CASE STUDIES

SPECIAL SITUATIONS:

These include contrarian opportunities such as: ‘unloved’ crisis markets, out-of-favour industries or sectors offering relative value with a favourable risk-reward profile. The prime objective is to achieve out-sized returns over the medium term (2-5 years and beyond) in excess of stock market benchmarks.

Examples include:

Crisis Market: Cyprus Banking Crisis 2013.  An EU-led ‘bail in’ of the leading banks that had a high exposure to defaulting Greek bonds resulted in a severe economic downturn. This developed into a classic crisis opportunity for the ‘adventurous’ contrarian investor with the local stock market down more than 95% from its all-time high. Despite the headline issues the country was facing, it was felt that it would eventually pull through – the challenge was to research solid companies that were profitable and still paying dividends that would survive. A small basket local companies were identified that were profitable and selling at well below book value. (Of the 120 or so listed stocks, only 40 were liquid in a low volume market. Of these 40, there were only 8-10 that were regarded as being worthy of investment). It proved to be a profitable trade and exited later that year. This speculation may play out over several years to become highly profitable play but was exited due to market liquidity and other opportunities of interest available elsewhere. This type of crisis investment is based primariiy on extreme valuation dislocation and business survival, as opposed to a judgement on the quality or growth prospects of an individual company. In some instances and where available, ETFs may be a suitable vehicle for this type of macro strategy, although a 'buy a basket' of individual stocks approach is the preferred option.

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'Unloved' Sector: Gold miners 2014/15. Along with the correction in the resources sector and gold went out of favour due to a strengthening US dollar and appetite for risk assets, Australian small and mid cap mining companies began to offer compelling value. The gold price fell from its 2011 high of $1,900 to around $1,100-1,200 range, down to a level of the costs of digging the metal out of ground. It became clear that this was unsustainable and the industry went through a period of consolidation. Leading up to 2015 well financed small and mid-sized gold producers began acquiring cheap assets and rationalising costs at a time the mining services sector was also in a downturn. Shares in small cap miners that were on a solid growth path and with a low cost base were purchased from 2014. Gold stocks began a solid rise in 2015 going into 2016 with the strengthening of the gold price. The resurgence in interest came in part due to the low interest rate environment with many countries at almost zero or a negative interest rate, thereby increasing the interest in gold as a store of value. This view was vindicated by some well publicised commentary from high profile investors and hedge funds in early 2016. Some were buying gold miners as an investment or trade, others saw it as an alternative currency in volatile times and insurance against a potentially faltering USD. Whatever one's view of gold - as a currency, story of value in uncertain times, catastrophe insurance, or as a contrarian play, it has been and may well continue to be a attractive long-term opportunity. Update 2018: The basket of small producing companies continued to grow and thrive into bona-fide dividend-paying ASX-listed mid-cap stocks.