2022

Franco-Nevada Orogen Royalties
Wheaton Precious Metals Midland Exploration
Altius Minerals Lara Exploration
Pan America Silver Nova Royalties
BHP Group Gazprom

NOTE: This “allocation sheet” is intended to provide an idea of what a new account in this category might look like, based on current largest holdings and what we are currently buying. The 10 stocks listed are not necessarily our current largest holdings, nor would a new account necessarily include all these positions. The composition of the portfolios will vary for individual clients and is subject to change at any time at the manager’s full discretion. Prepared on January 23, 2022 for potential clients.

GLOBAL CONSERVATIVE ACCOUNT

Allocation

Overview

All accounts are tailored to individual objectives and circumstances, so even within a single category, such as “conservative,” the portfolio balance and specific securities can vary. Conservative accounts can have as a primary objective capital preservation, income, or risk-averse, long-term growth.

Investors with conservative accounts generally prefer a stream of income and the return of capital in preference to potentially higher return on capital. Conservative accounts aim for less volatility than other objectives. This is achieved by being more “balanced”; however, it should be emphasized that all securities, even the most “conservative,” have some risk, and can be volatile. Diversification in the account can mitigate volatility in the overall portfolio, even if individual stocks or sectors decline. (Where clients authorize, we also sell puts as a low-risk way of buying stocks we like, as well as generating income.) Typically, there is also much less turnover in more conservative accounts than in others.

Adrian Day Asset Management is primarily an equity manager. Even though we own bonds from time to time, our accounts are typically dominated by equities. Moreover, we believe the risk/reward for bonds is unattractive at this time. We sometimes hold foreign currency debt, but prefer shorter maturities. Most major global markets are overvalued, driven primarily by central banks’ easy money policies. However, we see many global blue chips as well as U.S. defensive stocks that are more reasonable value than market leaders. We are deliberate in our buying, searching for great companies selling at reasonable prices, that is, less than their intrinsic value. We are now raising cash, given that we see enhanced risks. Sometimes we are selling only partial positions. We continue to hold stocks of quality companies, large and small, from around the world that pay good dividends. We look at the macro-economic and financial situations as well as at markets and sectors and see gold as an essential component of a portfolio in the current environment. But mostly, we take a “bottom up” approach in buying, and are always searching for and finding idiosyncratic opportunities.

Top Holdings

As of January 2022

Nestle Gladstone Land
Bayer Franco-Nevada Corp
Vodafone Osisko Gold
Ares Capital Altius Minerals
Gladstone Investment Kingsmen Creatives

NOTE: This “allocation sheet” is intended to provide an idea of what a new account in this category might look like, based on current largest holdings and what we are currently buying. The 10 stocks listed are not necessarily our current largest holdings, nor would a new account necessarily include all these positions. The composition of the portfolios will vary for individual clients and is subject to change at any time at the manager’s full discretion. Prepared on January 23, 2022 for potential clients.

GLOBAL GROWTH ACCOUNT

Allocation

Overview

Generally, in growth accounts, we seek long-term growth commensurate with risk over a three- to five-year period. Over the shorter term, one should be prepared for volatility. Many of our assets are purchased with a view to holding for that time frame, or even longer, although, of course, if circumstances change or the stock price meets expectations sooner, we may sell much sooner.

Growth accounts take a global, value approach, including, as appropriate, bonds, gold stocks and emerging markets. The precise allocation in a growth account will vary with the size of the account and individual circumstances, as well as market conditions.

We think many major global markets are overvalued, particularly in the U.S., with the bull market driven by easy money. This makes markets vulnerable to unexpected events. In the U.S., in particular, the major indices have been driven by fewer and fewer stocks. Both the S&P and Nasdaq have the widest dispersion ever. There remain good values in various markets, however, and we are certainly looking for good buys selectively. We are very opportunistic in our buying at this time looking for quality companies, sectors and markets that are down for short-term reasons, as well as looking for short-term trading opportunities.

