Q:  Could you give us some examples of specific investments that highlight your research process?

A: The commodities space is quite diverse as there are many different types of commodities, and each individual commodity has its own supply and demand dynamics. We start with a macroeconomic layer to select commodities with more favorable dynamics, and then we look for the individual stock picks that would benefit from the positive macroeconomics.

For example, last year we were very positive on the outlook for nickel. After the release of some very bullish drilling results and discussion with the management, we selected a company called Sally Malay. Because many companies are located here in Perth, we can spend considerable time with the management. So we sat down with them to discuss the potential upside in their project, their strategy in terms of regional exploration, and the results of their geological work. We built a substantial position in that company, management kept on achieving its exploration and production milestones, and the nickel price kept going up. We offloaded the position last month after producing a handsome return for 12 months.

Q:  Why did you decide to sell it?

A: We thought that it was getting a little bit beyond its valuation. Also, we were noticing in the nickel market that Chinese were looking to use cheaper substitutes to make stainless steel and we felt that would dampen nickel demand and sentiment in a fairly overbought market. They are not using nickel, they are using substitutes. So we made that decision again based on the macroeconomic overlay. Both the nickel price and the stock has pulled back already since we got out, so the process has been vindicated in this instance.

Q:  Could you give us another example?

A: Lynas Corp. would be an example of rare earths play. Again, the initial interest was prompted by the big picture. In that market, 95% of rare earths come from China and the price was increasing. Looking for a way to play rare earths outside of China, we did research on Lynas Corp, which is based in Sydney. We arranged for the managing director to fly over to visit us. We had a very positive meeting and were taught a big lesson on the fundamentals and main drivers of the rare earths market.

The more we were researching the rare earths market, the more compelling the story became. There is large demand for end products - light bulbs, catalytic converters, plasma screens, iPods, etc, and China is almost the only source for the companies to get this material. At the same time, China was shutting down mines because of inefficiency, pollution and strategic reasons.

All those ingredients of the story prompted us to build a big position in this company and to develop a good relationship with the management. It kept achieving its benchmarks as it moved towards production. Now it will mine the Mt Weld deposit here, in Western Australia, and is going to process the ore in Malaysia. It has a very favorable contract with the Malaysian government, including a tax-free status for 10 years. So there is a lot of value in this story to be unlocked as the management keeps achieving its milestones.

Q:  How do you approach the portfolio construction process? How many stocks do you have?

A: At the moment we have 54 stocks in the portfolio. Within our macroeconomic overlay, we are currently quite favorable on the fundamentals in zinc and energy, including uranium. Our strategy is to overweight our higher conviction stocks, which can consists of say 5% to 6% of the portfolio and build a long diversified “tail” of investments that could range from 0.5% to 2% of the portfolio.

We keep a close eye on the position that comprise of the less weighted “tail” of the portfolio. As these stories develop and we see milestones being achieved, we look to build bigger positions in these companies to capture the potential growth in anticipated share price appreciation.

Q:  What types risk do you perceive and how do you try to mitigate them?

A: Diversification is one way to mitigate risk. Although we are favorable towards certain commodities within the macroeconomic overlay, we will not concentrate our holdings in one commodity. We do have a split across all the commodities within the diverse resources sector.

We also use cash tactically as a risk management tool. If we don’t see value, or if we think that the market got ahead of itself, we tend to move to cash quite readily, particularly with the more liquid stocks. At the moment we have about 15.5% cash. We can use derivative instruments to hedge NAV when we feel that stocks in the portfolio have overshot their valuations.

Although we are big believers in the commodities secular bull market, we know that it’s not going up in a straight line in perpetuity. We recognize that there are pullbacks and plenty of volatility along the way. We certainly embrace those opportunities and are comfortable holding cash positions and wait for the market to reach a level where we feel there is more appropriate value.

Q:  How do you handle the tax-related issues?

A: We don’t have any tax-related issues. The majority of our stockholders are fund of fund managers, and 20% of our stakeholders are smaller investors who came in through one of the platforms in the U.K. They deal with their own tax issues through their financial planners, so it is not a concern of ours.