Fund Manager bulllish on Gold (from Barrons)
Hiding Places
Fund manager is long on gold and cash, has problems with the
American dream
An Interview With Paul Stuka ~ At Fidelity during that
firm's glory years in the 'Eighties, first as a health-care analyst,
then as an assistant portfolio manager on a number of funds,
Stuka came to fame as the manager of the Fidelity OTC Fund
when it was launched in 1984. OTC was the
second-best-performing mutual fund in the country in 1985, next
to George Noble's Fidelity Overseas Fund. When the fund's
assets approached $1 billion the next year, Stuka left to form a
long-short hedge fund.
Stuka Associates' record sizzled in the next five years before
being undone by an interest-rate cut in late 1991. Stuka then
went on to work at Teton Partners with Noble, did a stint at
State Street Management & Research, and was a managing
director at Longwood Partners with Bob Davidson before
striking out on his own again in the middle of 2000. Named
Osiris Partners, after the Egyptian god of the afterlife, Stuka's
latest long-short fund is tiny, with only about $8 million in assets,
but it has turned out top-notch results through top-down,
theme-driven, value-oriented analysis. In its first six months,
Boston-based Osiris produced a gross return of 29%, followed
by a 17% gross gain last year and, so far this year, 30%. For
why the portfolio is currently 25% net short and heavily invested
in cash and gold, please read on.
-- Sandra Ward
Barron's: What's your take on the market at this point?
Stuka: I look constantly at the Fed fair- value calculation. It
gives you a good idea of whether the market is overvalued or
undervalued. By that calculation, the market is discounting about
$62 in S&P earnings for this year.
Q: What's your estimate?
A: I have been using $52. The market is about 18%-19%
overvalued. People are counting on a big snap-back, going from
losses to big earnings by the end of the year. Last year the S&P
earned somewhere around 40. Whether this year comes in at
$52 or $42 depends on two things holding up: the stock market
and the real-estate market. That's where people have made their
bets. Assets are in stocks and in homes. People have borrowed
against both of those asset classes over the last few years.
Q: The U.S. consumer wasn't always this way.
A: A lot of lessons were learned in the 1930s, 1940s and 1950s.
Certainly, my parents were never consumers. It was true of the
whole generation that went through the 'Thirties and World War
II following that. Starting sometime in the 'Sixties and 'Seventies
and certainly in the 'Eighties and 'Nineties we became a
consumption economy. That creates problems -- a very low
savings rate, for one. We as a nation have become dependent on
foreign capital. That's happened here with a trade deficit
approaching $400 billion and a current-account deficit at $500
billion. You never know when that is going to end, but you
know the risk factor is growing. Consumer debt as a percentage
of income is the highest it's ever been. The nice part is, rates
have come down. People are buying homes, and buying homes
is wonderful for the economy because you get the full effect of
that home sale. The construction, the materials, the labor, and so
on, and that goes through this year's GDP. It is a big bang for
the economy. But the debt is with you for the next 15-30 years
and the debt has to be serviced somehow.
Q: What do you think
about real estate at
this point?
A: There is a
mini-bubble going in
the housing market.
Let's be honest.
There are positives
for the U.S. housing
market. There is a
growing population.
You have a culture of
home ownership in
the U.S. -- something
like 70% of U.S. families own their own homes. That is the
highest in history. The tax laws encourage owning your own
home because you can deduct the interest. Home prices have
never really gone down nationally. In 1990-91, they were about
flat, though in the high-price markets they went down. Home
prices have been appreciating 5%-7% a year for the past five to
six years. But if you look at home equity, the percentage of
equity the homeowner has in his home, it has gone flat. Let's
assume the house price has gone up 5% or 6% for five years for
a 30%-35% increase in value, but home equity as a percentage
of value has gone dead flat. For every $2 in appreciation, the
homeowner is taking one out. It is the leverage that bothers me.
On a stock you can get 1-to-1 leverage. You buy a $100 stock
for $50. On a home mortgage you put down 20%, and
sometimes not even that, so your leverage factor is much higher.
Even if the consumer pays down margin debt on stocks, they
have gone into a higher-leveraged asset in homes. I find that
bothersome. What's also bothersome is if you look at the median
size of the home, it has grown by 17% in the last 15 years.
