VAN ECK GLOBAL HARD ASSET FUND INTERVIEW
This month’s interview is with Derrick Van Eck who is one
of the owner/operators at the Van Eck Funds. Derrick is the
Chief Investment Officer and Portfolio Manager and head of the
investment team on the Van Eck Global Hard Asset Fund.
can you provide us with some background information on the
Global Hard Asset, the types of hard assets you invest in as
well as the outlook for each of these assets?
Van Eck: The Fund was started back in 1994, so it’s
been around for a fairly long period of time. The key reason we
started the fund was because we thought that hard assets were
oversold. They had a very difficult period for approximately two
decades. Prices were significantly below normalized levels and
had been so for a long period of time. To us, that was setting
you up for a great supply-side picture from a commodity price
perspective. In other words, companies weren’t building or
spending the amount of capital that they had historically been
on different commodity projects. It was a period of very low
growth of supply. Combined with the emergence of virtually every
emerging market country in the world, which is now pretty well
documented in the press, it was obvious that the leadership was
in China’s hands. As a result, the last couple of years have
been quite tremendous. That has fed demand virtually across the
entire commodities sector. In answer to your immediate question,
what do we invest in? We invest in both commodities as well as
commodity stocks. If we need a little bit more color on that, we’ll
invest in the energy complex, which will range from crude oil
all the way down to the equity side, upstream, downstream,
midstream and everything in between all the different
value-added sectors. We’ll do that in gold or precious metals,
base metals which are copper, tin, zinc, etc. We’ll invest
through some agricultural shares. We do not invest in
agricultural commodities themselves in the Fund, but we do
invest in the stock shares. Our investment universe takes us
across all of the commodities sectors, again, leaving out the
agriculture part of it, which is a very minor part of the
commodity world. In other words, we invest in the entire
spectrum of commodities and commodity-related equities. We do
that on a global basis, not just from a U.S. perspective.
do you think the outlooks for all those different commodities
Van Eck: That’s an easy question. Last year was
kind of an anomalous year in that you had strong global growth
throughout the world combined with awesome supply-side stuff.
The commodity world will differentiate itself more and more as
it has in the last couple of months. We continue to be most
excited about the energy complex. We think that the value in the
energy complex remains in the equity piece (in energy
securities). We don’t think energy company valuations are
discounting nearly what the crude forward curve on the commodity
side is telling them for the next five to ten years or so. We
see strong value in the equity component of the energy universe.
That’s where we have most of our capital in the Fund. From
there, you kind of drop down. There are some interesting base
metal commodities and stocks. Stuff like nickel, which we have a
tremendously strong outlook on. Stuff like zinc, which we also
have a very strong outlook on. Then we would go down to the
copper markets, which we are less and less excited about as time
goes on as we continue to plot out additional supply-side
additions to the mix. We think, more or less, that it may well
be likely that copper, for example, has peaked for this cycle.
We’ve therefore put all our capital into nickel stocks and
some zinc stocks that we own. We actually own the commodity in
the case of zinc in the Fund as well. I would say that the base
metal complex is probably the next area of large interest for
us. I would say on the equity side again, the value is there.
There has been a lot of consolidation activity in that space in
the last year or so and we think there will be additional
acquisitions to come. All of this has been accomplished at
premium pricing. We see that aspect, that optionality to emanate
growth continuing as well as these companies continue to earn
these massive amounts of free cash flow. Some of these companies
have free cash flow yield of something like 20% to 30% based on
our numbers this year. Awesome numbers! The market doesn’t
seem to want to pay up for it. So we think there’s value
Over the course of the last year, I would say, we have taken
some capital out of the precious metals arena. This has
particularly occurred in the last six months or so, during which
the dollar was close to peaking on an interim basis. Gold was
therefore likely to underperform some of the other commodity
sectors. We still have that view, but I can tell you, we spend a
lot of time in our shop talking about how that may well be
priced into the market. You’ve seen some tremendous
underperformance by the gold shares in recent months. We are
actively talking in our shop about getting up and taking a hard
look at that stuff. Gold shares today are trading at
unprecedented valuation levels compared with bullion. We’re
looking hard at gold mining companies. We haven’t really upped
our exposure in recent months, but are looking very hard,
thinking that there will be more corporate acquisition activity
at these price points. At the moment though, you’re getting
some unbelievably good value in some of these gold mining
stocks. I would place that area as the third largest area.