In the U.S. most of our equity investments at this time are dividend-paying and defensive. Indeed, we favor dividend payers in most markets and sectors. Because of our concerns with the market, we frequently use puts where authorized rather than purchase a stock outright (that is, we sell below-market puts on stocks we like, either pocketing the premium income or buying the stock if it is put to us). In addition, we own gold, which we believe represents good value and acts as a diversifier in an overall portfolio. Overall, we hold more cash in most accounts than we have for a long time.

Top Holdings

As of January 2022

Franco-Nevada Nestle
Altius Minerals Kingsmen Creatives
Barrick Gold Vodafone Group
Pan America Silver Alibaba Group
Ares Capital Gazprom

NOTE: This “allocation sheet” is intended to provide an idea of what a new account in this category might look like, based on current largest holdings and what we are currently buying. The 10 stocks listed are not necessarily our current largest holdings, nor would a new account necessarily include all these positions. The composition of the portfolios will vary for individual clients and is subject to change at any time at the manager’s full discretion. Prepared on January 23, 2022 for potential clients.

GLOBAL GROWTH AGGRESSIVE

Allocation

Overview

An aggressive account is suitable for the person who can allocate a part of his overall portfolio to high-risk (and high-potential) investments, implying that he can tolerate volatility and even potential loss of capital. Whether such an account objective is appropriate depends on an individual’s circumstances: age, financial circumstances and obligations, earning power now and in the future, and so on, as well as, the fortitude to tolerate risk.

Aggressive accounts by their nature are more volatile than more conservative accounts, and thus a longer-term view is important. Some clients open an aggressive account with a portion of their portfolio, keeping the rest under a more conservative objective. We take a global view, including emerging markets, and prefer undervalued stocks with long-term potential, to frequent short-term trading, so patience is required. Having said that, aggressive accounts tend to have more trading than more conservative accounts.

Where authorized by clients, we use options to maximize gains. Frequently, aggressive accounts invest in markets or sectors that are out of favor at the time. We are not afraid of high concentrations in aggressive accounts, which tend to be less diversified than more conservative accounts. Aggressive accounts also tend to have less current income, but instead look for capital appreciation. At this time, most broad global markets are vulnerable. Our buying is focused on special situations, undervalued markets, and resources, especially gold.

Top Holdings

As of January 2022

Barrick Gold Gazprom
Midland Exploration Kingsmen Creatives
Altius Minerals Alibaba
Orogen Royalties Abaxx Technologies
Fortuna Silver VIX ETN

NOTE: This “allocation sheet” is intended to provide an idea of what a new account in this category might look like, based on current largest holdings and what we are currently buying. The 10 stocks listed are not necessarily our current largest holdings, nor would a new account necessarily include all these positions. The composition of the portfolios will vary for individual clients and is subject to change at any time at the manager’s full discretion. Prepared on January 23, 2022 for potential clients.

investment tactics

Although the use of cash is not really a tactic – and the level of cash often not the result of a deliberate effort – it can be discussed here. A value investor (such as ourselves) does not make bets on market direction or timing. Rather, he buys things when they are good value. If he finds something to buy but has no cash, he sells his least undervalued asset to replace it with the new, more undervalued asset. But he feels no need to be fully invested at all times. So if there are no good values then he does not buy, resulting in a high cash allocation. By default, then, he becomes a market timer, but the high cash position is a result of finding no value, not a goal in and of itself.

As Jean-Marie Eveillard puts it, “cash is a residual.” But that residual can be quite high if there are no values.

Another value investor, Seth Klarman says investors “should choose to hold cash in the absence of compelling opportunity,” again emphasizing that high cash is not a top-down allocation, but the result of the bottom-up search for bargains. He tells his investors who query why they are paying him to hold cash. “You are not. You are paying us to decide when to hold onto cash and when to invest it”, an answer with which we would concur.

