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Survival of the Fittest in Energy Investment

By: The Energy Report, Malcolm Gissen, and Marshall Berol

-- Posted Tuesday, February 19 2013 | Digg This ArticleDigg It! |

Source: Peter Byrne of The Energy Report


Times may be tough for energy commodities, but Encompass Fund Managers Malcolm Gissen and Marshall Berol are hard-core survivors. In this interview with The Energy Report, the dynamic duo share their tactics for winning in 2013 after decades of experience investing in uranium, oil and gas, coal, hydroelectric and geothermal energy.

The Energy Report: In 2010, the Encompass Fund, which specializes in resource commodity stocks, had a spectacular return of 60%. Last year, the return was negative. What is your plan for success in 2013?

Malcolm Gissen: We have a diverse portfolio of companies, including real estate, healthcare, fixed income and natural resources. We have typically emphasized resource companies, because they are attractive growth prospects. But, as we all know, the resource sectors have done badly for more than a year. We are being rather cautious as we reconfigure our resource portfolio, looking for strong companies, especially junior and intermediate producers with very high appreciation potential.

TER: How do you define "strong"?

MG: In our experience, the quality of the management team is extremely important. We closely examine the experience of company executives, their past successes and non-successes, as nobody's perfect all the time. The importance of being well capitalized cannot be over emphasized. We consider management's proven ability to raise cash. Location of the assets is important: Geopolitical upheavals around the world are impacting mining and energy companies. The political factors range from overthrowing governments to altering tax and royalty rates and rewriting concession laws.

TER: What else do you look at?

MG: The investor base. We invest in companies that are supported by committed individuals or institutional investors. Strong support from brokerage firms helps a company to raise capital. Companies with CEOs who have access to cash or prior successful experience raising significant amounts of capital have strong advantages at a time when it is very challenging for resource companies to raise adequate capital.

TER: Do exchange-traded funds (ETFs) play a role in your strategy?

Marshall Berol: There are more than 1,200 ETFs on the market. They can be worthwhile, but Wall Street is slicing and dicing sectors and industries into really thin tranches to create somewhat non-transparent indexes. ETFs are not per se better than mutual funds or individual stocks. Investors must look under the hood of any ETF to see if it is investing in stocks, futures contracts or bullion. With that said, we do look at ETFs and have commodity ETFs in our separately managed accounts.

TER: Let's talk about the energy resource space. How do you parse it?

MG: It's going to take at least two to three years for natural gas prices to recover, largely because of increased production in North America. And because coal generates approximately double the pollutants in the atmosphere in producing electricity than natural gas, we believe that North American utilities will continue to close down coal plants. We also believe that because countries around the world are increasingly concerned about the pollution that comes from their power plants, they will be expanding their nuclear power programs. This is one of several reasons why we are bullish on uranium and the companies producing or soon to be producing uranium.

TER: Why?

MB: Simply put: Supply and demand.

MG: There are over 60 nuclear power plants under construction today. In 2011, 143 million pounds (143 Mlb) of uranium of were produced worldwide. Globally, 165 Mlb of uranium was consumed. The difference between consumption and supply was provided by the decommissioning of Russian nuclear warheads pursuant to a 1993 treaty, which expires at the end of 2013. Globally, utilities are looking to find new sources to provide uranium that they're going to need for the next decade and beyond.

TER: What about oil and gas?

MG: Going back to our earlier discussion about geopolitical considerations: Fracking is regularly in the headlines as people ask whether it's beneficial or harmful. The oil and gas industry in Canada has engaged in fracking for more than 40 years without any demonstrated detrimental effects, but it has become such a hot-button issue with environmentalists that the politics are certainly something to monitor. Natural gas is plentiful in North America because of fracking, and that has resulted in much lower heating bills for American consumers. Unfortunately in the United States, activists have created an emotional issue out of fracking. If reasonable regulations are adopted and enforced, the energy industry can comply with those regulations and continue its operations, and public interests can be safeguarded. But if elected officials bow to pressure and reduce fracking activities, the amount of oil and natural gas will constrict. That will increase the price of gasoline and all forms of gas, of course, and also prevent the U.S. from becoming energy self-sufficient. Reducing fracking cuts both ways.

TER: Have you seen any promising juniors in the coal sector?

MG: We like the coal space because coal generates electricity all over the world until the cost of alternative energy can be significantly reduced. But coal also faces environmental issues in the United States that should continue to drive the export of coal, particularly to China. New regulations and restrictions could continue to reduce coal as a source of energy power. However, in the meantime, from time to time one can buy a coal company when the price is down, for company reasons, or industry reasons, and ride it back up.

TER: Thank you for your time.

MB: It's a pleasure.

MG: Thanks, Peter.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. Whereas early in his career the firm specialized in financial planning and in funding private companies, since 2000, the firm has focused on money management. He has invested in all asset classes and developed expertise in resource companies over the last 10 years. Gissen received a Bachelor of Science degree from Case Western Reserve University and a Juris Doctor degree from the University of Wisconsin. In 2006, Gissen and Berol co-founded the Encompass Fund, a no-load mutual fund, and are the portfolio co-managers.

Since 2000, Marshall Berol has been the chief investment officer of Malcolm H. Gissen & Associates Inc. In addition, for more than 20 years, he has owned the investment firm BL/SH Financial. His investment management experience has focused primarily on investments in publicly traded companies. He did his undergraduate work at the University of California, Berkeley, and received a a Juris Doctor degree from the University of San Francisco School of Law. He was in the private practice of law before entering the investment management business.


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-- Posted Tuesday, February 19 2013 | Digg This ArticleDigg It! |

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