Relatively, it’s about 10% to 12% of capital in the Fund right
now. I would say, if we have this conversation three months from
now, we’ll probably be a little bit higher.
On the negative side of things, we’re not super
enthusiastic at the moment about agricultural commodities. There
are just huge stockpiles of soybeans and wheat now. Crop reports
are showing that crop yields this year will be extraordinarily
healthy again aside from reports of some Asian countries. We’ve
kept our capital out of that sector and really put our monies in
the three sectors I mentioned earlier.
One other sector of interest, that hit the press on Friday,
we have about 10% of capital in timber-related shares. We own
companies like Timber West. It is a big company in western
Canada. We have owned the stock for a number of years. We still
think the stock has attractive valuations from a timberland
perspective. We have a piece of Weyerhauser in the Fund. We
still think, in other words, there is huge value creation
potential and realization potential in some of these forestry
companies. You haven’t just seen the kind of people like the
Franklin Templeton folks which own a 6% or 7% stake in
Weyerhauser trying to increase the stock’s value through
corporate actions. You’ve seen a lot of financial engineers
come in, such as Carl Icahn. You’ve had some private equity
firms like Maddox and Dearborn Partners come in and take runs at
some of these companies. They really have been able to create
and realize value in some of their timberland by spinning those
operations out. We see that formula continuing as well.
Hopefully that gives you a pretty broad stretch of what we think
might be going on.
you say you own some of the physical commodities as opposed to
shares, how are you buying those physical commodities? Are you
buying the actual physical metal or are you buying futures?
Van Eck: We’re not buying physicals at all. We’re
not allowed to do that by virtue of the 1940 Act. We have to buy
paper assets. We’re buying futures and/or structured notes
which are effectively securities that Wall Street offered to get
around some IRS restrictions and some 1940 Act restrictions.
These are notes levered to various commodity prices. Basically,
we are acquiring ownership positions through futures and
do you see the most potential and what kind of asset classes? Is
it energy at this point?
Van Eck: It is most clearly energy to us.
Particularly in the last couple of weeks, there’s been an
interesting sell-off. With respect to underlying crude prices.
Underlying crude prices are something like 10% to 12% off their
highs. These companies, particularly some of the oil service and
drilling companies, have reported outstanding results for the
first quarter. Being already excited about the expected numbers
but beating them handily to the extent which has never occurred
before. They have beaten the commodity numbers to this extent
only once in the course of the last 10 to 20 years or so.
Activity levels and fundamentals are phenomenal, yet you have
this kind of stock sell off in the last couple of weeks. We’re
trying to step up here. We think the value in that space is
outstanding, and the potential returns are astronomical. We have
expected returns on some companies that we like and own in the
portfolio of 30% to 40% or so, without heroic assumptions.
the companies themselves obviously you’re buying as opposed to
the actual different ways to buy energy, correct?
Van Eck: We don’t see tremendous value in owning
crude oil at $50 a barrel. I’d rather own the stocks which are
probably discounted. By the way, some upstream companies have
tremendous upside, and frankly I think the biggest anomaly in
the energy markets today is in the upstream. Some of these
Production companies could go out and hedge out their production
to the end of the decade and take out virtually all of their
commodity price risk and earn returns on that kind of portfolio
of something like 10% to 80% depending on what kind of
properties they’re taking over. There are a lot of private
guys who are looking at this by the way. You’ve got just a
clear anomaly that people are just waiting to take advantage of.
