PARTICIPANTS
Jason Gibbs
Guest Host, Vice President & Senior Portfolio Manager
Robert Cohen
Vice President & Portfolio Manager
Mark Brisley: You're listening to On the Money with Dynamic Funds, the podcast series that delivers access, insights, and perspective from some of the industry's most respected active managers and thought leaders. From market commentaries and economic analysis to personal finance, investing and beyond On the Money covers it all because when it comes to your money, we're on it.
Jason Gibbs: Welcome to another edition of On the Money. I'm your host, Jason Gibbs. Today I'm very happy to be joined by Rob Cohen, who is a vice president and portfolio manager at Dynamic Funds, and Rob is the lead portfolio manager on our precious metals and resource funds and has been with us for 25 years now at Dynamic. He's a key member of our team and someone whom we all look to for advice on precious metal stocks. There are a lot of questions this year, particularly gold and gold stocks, and precious metal stocks, and how they've acted in this year of inflation. We're really fortunate to be joined by Rob to unpack some of these questions. Rob, it's wonderful to have you here today.
Robert Cohen: Thanks for having me.
Jason: Rob, you are one of the rare people in this industry where you have both an engineering and an investment background. There's very few that can say that, at least in my experience. Can you tell us a little bit about your background and how it's helped you develop and refine your investment process?
Rob: Yes, I'm actually the son and a brother of mining engineer and geologist. Growing up as a child mining was the talk around the dinner table. When it was time to go to university, initially I thought, I'm going to be different from the family and do something different then, no, I actually defaulted in doing exactly what the family does. I was already very accustomed to what the whole industry was about, and then at a young age, I really took an interest in valuing mining assets.
I was working for a public company and merged from being an engineer, but I was also living in Chile and looking at other opportunities for the company and started teaching myself how to build out models on these projects so that they could look at it and have an idea of the financial side of things. Then later I backed it up with an MBA and CFA, so that solidified my experience.
Jason: Rob, it's been a volatile year for equities, but gold has hung in there. There's definitely been some swings throughout the year, but gold is looking relatively flat. Could you give us maybe an overview of what's been underpinning the price and some of the reasons we've seen a few big swings in price over the year? When you look out to the market universe, what's going on with inflation and central banks? Has gold acted as you'd expect?
Rob: Gold has acted very much in concert with what we would expect. I think what people forget is that gold moves in a macro fashion. When the M2 money supply increases gold reacts immediately. We saw a lot of M2 money supply growth, especially in the early days of COVID with CERB payments and what have you. In the U.S., M2 money supply, for example, moved up close to 40%.
I think it was around 15 trillion before COVID, now it's 21 trillion. The gold price has also moved up in the same timeframe, about 21%, but it did most of that movement early on when the money supply increased, but think if money supply increases, does that mean the price at the grocery store goes up correspondingly the next day?
It doesn't. It takes four to eight quarters for that money supply growth to slowly digest, work its way through the supply chain, and eventually your price of eggs at the grocery store has moved up.
A lot of investors look at, well, we've had all this inflation at the grocery store level over the last few months, but gold hasn't done anything. They're losing sight that gold moved up well ahead of that. Gold does still act very much alive and well as a hedge against inflation. In terms of equities again, I think that notion of, "Well, if gold didn't do anything, maybe it's going to roll over," and they worry, and the equities had a selloff starting in March of this year, but they are making a comeback now.
I think what's happened here with what the rate hiking cycle has done, I think it's the wrong prescription. I think there are two kinds of inflation. You have the traditional inflation, an overheated economy, high unemployment, wage pressure, and then that leading to inflation, which we saw in the 1970s. This inflation we see now is monetary and fiscal policy driven because governments have made large entitlement payments over the last two years. Of course, there's going to be an effect. You print money, you're going to pay for it later in higher prices. A lot of people are going, well, we have inflation do something about it. They only know the old textbook inflation remedy, and that's higher rates, but higher rates are more for what we saw in the 1970s when the economy could handle higher rates. I think the way to solve inflation is to not do so many entitlements anymore and keep the money supply growth down.
I think the inflation we've had, it's under our belt, water under the bridge. As long as we don't have more entitlements that inflation level should drop off regardless of interest rates. I think all this rate hiking we've had has only caused more damage to the economy in the view that it is solving inflation when it's not, the inflation would've gone away anyway. I think what we'll see over the next year is a realization from the Fed, Bank of Canada, "Oh, maybe we hiked too hard, too fast, because the economy is starting to stall out."
In fact, they'll not only stop raising rates, they'll probably in fact lower them again. We saw this back in the Greenspan years, we've seen this before, where they've hiked too hard. This is the third fastest-rate hiking cycle we've seen in the last 50 years. The first two, one was 1970, the other one was 1979, but that was a different economy-driven inflation where this time around it's monetary policy driven. I really believe that this was the wrong prescription, and they'll discover that.
