Interview with Charles Supapodok, Fund Manager of the Artemis Silver Fund
Charles Supapodok has over 15 years’ experience as an analyst and trader, with over seven years’ experience as a silver expert. He started out as an equities analyst with Deutsche Bank in Bangkok before joining Credit Suisse First Boston in New York as an analyst in the M&A department. Subsequently he worked for several years as an equities analyst in Bangkok, covering stocks traded on the Stock Exchange of Thailand.
A fund specifically targeting the silver market is a new and interesting concept. Could you elaborate on the case for silver and for the Artemis Silver Fund?
Silver has always been in the shadow of gold, and remains relatively unknown in the investment world. However, this shiny metal has outperformed gold in the commodities bull market to date, and I expect that to continue. There are many reasons for my bullishness on silver.
Silver, unlike gold, is an important industrial metal that is used in a wide variety of industries. Industry demand takes up approximately 50% of yearly supply. We see industry demand steadily increasing in the years ahead, as the economies of the world develop and use more silver. We have already witnessed large demand increases from India and China in the last two years. At the same time, mining supply has been slow to catch up. There is a long lead time to build new mines (five years or more) so we won’t see huge silver supplies coming out to depress prices.
Silver is an extremely small market when compared to gold. If one tallies all the silver supply above ground in 99.9% bullion form (not counting silverware or jewellery), one would see there is only approximately 400 million ounces remaining in the world today. At current silver prices that represents about US$5.2 billion, a mere drop in the bucket in terms of global liquidity. What’s more astonishing is that these inventories are at historically low levels. During the last commodities bull market in the 1970s when silver shot up to nearly US$50/oz, there was much more silver in inventory stockpiles than there is today. Silver inventories have declined because there has been a 15-year deficit in the silver market, whereby nearly 1.5 billion ounces has been shaved off the market. Where has this silver gone? Much of the silver has been used by industry and lost forever.
Perhaps the most bullish factor for silver is rising investment demand going forward. In the past few years we have witnessed a virtual revolution in the precious metals markets around the world. Three new commodity exchange markets have opened up: the DGCX in Dubai, the Shanghai Gold Exchange in China and the Mumbai Exchange in India. At the same time, financial industry deregulation has opened up markets in India and China to new investment. In both India and China, citizens can now hold bars of silver and gold legally. Just a few short years ago, this could have landed people in jail in these countries! In addition, in India mutual funds are now able to launch local ETFs, and in China the government lifted restrictions on precious metals funds.
We have seen the rapid growth of new investment products for both gold and silver as well. Our silver fund, the first of its kind, is one example. The numerous new ETFs have been wildly successful, and have already taken much physical silver and gold off the market. In the short time since the first silver ETF launched in April 2006 (Barclay’s iShares ETF), it has already amassed over 140 million ounces, or roughly more than 1/3 of physical above ground supply. There are already three more silver ETFs that are planning to launch soon. These will surely put pressure on an already tight physical market in silver.
The effect of all this market deregulation and new investment vehicles for silver cannot be underestimated. During the previous commodities bull market in the 1970s, silver prices were driven primarily by markets in North America. This time around the countries of the world will be participating. When silver prices really start to move, the combined effect of investment demand pouring out from all over the world into such a small market will send silver prices rocketing skyward. I see prices easily surpassing nominal highs of US$50/ounce within the next five years, eventually reaching new inflation-adjusted highs of over US$100/ounce.
From an investment manager’s perspective, in what key respects is the silver market different from those of other precious metals, and what, in your opinion, explains the dearth of fund manager interest in this market?
As mentioned earlier, the silver market differs from other precious metals in that it is an important industrial metal. Palladium and platinum are also used in industry, but their uses are limited. Silver is used in a whole variety of industries such as technology, electronic, medical (silver is a natural biocide), defence, superconductor, photography and others. Silver has the highest thermal and electrical conductivity of all metals, so it is an extremely useful metal in industry and difficult to replace.
The lack of fund manager interest in silver could perhaps be explained by the fact that there are not many available vehicles investing directly into the silver market, not to mention – the silver equity market. It is a rather specialised and niche market, where not many players are capable of trading, and if they are – they do so for their own money. Another possible reason could be the silver’s silver’s long 20-year bear market which ended in 2001. This long protracted bear market did much to damage silver’s credibility as an investment vehicle. During the 1990s many silver mines shut down operations due to low silver prices. In fact, in the 1990s there were only a handful of listed mining companies that could be called pure silver mining companies. These listed companies did not have a large market capitalisation either, so it didn’t make sense to build a fund around three or four listed companies and a commodity which had been on the decline for 20 years. However, all that has changed now as silver has gone up from US$4.50/ounce to nearly US$15 at its peak last year. There are plenty of new silver mining companies coming to the market now, and several new silver investment vehicles as well.