At Adrian Day Asset Management, in addition to this approach, we also overlay our assessment of the general market risk profile. If the overall risk appears high, then we will insist on greater and more sure values before buying.

When values are somewhat high, rather than buy outright, we may sell puts on stocks we like, at below market strikes. In this way we can generate additional income, while exposing ourselves to sectors and equities we like. (For more on this, see “Options”, one of the discussions under “Investment Tactics.”) In such cases, we always set aside the cash that would be required were an option put to us; thus not all our cash is necessarily unrestricted, and may be working for you anyway.

When we talk of cash, we are primarily thinking of U.S. cash (or cash equivalents). We may purchase foreign currencies, holding in cash equivalents, as a hedge against the dollar, an investment in and of itself. But again, if we find good values in foreign stock markets, we will generally prefer to hold equities than foreign currencies.

We tend to be incremental buyers and sellers. When we have a new company to buy, we tend not to buy for every client (for whom it meets their investment parameters) all at once at the same time and price. Rather we will tend to buy incrementally, for some clients first (those for whom it is most appropriate, or who are underweight that sector or market, or who have larger cash holdings at that time).
Similarly, we can buy a full position for individual clients, particularly larger accounts, in stages, taking a modest position and buying more if the stock price drops or as developments at the company warrant.

The selling process is similar, selling as the stock moves up, though of course, if we have changed our mind on a company, we will move quickly to sell for all clients.

If we purchased additional shares for a client, we may sell that additional purchase sooner, at a modest profit, while retaining the core holding.

The use of stop losses is one of those issues to which there is no absolute answer; the truth is that using stops can sometimes prevent a small loss from becoming a larger one, while there are definite risks with using stops; each investor must decide for himself when and in what way to employ stops.

Here at A.D.A.M., we tend to be somewhat cynical on the use of stops. First, automatic stops can be employed for the most part only on stocks listed on U.S. exchanges; they cannot be used on Nasdaq, for Canadian stocks, and on most other foreign markets.

Second is the important consideration of being whipsawed, wherein a stock declines to the stop level, takes you out, and then reverses and moves back up. (It is widely thought that some speculators will take stocks down to prices where there are batches of stops.) This is particularly, but not only, true of volatile stocks. Had we employed stops consistently, we would have been taken out early on every single one of our favorite long-term winners.

Further, a stop loss of necessity takes one out of the stock at a low point rather than a high point. This does not mean, of course, that the stock will not go lower, but rather that you are being sold when the stock is down. And once a stop is triggered, it becomes a market order, meaning you may get sold at a price somewhat below your stop level, particularly in thinner markets.

The most fundamental objection to the continual use of stops, however, is this: if one is a long-term value investor and has done one’s homework correctly, then when a stock price declines, it is precisely the time to buy more, not to sell. If one likes ABC at $60 and nothing has changed, one should love it at $40.

Having said all that, we use stops in two different circumstances. First, as discussed above under Shorts, we prefer to use stops when short selling. This is because stocks can move considerably above their true value for extended periods, and in short-selling, one must put up more margin when short sells move against you. As the old saying goes, “markets can remain irrational longer than most investors can remain solvent.”

Secondly, we sometimes use stops when a stock has performed very well, and though we believe the stock is fundamentally overvalued, market conditions make us believe it could go even higher. So instead of selling, we will use a tight trailing stop, moving the stop up as the stock moves up. In such circumstances, a stop is to “protect profits” rather than to “stop losses”.

Sometimes, we have a negative view on the market or a particular sector and want to “make a bet” against the market. This can be done by buying puts or selling short, either indices or specific securities. We may undertake such trades either as a way of profiting from a decline in price, or as a way of hedging an overall account. For example, a client may own a considerable number of European stocks, each of which individually we like. But if we are nervous about the outlook for European stock markets generally, we may hedge that position with an index put or short sale, instead of selling of the stocks.

