Growth is where you find it. Taylor Asset Management founder and CEO Stephen Taylor is an active global investor who loves Latin America, China and certain event-driven natural resource plays that he expects will provide big growth to investors who have made a bet on his Taylor International Fund. In this exclusive interview with The Gold Report, Stephen shares his best ideas—ideas that have multi-bagger potential.
Companies Mentioned: Anfield Nickel Corporation - Largo Resources Ltd. - LianDi Clean Technology Inc. - Lumina Copper Corp. - Miranda Gold Corp. - Red Eagle Mining Corp. - Saratoga Resources Inc. - Silvermex Resources Ltd. - Tag Oil Ltd.
The Gold Report: You had an interesting career that included being a floor trader on the CBOE when you were at Lakota Trading. You mastered skills there that could never have been developed in any other way aside from being on the floor of the Exchange. How does that inform what you do today, considering that so many of your current equity holdings are micro-cap, small cap or China-related and may not have derivatives attached to them?
Stephen Taylor: I started on the floor back in the days of floor trading, when it was open outcry and traders stood next to each other yelling and screaming. This was before the screen-based computerized trading of today, and it allowed you to see the emotional elements of markets up close and personal.
TGR: That's actually what I was getting at.
ST: When you were going down to the trading floor, you could hear the roar of the crowd before you got there. Depending on that tone and the volume you could tell if the market was up, if it was down, how fast it was moving. In the trading pit itself you saw those periods when fear or greed would take over.
There's nothing like seeing it up close and personal and watching individuals or firms panic and make trades that maybe with the passage of time would not appear to be completely rational. So, in that sense it was an invaluable experience.
TGR: Your Taylor International Fund is heavily weighted in natural resources and emerging markets. Given that this space has seen a pullback and is generally soft at this point, how is your fund pacing so far in 2011?
ST: Well, we've taken our lumps. We're not too far behind some of the resource-related averages, such as the TSX Venture. We're down a little bit over 10% this year. But, you know, volatility is something that comes with this space. It's something we're comfortable with as long as we believe in the companies and the management teams that we're investing in.
We maintain a long-term perspective. We seek out and encourage our investors to maintain a long-term perspective. So, we're not really rattled or shaken by these sorts of pullbacks. It just goes with the territory.
TGR: Do you think of the volatility as your friend?
ST: In many cases, absolutely. Not everybody likes volatility. Not all funds are able to deal with it. But it does present some opportunities. I think we've seen some overdone selloffs in the resource space. We've seen some extreme selloffs in the China space. And that's presenting some good opportunities, in our opinion.
TGR: Your China positions represented about half of your portfolio when you last spoke to The Gold Report six months ago. Some of these were private equity. The due diligence would be daunting to most people. How do you research and verify these assets, liabilities and valuations in what I might refer to as esoteric investments?
ST: As you know, diligence is an ever-present issue, not just in this China space, but in the resource space as well. We are big believers in looking at management teams that have delivered in the past. We look at the partnerships that management teams and companies have, and the banking teams that they choose to deal with. We look at the strategic investors that they bring along, as well as the firms doing their auditing and legal counsel. We do site visits, and repeatedly meet with management teams. We try always to look at what companies do, and not what they say.
TGR: Is there any China counterpart to Sarbanes Oxley Section 404, requiring executives to be responsible for their financials?
ST: Well, I would point out that SarbOx has certainly not been a panacea in and of itself here in the U.S. A number of the high-profile blowups here in the U.S. were Sarbanes-Oxley-compliant, or at least testified that they were. Ultimately, whatever regulatory structure you have is only as good as people backing it up. With respect to China, clearly it's a developing market.
Their financial markets are not as mature as those in North America or Europe, and it's an ongoing process. I think you'll continue to see some progress being made in that area over the next year or two, especially with respect to allowing for broader SEC investigation and actions in China and harmonization of accounting standards.
TGR: When you founded the Taylor Fund in November 2008, you had $10 million under management, I believe. How much do you currently have under management?
ST: We're a little under $50 million at this point.
TGR: So, you have almost five times the assets you started with two and one-half years ago. Has that growth occurred mostly without new investment?
ST: It's been a combination of organic growth, some new investment and some follow-on investment from existing investors.
TGR: Have you reopened the fund to new investors?
ST: We haven't formally reopened the fund. I suspect that we may do that sometime in the fourth quarter. That'll be our three-year anniversary and an appropriate time to take a look at it.
TGR: That's when the lockup will end for your initial investors?
ST: That's correct, at least for a portion of them.
TGR: In a fund of this type, you really have to be as comfortable with the investor as the investor has to be with the portfolio manager.
ST: Oh, absolutely. In an ideal world, all funds would be that way. As a manager, it's vital to know the risk tolerance and financial profile of your investors. I couldn't operate nearly as well if I were concerned that some of my investors were taking inappropriate risks for themselves. It really has to be a good match.
TGR: You have to walk a narrow path, where you hold enough different positions that you're not dangerously under-diversified, but where at the same time you can potentially achieve outstanding capital appreciation. Currently, how many different securities does your fund own? How are you weighted by country and sector?
ST: We have approximately 45 positions right now. In terms of weighting, we're probably 20% in the energy space, 20% to 25% in the mining space, and we have probably about one-third in China-related investments. We currently have a 2% or 3% weighting in the financial space, but I suspect that will change to about 10% in the next few months. And we have roughly 5% or 6% in cash.
TGR: In part, you buy very small companies, some of which are in the micro-cap range. In many cases, they probably require some tinkering or restructuring. Do you think of yourself as an active investor or an activist investor? How do you see yourself?
ST: We like to look at ourselves as being positive, additive, collaborative shareholders. We like to think of ourselves as always having a good relationship with management teams. Depending on that relationship, CEOs will reach out and may ask for our input from time to time. We like to work on a collaborative basis in a win/win situation. Having said that, there are times when we have had to become active.
One case that I mentioned in the December interview was the Chapter 11 case of Meruelo Maddux Properties, Inc. (OTCPK:MMPIQ). It unfortunately required a lot of time and effort on our part, and it's something that we're happy we did. As part of the confirmed reorganization plan, which we believe will be effective this week, I will be taking a board slot there. So, I'm going to restrict my comments on that for now.
