Tom Holl, Director and Portfolio Manager is a member of the Natural Resources equity team within BlackRock’s Fundamental Active Equity Group. Mr. Holl co-manages a series of natural resources funds and the team’s broad natural resources strategies. His service with the firm dates back to 2006, including his years with Merrill Lynch Investment Managers (MLIM), which merged with Black- Rock in 2006. Mr. Holl earned a BA degree, with honors, in Land Economy from Cambridge University in 2006.
Tom, thanks for joining The Assay. To start us off, what drew you to the mining investment world?
As a fundamental investor, the initial attraction was the inefficiencies of the market for mining equities, which present a whole variety of opportunities to find under- and over-valued investments. Over the last 12 years, it has been a combination of the fascinating technical aspects of mining assets and the colorful characters involved that has maintained my passion for the sector as a whole. In terms of gold, I’m not a “gold bug” but find it a great asset to study, as to have a view on it, you need to see it as part of the wider macroeconomic and market puzzle, with the gold price a reflection of a number
Can you provide insight into the investment approaches of the World Gold strategy? How do gold miners meet the criteria for investment?
We invest mainly in precious metals equities, with typically more than 80% of the strategy in gold-related companies. Our clients tend to use this kind of strategy for adding diversification to a broader portfolio, as the strategy’s primary performance driver is what happens to the gold price. We conduct fundamental analysis to pick stocks that we believe offer better risk-reward opportunities for our clients. This is a rigorous process that involves steps such as financial modelling of companies, meeting with management teams and even going to site, to visit the mines of the companies we’re investing in. We run a relatively concentrated portfolio. Our philosophy is that higher-quality gold companies outperform over the long-run and so we run the portfolio with a quality bias. We look for attractively-valued companies that have stronger-than average balance sheets, lower-than-average costs and high-quality management teams.
We also take companies’ Environmental, Social and Corporate Governance (ESG) into account as we see a positive correlation between robust ESG and investment performance. Given the nature of the gold-mining business, we believe ESG considerations are particularly important for this sector, with the social licence to operate being a vital ingredient in a successful mining company. Finally, we look for companies that have stock-specific catalysts that we believe can help them outperform even in a flat gold price environment. For example, these may be companies that we believe are particularly good explorers, companies on track to grow their production meaningfully or companies set to make efficiency gains.
What experience and backgrounds do the team members have to make them well-placed for managing gold funds?
The team’s first gold strategy was launched in April 1988, so we have a very long track-record. We have a mix of academic backgrounds on the team today, with trained geologists, engineers, financial backgrounds and team members that have worked for natural resources companies. We believe this mix of backgrounds makes us uniquely positioned to achieve an unrivalled understanding of companies and proves especially useful when we travel to visit the mines.
What would your message be to gold miners looking to raise more capital? What should they be doing to make their companies an attractive investment?
Our view is that gold companies should be continuing to focus on capital discipline and remaining mindful of the mistakes made during 2011 and 2012. Whilst we like companies with strong growth prospects, this is negated in our view if growth comes at the expense of rising capital intensity and operating costs. To make themselves an attractive investment, we believe companies should be focusing on: strengthening their balance sheets, reducing their costs and growing their production per share. These positive fundamentals on the asset and corporate side have to be backed by a strong licence to operate and a robust approach to all elements of ESG.
Gold prices have been rising over the past year. What have been external drivers of this turn to a “safe haven” asset?
Gold’s price rise appears to have been driven by strong investment demand in the futures market and physically-backed gold exchange traded funds. The key tailwind behind investment demand has been the fall in real rates, in our view, with the US 10-year real rate now around 0.17%1 , having started this year at 0.92%2 . Real rates represent the true opportunity cost of holding gold and we expect them to fall further over the next 12 months. The US Fed has been forced to change its strategy drastically and we believe it will be a significant amount of time before it can begin reducing its balance sheet again, with a greater chance of balance sheet expansion restarting.
Meanwhile, there’s now around US$17 trillion of assets in negative yielding bonds (3) and whilst gold is a zero-yielding safe-haven asset, a zero yield is better than a negative one. Holding physical gold would have no counterparty risk, whereas bonds, even those with a negative yield, carry issuer risk. On top of falling real rates, heightened geopolitical uncertainty, concerns around global economic growth and volatility in equity markets appear to have contributed to increased ‘safe-haven’ demand for gold.
Does Blackrock have any preferences over the countries/regions it invests in?
The country allocation of the World Gold strategy tends to be mainly a function of stock-selection. That said, country and political risk are considered when we pick stocks. Gold mining in more economically-developed regions, such as North America and Australia, tends to carry less risk than operating in regions such as Africa, Russia and South America. The corporate governance and level of reporting and disclosure by companies also varies significantly by region. We also consider how geographically-diversified companies’ assets are i.e. does the company have single asset risk? Whether we invest in a company or not will depend on whether these risks are more or less-than-fairly priced into the valuation.
Are you bullish on any region in particular?
Some key-producing countries, such as Australia and Mexico, have seen their currencies depreciate quite significantly versus the US dollar in recent months. This would have led to significant margin improvement and attractive investment opportunities in companies operating in those countries, as their revenues are predominantly denominated in US dollars and costs in the local currency. We also like the geological opportunity in Russia, which is also endowed with a relatively skilled workforce. However, given the risks of investing in country, any position with exposure has to be appropriately scaled.
Is there any investment interest beyond precious metals? For instance, would technology metals or base metals be of interest?
We aim to keep the World Gold strategy ‘true-to-label’ and want the strategy to maintain its portfolio diversification properties. As such, we are typically over 80% invested in gold companies and precious metals-related equities. That said, we do have the flexibility to have limited exposure to broader mining stocks should we see a very attractive opportunity.
There is a lot of political instability in the world right now – including Brexit, the US-China Trade War, Iran, etc. What impact do you see these having on the current mining and investment industry and how can both miners and investors navigate today’s markets?
We expect elevated political uncertainty to remain for some time given factors such as: the US-China trade war, rising protectionism in general, military tensions in The Gulf and closer to home, Brexit. Meanwhile, whilst our base case is no global recession in the next 12-18 months, the risk of one has increased, and markets appear to be turning a blind eye to the potential implications of soaring debt levels globally. Broader equity markets are still close to all-time highs, after an extraordinary bull-run, and valuations in general look expensive. These factors contribute to our view that ‘safehaven’ investment demand is set to remain robust and there is a strong argument for turning to gold and gold equities for diversification today.
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