People have to have somewhere to live, but they don't have to
live in the mini-palaces that have been built over the last 15
years. There is risk there.
Q: Aside from leverage, do you have other concerns with real
estate?
A: I am worried about people's belief that it is a safe investment.
If you own a home, the one thing you find out is there are
always bills. There's the mortgage, obviously, but also taxes,
insurance, electricity and phones, and then the lawn has to be
mowed, the snow has to be plowed. There are big costs. Most
people believe the capital in their home is going up every year.
That all works as long as people can afford to keep paying the
mortgage and you don't have inflation in other areas.
Q: How big a deal are Enron and the accounting issues?
A: Go to the textbook, turn to the post-bubble environment and
the next chapter will be recriminations and tightening of
standards. What is unbelievable to me in this market is what is
important one week is totally forgotten the next. Two weeks ago
it was a different world. People were much more concerned
about Japan. People were much more concerned about Enron.
They were much more concerned about IBM. We saw a couple
of better statistics indicating the economy was getting better.
Greenspan spoke and said the world is better. Gee, whatever
happened to Enron? Whatever happened to all these accounting
issues? Whatever happened to the stock-options issue? From the
close March 1 to midday the next Tuesday, the semiconductor
index rose 20%. In 2½ days!
Q: What explains the volatility
A: Hedge funds, to a large extent. There are thousands of hedge
funds. They are managed by younger, fast-money people, a lot
of whom made their money on the long side and don't have a lot
of experience on the short side. They haven't been through a lot
of short squeezes. Two things are going on: They are getting
squeezed and feel compelled to cover. And they don't want to
miss the moves so they go long on the other side.
Q: What are your thoughts on gold here?
A: I believe gold is in a secular bull market. But you are going to
have a lot of volatility. Gold had been an awful area for 20 years
because there was a secular bull market for financial assets. Yet
looking at supply-demand, there has been a negative situation for
eight or nine years. Mine production was growing very slowly
and demand was outstripping the supply. It was masked by the
industry's forward-selling programs and central-bank selling.
There is a favorable primary production profile. What gives me
the most optimism is the Japanese public buying gold. The
country is lowering its guarantee on savings deposits, so people
are moving into gold. Japan has imported a lot of gold over the
last six or eight weeks. When people get worried about the
financial system, they buy gold.
Q: Do you buy the stocks or the bullion?
A: I buy the stocks. But one of the issues in buying the stocks,
to be quite honest, is none of these guys has production growth.
This year the only major -- and I use the word major very
loosely -- the only gold producer of the top 20 that has
production growth is Agnico-Eagle Mines. This year will
probably be flat in terms of global industry production. Next year
will be down a couple of percent. The percentage decrease will
keep growing because there is no exploration and no mines
under construction.
Q: Makes it tough to pick a stock, then.
A: You try to find the ones that have some growth or the ability
to expand. Goldcorp has always been my favorite. If I showed
you the chart of Goldcorp, you wouldn't know it is a gold
company because it has been going up for the last four years.
They have had production growth in Canada. It's a fantastic
mine. This year they are not going to have growth because they
have shut down part of the mine to do more exploration. But
they have growth potential. Newmont Mining is the one people
are going to buy in the U.S. If you are a U.S. manager and you
want to be in North America, you don't have many choices.
Homestake is gone. Battle Mountain. Nothing is left of those
companies. Barrick Gold is a great company. They have done a
fantastic job. But they have always been hedged. Placer Dome
has a bad production profile. It is declining, and declining at a
pretty good clip. So you have Newmont, which just bought
Franco Nevada. Those guys are among the smartest guys in the
business and they just made a huge bet with their personal
money by taking Newmont stock.
Q: How much of your
portfolio is in gold?
A: It has bounced around
between 25% and 35%. I believe gold works in any environment
going forward, unless we go back to a low-inflation,
the-world-is-wonderful investment attitude. I don't think you are
going to lose a lot of money. You have a very favorable
supply-demand outlook. If the world keeps growing, there is
going to be more jewelry. India and China believe gold is money.
The Chinese Central Bank could be buying a lot of gold. They
have a very low weighting in gold compared to almost every
developed country. Gold is about 3% of their reserves. The
average of other countries is about 9%-10%-11%. The only
thing I foresee going wrong with gold is we enter a perfect world
of low inflation for years. |