Or they could structure some of our investments to do that as
well. I think there’s basically a lot of skepticism of the
structured commodity partnership, particularly in energy.
you tried to play the royalty trusts out of Canada at all? We
keep running into individuals looking to play that game.
Van Eck: We have not. We think that is not a space
that we want to put any capital in, just given the decline
curves that are going on in that space and given the kind of
euphoric nature some of the valuations of those companies. Our
Energy and Production guy, Sean Reynolds, has taken a hard look
at that space. He used to own the firm in Denver called Petri
Partners. They have done a lot of work, not so much in Canadian
royalty trusts, but on understanding how to unlock value in
Energy and Production companies. That’s been the core
arbitrage up in Canada. Petri Partners took a hard look at that
stuff and just decided that’s a pretty temporary game that
they don’t want to get involved with. We have chosen to avoid
the royalty trusts in the Fund.
one time, did you not have REITs in this particular Fund?
Van Eck: Yes, we did. I think at the beginning and
inception of the fund that we had REITs. We still own some REITs
but it’s 4% to 5% of capital. The reason we put REITs in the
fund was, I think, for portfolio stability and to add some risk
management. The correlation of REITs to some of the other
commodity universes is pretty low. You get pretty low standard
deviations and pretty high yields on some REITs when we first
put them in the Fund. We’re much less excited by the valuation
on the REITs today. REITs didn’t provide the kind of total
stability and the value added from a return perspective that we
wanted so we minimized the exposure in recent years. Although
that’s been wrong. That’s how we felt. We still believe that
REITs are a little bit overvalued. We like the value in some of
the commodity stocks much better.
you see this as a viable concept, basically a commodity-related
type theme, even 10 years from now?
Van Eck: Absolutely. I don’t understand why this
marketplace has not leapt onto this concept of commodities as a
separate asset class. If you look at the return features, the
risk features, the draw-down features and the low correlation
coefficient, there is no way you can explain to me why the
concept would not fit into a diversified portfolio. We’ve
calculated the numbers on that. We have also had Ibbotson and
Associates provide the number crunching on that. We’ve looked
at I don’t know how many different studies that have proven
this concept. By the way, this concept is clearly being accepted
in the institutional world. We’re just not quite sure why it
hasn’t crept into the retail space that much yet. I clearly
think that the story has legs not only from a return
perspective, but that it has awesome diversification
characteristics. I think you’re getting paid to have
diversification in your portfolio in this case. You certainly
have been in the last couple of years. We think that the return
profile continues for a while.
mentioned a study performed by Ibbotson Associates. Could you
elaborate a bit?
Van Eck: The study was prepared by Ibbotson and they
created a hypothetical index of hard assets where they go back
and study the effects of adding hard assets to an otherwise
well-diversified portfolio dating back to the early 1970s. The
net result is, depending on the characteristics of the
portfolio, being conservative, moderate or aggressive, you get a
varying mix between risk and improved return. The long and short
of it is, building hard assets into a portfolio over time
enhances return and reduces risk to one extent or the other,
again depending on whether it’s a conservative, moderate or
studies have found also that it makes a lot of sense, especially
when you’re in a portfolio of stocks and bonds, that the hard
asset or commodity-based type investment really drops the risk
levels substantially. Actually, if you run correlation analysis
including REITs, especially if you equally-weight them, you will
be pleased. When you already have a low-risk portfolio, meaning
that the standard deviation is very low like 4 or 5 already,
sometimes we’ve found when you add a commodity piece into it,
it really doesn’t reduce risk at all and it doesn’t
necessarily add return, either, believe it or not. When you’re
going from a typical portfolio, our studies have also shown that
commodities are a way to drop down risk levels pretty
substantially, is to add commodities.
