5 Reasons Why Active Management Works
As we all know, exchange-traded funds (ETFs) have increasingly become the hot menu item, attracting a lot of money away from actively-managed funds such as mutual funds.
As we all know, exchange-traded funds (ETFs) have increasingly become the hot menu item, attracting a lot of money away from actively-managed funds such as mutual funds. But don’t discount active management just yet! There’s still plenty of room in your portfolio for this type of investment.
Consider the following:
1. First-Mover Advantage
Active management gives us the ability to act swiftly and strategically, with the surgical skill of a highly-trained team of Special Forces. It allows us to push out of the starting blocks much faster.
As active managers, we closely monitor key indicators and macroeconomic themes such as PMI (the Purchasing Manager’s Index), which we’ve written about many times, and negative real interest rates. These indicators, among other factors, often serve as the signals we’re looking for.
2. Explicit and Tacit Knowledge
Some people have book smarts (explicit knowledge), while others have street smarts (tacit knowledge). Active management requires that you have both.
Not only are we experts in geology and mineral resources, we’re also world travelers with “boots on the ground” experience visiting mines, spending time with mining crews and meeting with management teams.
3. Technical Models
We are practitioners of quantitative analysis on a per-share basis. We use a matrix of top-down macro models and bottom-up micro stock selection models to determine weightings in individual securities. When looking at mining stocks, for instance, we screen for the following factors:
4. Hidden Gems
Using technical stock screens and tacit knowledge of management teams can help us uncover hidden gems with attractive growth prospects.
One such company is Nevada-based Klondex Mines, which reported incredible second-quarter growth of 82 percent in net income and 25 percent in the amount of gold produced compared to the same time last year. Klondex is up more than 156 percent year-to-date, as of August 30.
Granted, this type of performance is out-of-the-ordinary, and there’s no guarantee it will be repeated in the future. But when it happens, active management can help us capture the upswing.
5. Portfolio Manager Tenure
Active management is only as good as the people running it, and at U.S. Global Investors, we’re fortunate to have one of the best in the business—Ralph Aldis. Ralph has over 20 years’ worth of experience at USGI alone and was even named a metals and mining “TopGun” fund manager by Brendan Wood International last year. The capital markets performance measurement firm recognized a group of investors as “optimal leaders of thought in the industry” during the year. The honor was given based on a vote from 269 sell-side professionals, and this was Ralph’s second time to receive such recognition from his peers.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Cash Flow Return on Invested Capital (CFROIC) is defined as consolidated cash flow from operating activities minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: Klondex Mines Ltd., Silver Wheaton Corp.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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January 23, 2023Learn More