In theory, buying a put is less risky than selling short, since the maximum loss from a put purchase is the price paid, whereas a short sale has, theoretically, unlimited loss potential. However, puts have two significant drawbacks: they are limited in time; and one pays a premium. In sum, puts are time-wasting assets.

Thus, if one buys a put on, say, Google, expecting the stock to decline, one must be correct, not only on the direction of Google (i.e., down), but right about the timing; the decline must occur during the period when the option is active. And the premiums on puts on some stocks, particularly the most overvalued and volatile ones, can be very high, making it difficult to make money from the purchase of puts. (This is one reason why we prefer to be sellers of options, rather than buyers; see discussion on Options.)

We short typically only in larger accounts. The client must have given us express authorization to sell short. The value of short sales will only ever be a small portion of a total account. Typically, we sell short listed stocks (that is, stocks listed on an exchange), where one can place an automatic buy back, should the stock move up. And we use those stops, which take the emotion out of what can otherwise be a hair-raising experience.

Having said all of that, shorting a stock, in essence, is no more than the reverse of buying it, and, although we do not aim to run a long-short program or hedge fund, shorting indices and individual stocks can be a useful hedge and a profitable exercise.

Options, of course, are but a tool, a tool that can be aggressive or conservative, used or misused. Below we outline the options strategies that we employ most typically. In general, we use such strategies in a conservative manner to enhance performance or to hedge the overall account. However, clients must provide special authorization in order for us to undertake any options trades, and we ask clients to do this only if they are fully comfortable with what we are doing.

  • We sell puts on stocks we want to buy. This enables us to buy the stock, net of options premium, at a lower price than we could have done otherwise. If the stock moves up, we do not buy the stock, but pocket the premium.
  • We sell calls on stocks we own as a way of selling at an “above-market” price or collecting premiums if the stock does not move up.
  • We buy puts from time to time, whether on indices or individual stocks, to profit from a declining market or specific stock; this also acts as a hedge on the overall account.
  • We buy calls occasionally in order to increase leverage from short-term moves.

Sometimes, we will undertake strategies that involve a combination of option purchases and sales (such as selling a call and buying a put at the same time, to buy downside protection at no cost).

In order for us to undertake these strategies in an account, the client must sign special paperwork. By doing this, the client is authorizing us to undertake any options purchases and sales for which he has signed. If as a client, you do not want to authorize us to undertake certain transactions, then you should not provide that authorization.

Accounts may be limited as to strategies that can be employed by legal or other reasons. (For example, IRA accounts are restricted by law from certain strategies; trusts may be limited by the trust document or trustees; and brokerage firms must approve clients for certain options activities.) Margin is required for certain options strategies. In order for us to sell puts, for example, we must have margin authorization. We do not sell naked calls or undertake transactions using margin in the sense in which it is commonly understood; that is, your exposure would never be more than 100% of the price paid for the put or call, or the exercise price if a sale. When we sell a put, for example, we put aside the money required should the put be exercised.

As mentioned, typically, we use options to limit risk exposure. In addition, such strategies only ever comprise a small part of an overall portfolio.

Private placements are offerings of stock in new or secondary issues that are not available on the public market. Shares are typically sold at a discount to the market price and with attached warrants, thus providing leverage over a market purchase. Placements frequently have minimum investments, and there are restrictions on the sale of the shares; the “hold” period is typically at least four months and sometimes a year, during which time the shares cannot be sold. Even after that, there are frequently restrictions on sales which limit liquidity.

So though private placement can be a very advantageous investment, they are not without drawbacks and risks, and are clearly not suitable for, nor available to, everyone.

In order to participate in a private placement, you must be an accredited investor (currently, $1 million net worth, excluding primary home, or $200,000 annual income; there are other requirements as well.)

We have dealt with private placements for clients since our inception in 1991. However, not all custodians can accommodate foreign placements. For clients who are interested, we can send a list of requirements and other criteria. Please note: you must be an existing client to participate in a placement.

If you have to compromise, compromise on price, never on quality.