Van Eck: I think that’s more or less exactly what
the Ibbotson numbers bear out as well. We’ve done some other
asset allocation studies I think which would suggest the same
thing. I think the other piece is that it would be certainly
lower risk and depending on how you want to structure the stuff,
you can either increase your returns as you are well aware for
the same level of risk or just drop your risk down for the same
level of returns. To us, it clearly has excellent
diversification characteristics. I would just layer on top of
that, that I think the return characteristics are not as
attractive as they have been in the last couple of years, but
still remain very attractive.
Fund has outperformed the S&P 500 over the last 10 years by
about 1% per year, yet your risk level has been about the same.
This has resulted in the standard deviation being about the same
yet when those two asset classes are combined, the risk level
drops down quite a bit, correct?
Van Eck: That’s exactly what we’re saying.
us about the Fund itself. What’s unusual about the Fund? Why
should we use this fund versus a fund like a PIMCO commodity
fund or something along those lines?
Van Eck: A couple of answers to that. One is, I think
The Van Eck Global Hard Asset Fund has more flexibility. We have
the ability to buy not just underlying commodities but
underlying commodity stocks as well. I think if you look at the
basic returns (pre-tax returns) on our strategy versus the PIMCO
fund, you’ll find that it’s reasonably attractive. On an
after-tax basis, it’s particularly attractive. I would say,
one, returns, two, flexibility in investment approach. I just
think we’ve got a much broader mandate. Three, probably the
most important thing is that you’re investing with a group of
seven people. When I say seven people, we’ve got a team, I’m
one of the seven, so there are six other guys that spend all
their time looking at hard asset investments. The team that we’ve
put together I think is a fairly interesting team. It’s worked
pretty well for us. On the one hand, we combine the skill sets
of a petroleum engineer and mining engineer with our gold expert
who used to run a mine out in Nevada. Our petroleum engineer,
Sean Reynolds still looks at a lot of properties and works on a
number of properties that are now part of the Fund in some way
shape or form. That’s one skill set which I think is
appropriate and it has been helpful in actually two respects.
One, just for idea generation, but secondly, for risk
management. We tend to stay out of the situations that are
pretty iffy. There are a lot of promoters and guys who tell a
good story but may not back that story up with solid resources
in the ground. Having that skill set really allows us to
understand that aspect.
The other skill set we marry that with is a recognition of
market tactics and trading fundamentals. We’ve got a bunch of
traders. Two of our traders have worked with us for probably an
average of 15 years or so. I think they’re the best in the
business from a commodity perspective. These guys are much more
shorter term but have a very good understanding of their area of
the marketplace. I think there’s a tremendous value added in
kind of tactical movements that we might be making such as when
we’re hearing that a company might be issuing a secondary or
something like that, we’ll tend to stay away from that company
for a while. Or that some Commodity Trading Advisor (CTA) is
getting involved in the gold sector which has traditionally been
either a very healthy thing or a very unhealthy thing. Having
our traders with that kind of skill set brings a lot of value to
the table as well. I would say once again, given our historical
numbers (pre and after-tax returns), the flexibility in our
investment options, the investment flexibility, to actual
commodities and/or commodity stocks, and invest on a global
basis is what makes our Fund an excellent option.
What also makes our Fund different is our research approach.
As you’re well aware, China’s been THE story behind
commodities in the last couple of years. We have had someone
over in China virtually once a month. I am headed over in a
couple weeks. We had our energy analyst there a few weeks ago.
We also have the ability to invest in emerging markets resource
stocks that are a very attractive value to us right now. There
are some other Chinese stocks that we have the ability to invest
in such as iron ore stocks. That is a unique attribute that we
have. I would say investment flexibility and again the people
are key strengths.
