Steve Palmer, chief executive of Toronto investment firm AlphaNorth Asset Management, scans the market for inefficiencies. And it pays off in the long term. While comparable market benchmarks are down as much as 46%, his small-cap fund has returned nearly 200% since its launch in 2007. In this exclusive interview Palmer explains why his long-term vision makes him a continued believer in oil and uranium.
Companies Mentioned: Athabasca Uranium Inc. - Bannerman Resources Ltd. - Cameco Corp. - Canadian Overseas Petroleum Ltd. - Hathor Exploration Ltd. - Mega Uranium Ltd. - Newfield Exploration Company - Primary Petroleum - Rosetta Resources Inc.
The Energy Report: About 30% of the AlphaNorth Partners Fund, which consists mostly of Canadian securities, was invested in tech stocks, with similar percentages in metals and energy the last time we spoke in May. What's the asset mix now?
Steve Palmer: Technology stocks comprise about 32%, metals 26% and energy 27%.
TER: Although the fund was down about 6.5% in August, it is up 23% for the year through August. It was down about 15% in September, but it's still positive on the year. What edge does AlphaNorth have that allows you to make gains in an economic climate that's as negative as this one?
SP: It's very difficult to make money when markets drop more than 10% in a month. We don't pretend to be able to make money in those kinds of months like we experienced recently and in the fall of 2008. However, since inception of the fund in December 2007, the fund has returned approximately 190% despite declines in the Canadian indices.
The Canadian indices that I use as benchmarks are both negative. The S&P/TSX Venture Index, which is the closest benchmark to what we do, is down 46% over that timeframe and the S&P/TSE Composite is down 5%. Despite the poor markets, we're still able to generate substantial returns over a long-term timeframe.
TER: What is your primary strategy for generating profits?
SP: Good stock picking. We've had some good calls on specific stocks. We've been able to sell them at the right time. We use technical analysis to help do that. We do some hedging in the Partners Fund at certain times when we think the market is vulnerable to a correction. That has helped cushion the downside and contribute to positive returns when the short positions work out.
TER: In the coming quarters, do you see yourself leaning more towards one of those sectors that you mentioned earlier, perhaps at the expense of another?
SP: No, not particularly. Given the correction, all of those sectors have been beaten down pretty good. There are a lot of bargains across the board now.
TER: Let's take a closer look at the energy portion of the AlphaNorth Partners Fund. What's the mix in terms of oil and gas, uranium, renewable and coal?
SP: It's mainly oil-focused. Coal would be the next most significant component and then iron ore and uranium.
TER: Uranium's off the radar for many investors given the events resulting from the tsunami in Japan earlier this year. Are you still a believer in uranium?
SP: Yes, I'm still a believer. Long term, the supply/demand should result in higher prices. China's still moving forward with building many new nuclear plants. There's a huge demand for power in many parts of the world. Uranium is, in many cases, the most practical way to add power. It's unfortunate what happened in Japan. It's created a negative investor sentiment in the short term, but the fundamentals are expected to be strong over the long term.
TER: Many uranium projects being developed need $50 uranium just to break even. The spot price for uranium is just above that now. Do you believe Chinese demand alone can bring uranium prices up enough to make smaller development projects sustainable?
SP: Chinese demand will account for probably more than half of total new demand over the next 10 or 20 years. We've been working through stockpiles from nuclear weapons, but that's pretty much depleted now. We do need new supply, but there are not many new uranium projects coming on.