Gold will react to the fact that if they look at the Fed, and what tools they have in their back pocket to fight inflation, and if those tools are taken away, then you have an environment that is good for gold, negative real rates. You could have a bit more volatility in the mix, so that could also affect gold, and I think the DXY has been long overvalued for so long now. I think that's starting to roll over a bit as well. I think we have a good year ahead.
Jason: All right, thanks, Rob. When you look at the index, there's really a large concentration in a handful of names. Yet your Dynamic precious metals portfolio tends to have very little overlap with that index. Tell us about your process and what leads you to end up with such a different portfolio.
Rob: We are index agnostic. We do not just blindly follow what's in the index. I like to have the clients look at our portfolio, and actually not recognize most of the names, then I feel like I'm doing my job. If you're just going to buy the companies that are the big part of the index, anyone can do that. I think you want to do a lot more specialized investing. We're using our skillset myself as a mining and mill process engineer. Nawojka is the co-PM as a geologist and between the two of us we cover off the main facets of mining and we are looking for the right risk-reward ratio.
We're not going into junior companies and just gambling. We are investing in a nice, sweet spot in the space, and with the up-and-coming names mostly a few producers, but the best of the best is ballast. We also pay a lot of attention to what's going on in the Australian stock market. I think a lot of fund managers are just focused mostly on Canada, which is the, call it the mining finance capital of the world, but the second most important market is the Australian Stock Exchange.
There are a lot of great gold companies and base metal and resource companies in Australia, so by really focusing equally on both markets, we can really pick off the creme de la creme, or both the precious metal strategy and mining side of the resource strategy.
Jason: Rob, one question we get a lot geographically, are there areas that you prefer to invest in? There are so many areas in the world, people read the headlines, they get worried about some of these areas in terms of the risk, and obviously, you're on top of that, but maybe talk to us about how you look at your fund geographically.
Rob: Yes, I think, I really like to look at countries that have the most stable tax climate, investment climate, not looking for overriding royalties. A lot of countries believe that if a commodity price goes up, these companies are having a windfall. Usually, commodity prices go up along with inflation, which also mean your costs go up. It doesn't mean an absolute windfall, but you have countries that believe this and for political reasons they start to go after the companies thinking that their profits are going up when they're not moving up as fast as they believe. You want to stick with Canada, United States, Australia, Finland, Sweden, these are some of the best stable jurisdictions. Then you can spread out a little bit from there. You always have to review these countries' policies. We do not get involved in a lot of the world for that reason.
Jason: Rob, another question I have for you, as you go about building our portfolio, there are different components to this industry. Some companies are involved in production, some in development, some in exploration. How do you go about deciding the right mix when you put together your fund?
Rob: I don't think there's a specific answer to that question, but you want to have a blend of what you just mentioned. Producers, development companies, and exploration companies. Mostly tilted toward producers and advanced development companies because you want to have not only exposure to the changing gold price, but you also want to have a reasonable exposure to exploration upside. I think that's where our alpha generation is strongest.
Jason: Finally, Rob, maybe we'll wrap it up in the context of a broader portfolio. When you're thinking about what a financial advisor should look for, what an investor should look for, what does gold bring to the table and what should an investor think about when pondering adding gold equities versus gold bullion?
Rob: First of all, gold is the most uncorrelated asset class to any other asset class. To bring yourself up the Markowitz sufficient frontier in portfolio construction, this is the ideal asset class to do so. Typically, all you need is a five to 15% waiting in this sector to improve the risk diversification of your portfolio. What an advisor should be looking for is – you're going to be picking from different fund managers. When you go through each fund manager and their performance numbers, one of the first questions you should ask is, how did they get that performance? What went right, what went wrong? Maybe even compare the top 10 holdings or top 20 holdings across from the spectrum of fund managers.
I think one thing you will find with Dynamic is we are very different than a lot of our competitors because we have a very strong technical base here and we can really do some very specialized targeted investments in companies. Quite often we are the only institutional investor or the first institutional investor in a number of these advanced development companies. I think that's one thing that gives us an edge. In terms of equities versus gold bullion, kind of apples and oranges.
You do get both with our strategic gold class fund, at the end of the day with gold bullion, you have that physical gold. Equities, on the other hand, they do offer nice leverage to the gold price, typically a three-to-one ratio.
For every 1% change in the gold price, you can expect a 3% change in your typical equity. What we're also trying to do is generate alpha through, for example, through exploration. Exploration is like free money on top of that, provided you are invested in the right companies. This is a difficult sector to invest in. It's not easy. You probably want, in this case, a professionally managed fund for your stock picking.
Jason: You're one of the few people in this country that has a deep background in my experience being both an engineer and an investor and with your team, with Nawojka you live and breathe these companies and these stocks, and you've done a wonderful job over a long, long period of time in picking the right stocks here. Thank you so much for taking the time with us today.
Rob: You're very welcome. Thanks for having me.
Mark Brisley: You've been listening to another edition of On the Money With Dynamic Funds. For more information on dynamic and our complete lineup of actively managed funds, contact your financial advisor or visit our website at dynamic.ca. Thanks for joining us.
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