Kevin MacLean's strategy to reduce risk in his Sentry Select Precious Metals Growth Fund and outperform his peers has helped him win Lipper awards in the precious-metals equity category for the three- and five-year periods ending Dec. 31, 2009. His fund posted an average annual return of 8.5 per cent over three years, and 25 per cent over five years.
He looks for companies that can thrive without depending on a rising gold price, and sticks to smaller-capitalization firms as opposed to giants such as Barrick Gold Corp. or Newmont Mining Corp.
“When you hold these equities, which are the benchmark names, you should really not expect to make any money at all in the absence of a significant discovery or a rising gold price,” “I consider these shares to be dead money in a flat gold price environment.”says the 54-year-old manager with Sentry Select Capital Corp. and a former gold-mining analyst.
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The complete list of Lipper funds of the year award winners
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Mr. MacLean prefers to invest in companies that have demonstrated the ability to significantly add to existing reserves and resources at their operating mines and advanced exploration projects – what he calls “high wealth-creation yield” firms. He doesn't buy miners in their higher-risk construction phase where wealth creation is generally negligible and value can be destroyed by delays, cost overruns and equity dilution.
Why are you so cautious during mine construction?
It may take two to 21/2 years to build a mine. Six months before it is complete, I try to get on a plane and fly down to the property. I'll have a look and see that things are hopefully going well – that there is money left to finish the construction, nobody is picketing the project, there are no environmental issues, the government is not trying to impose new taxes or royalties, etc. If everything looks to be as advertised, I can start buying the stock because typically they would be discounted in the market at 15 per cent or more of future cash flows.
What is your outlook for the market in general?
I am not expecting a severe pullback. Certainly the market can correct at any time, but the value is exceptionally good here … Having said that, we live in a fairly unstable world from a credit contraction perspective … so in effect you can't have as much confidence in data points as you would in a more stable environment.
My view is that monetary policy will remain easy in 2010 and into 2011. I am optimistic that 2010 will actually be a decent year so I am not taking any massive cash position in anticipation of a smash in the marketplace.
What about gold bullion?
If the global economy recovers, I think gold demand will pick up. There is no new supply of gold available so the gold price will rise. If things continue to worsen, then I think that gold as a non-default, hard asset will be an asset of choice in a world where credit risk is the dominant theme. So I think gold is in a win-win position, which is why I run my fund generally 100-per-cent invested.