This is the heart and soul of this company. The legacy of the
company was the International Investors (Gold) Fund and the hard
assets was a brand extension off of that capability and the it’s
the heart and soul of what we do. Our Fund allows for active
management. That fund that you mentioned is based on the AIG
Index as I recall. They are therefore hamstrung, if you will, or
required to maintain high correlation to that index. They have
to be invested in what that index is invested which in part
includes soft assets actually if you go in and you drill in and
you look to see what the AIG Index is comprised of, there are a
variety of things, vegetable oil among them, that are probably a
little bit off the radar screen. These items that are off the
radar screen are in effect soft commodities. The active
management is another advantage of ours. We would suggest that
you compare the after-tax returns and see. I think there’s a
great misperception about the differential between before tax
and after-tax returns and I can just tell you that the numbers
are quite different when you look at it on an after-tax basis of
course. In a deferred tax this is irrelevant but in a currently
taxable account, after-tax returns are something that I think
people find meaningful. Another significant issue is the one
that would pertain to the TIPS component that is in that fund
that you named. It’s there of course for the obvious reasons,
as collateralization for the derivative products and whatnot. Of
course, there’s a little bit of interest rate risk there, but
the other thing that has been suggested more recently is that
simply because of supply and demand, the supply and demand
imbalance over TIPS, that TIPS may be a tad overvalued and
therefore adding an interest rate risk component.
response is all very logical in terms of our questions. The tax
situation is obviously better in the case of your Fund because
you won’t have that ordinary income component.
fund has a small asset base at this point in time. According to
Morningstar, as of March 31, 2005 you had $110 million in the
Fund. Is that still true?
Van Eck: That would probably be the A shares which I
am guessing at their close of business last Friday. We have just
under $130 million in the A shares and there’s an additional
$35 million in the C shares.
you run this same strategy in any private accounts?
Van Eck: We do not. Not a long-only strategy. Let me
take that back. We do have an insurance clone fund. We’ve got
the Worldwide Hard Assets Fund which is effectively a clone fund
that we run in various insurance products for Nationwide,
Pacific Life, New York Life, etc. It’s a variable insurance
trust that we run for Nationwide, Pacific Life, New York Life
and a number of others. The total would be an additional $265
you’re still altogether under $500 million.
Van Eck: Yes.
you have any similar strategies? Obviously you have the gold
funds and things like that. Are there any similar strategies to
the Hard Asset Fund?
there anything else you would like to tell us?
Van Eck: From an investment perspective, I think it’s
actually a very interesting time. I was over visiting some guys
in London a couple of days ago and the talk over there was all
about revaluation and what that number is going to be. That’s
been a fairly hot topic over the last four or five days or so.
We’re seeing some kind of interesting crosscurrents going on
with the Dollar and the Euro with growth moderation. There is
obvious growth moderation here in the States and some degree of
growth moderation in China. We’ve got all kinds of interesting
crosscurrents going on in the commodity space which in my
opinion has resulted in some investors taking profits in some
energy shares and some other mining shares etc. We are using
this sell-down to our advantage. We’ve had some cash in the
Fund for the last month which we are now able to put back into
the marketplace. I think it’s actually a very interesting time
from a tactical perspective. I think there are some really
interesting return profiles that are being generated, at least
in our opinion, given all these crosscurrents that are going on.
We’re pretty optimistic.
On a different note, we have placed an expense cap on this
Fund. When it was smaller a couple of years ago, we also put a
cap on it. In fact, effective May 1st of 2004 we put
a cap on it of 1.75% on the A shares. I think if you look at
audited annual numbers for the total of 2004, it blended to
1.85%. Starting January 1st then of this year, it’s
been at 1.75%. We have further reduced it effective May 1st
to 1.50% so that investors May 1st and forward will
be paying an annual operating expense ratio of 1.50%.
that permanent or just temporary?
Van Eck: It’s per year. It’s a year at a whack.
It’s locked in at 1.50% contractually. It’s stated in the
prospectus through April 30th of next year. At this
point, we’ve put the fund into a competitive expense ratio and
that’s where we’d like to keep it.
Van Eck: You’re welcome!
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