Basing on information in the Eurekahedge hedge fund databases, there are over 30 funds that invest in precious metals, and ten of these have merely a partial allocation to silver. What is the breakdown of the fund’s portfolio by sectors/instruments traded?
The fund is essentially a long-biased equities fund that has approximately 80% invested in silver mining equities listed on the US and Canadian stock exchanges. We also invest 5-10% of the fund in physical silver through Barclay’s Silver ETF. At times the fund will use options on silver futures to protect against downside volatility, particularly after periods of strong run-ups in the silver price.
With long-term capital appreciation as one of the objectives of the fund, what is the average holding period on your investments?
Among the fund’s equity holdings, we have a mix of core holdings and shorter term holdings. Our core holdings we may hold up to two years, while the shorter term holdings may range from one month to one year.
Moving on to performance, how has the sell-off in the financial and commodities markets towards end-February affected your fund’s performance since?
Our fund started at the beginning of March, just as volatility hit financial markets around the world. Fortunately the fund had a large cash position and bought into weakness, so our March performance was positive. As the fund is long equities, any sharp unexpected corrections in the broader equity markets will affect mining shares, regardless of how well silver is holding up in the spot market. I have seen this happen many times in the past. However, during sustained equity corrections, mining shares tend to disassociate from the overall market so from a longer term perspective there isn’t such a strong correlation of mining shares to the major stock indices.
Looking at past performance, would you say that the fund’s steep down months during the corrections of May and September 2006 are characteristic of investing in silver-related securities? To offer context, the Dow Jones-AIG Precious Metals Index was down 3.7% and 6.6%, while the Silver sub-index was down 8.6% and 11.4%, for the respective months.
There is no doubt that the silver market is volatile. The corrections in May and September of last year were typical of silver corrections in the past. While silver’s drop in May was particularly steep, from US$15 to US$10 or nearly 33%, it is important to note that it quickly recovered to US$13 within a few months. Going forwards, we do see a strong upside volatility in this market.
On a broader note, what are some of the risks associated with silver investing? Could you specifically elaborate on some of the bigger monthly losses that the fund has endured in the past?
Some of the risks of silver investing include company risk, market risk and currency risk. I mention currency risk because most of the silver listed companies are on the Canadian stock exchanges, so there is exposure to the Canadian dollar. I cannot comment on monthly losses yet because the fund has yet to have a losing month. However, I can comment on some of the managed accounts that the fund is based upon. The corrections in May 2006 and 2004 hit the accounts negatively, but during both times the downside was mitigated by profit-taking and moving the accounts to cash.
How does your fund manage risks – those associated with targeting one specific sector or otherwise? Are the fund allocations also geographically diverse? If so, what would be a typical breakdown?
The fund is concentrated on one sector, silver, and as such has market risk associated with silver prices. To minimise this risk, the fund uses options on futures at times of perceived market tops. As well, the fund is employing a stop-loss mechanism, profit-taking mechanism and position size policy.
Company risk in the equities is mitigated by spreading the investments over 15-25 companies, with geographically diverse mining interests. The fund holds a number of companies with mining interests in Mexico, Canada and the US, but also has some interests in China and Africa as well. So we are quite geographically spread out.
Last, the fund does not use any leverage.
Do you see competition in this niche picking up in the near future, as more fund managers recognise the opportunities in silver-related sectors?
This remains to be seen. Silver remains a very niche market and as such there aren’t many qualified fund managers out there who would have many years experience focusing on silver equities. I certainly see silver being given more allocation in general precious metals funds in the future. Our fund is one of the first available silver funds, and I believe that more managers will follow our strategy and will try to mimic our philosophy. This, however, may take time.
What is the fund’s investor make-up like? What types of investors have shown interest in the fund since its launch?
So far, the investor’s make-up has been mostly from Asia as we have a strategic partner in Singapore, ESC Financial Services Pte Ltd, focusing on Asian distribution at this point in time. I have recently completed an Asian roadshow; it was a great success as I find investor interest has been great for silver. Once the fund has a longer track record we envision more institutional interest in our fund going forward. Interest so far is shown by a broad scope of investors as Silver is a very good component to have as part of an investment portfolio. People are excited about our fund, as it is a rare component!
Could you briefly outline your near-term outlook for the silver market, especially given the current uncertainty surrounding inflation?
We are entering a seasonally volatile period for silver. In the past five years we have seen large run-ups or corrections in silver during the months of May and June. Silver has been weak the past two weeks; it has actually underperformed both gold and base metals. Technically, silver looks to be within an uptrending channel for the past six months and is near the bottom trendline of this channel. If silver breaks US$13 to the downside, it could fall back rather quickly to the US$10.80-11.00 support level. While I acknowledge that a fall like this may happen, I believe silver will hold and rally here, reaching some resistance perhaps at US$14.80 within the next month or two.
Higher inflation is bullish for precious metals and silver, and I forecast inflationary pressures hitting the US towards the end of the year as higher gas and oil prices work their way through the market.