Founded in 2007, AlphaNorth Asset Management is a Toronto based investment manager. The firm combines both bottom-up fundamental analysis and top-down strategy with technical analysis in the selection of investments offering the best risk/reward opportunities.
Justin Meiklem of Stockhouse sat down with Steve Palmer, CEO of Alpha North Asset Management to discuss the current hot markets.
Justin M. - Steve, thank you for spending a few minutes with us today. We reached out to you for two reasons. Right now we are seeing record investor traffic on Stockhouse.com, and at the same time you have several funds that are performing at +30% return in the past few months. The small cap markets are obviously heating up, investors are active, and we thought it would be a great time to pick the mind of a professional fund manager. To start: please give us a quick summary of your funds and the type of investors interested in each.
Steve P. - Absolutely, Justin, happy to. Our main fund is the Partner’ Fund, which is a long-biased small cap hedge fund, that’s for accredited investors, so a lot of high net worth individuals are invested, including those directly in the investment business. Then we have two mutual funds, which are open to everyone, and which have low minimums. We have quite a few investors who invest in small caps on their own, but who also buy our funds to supplement their self-directed investments. There are also fund managers that buy our funds because we have a more unique offering that typical managers may not have access to or have the ability to purchase in their own mandates. And there are investors who aren’t part of the small cap space but they realize that they should have exposure to small cap equities, so they use us.
JM - We are setting all-time highs for investor traffic records on Stockhouse.com through November, are you noticing investor interests changing?
SP - I’ve been saying for a while that the market has bottomed. While I was admittedly early, initially investors didn’t believe it, but now you can’t deny the fact the TSX V has bottomed. The low was back in January 2016. Obviously, if there are record levels of activity on Stockhouse, a platform for junior companies, it indicates that retail investors are back and are taking a more “risk on” approach. People have taken notice – our fund performance is reflecting proof of the bottom.
JM - We recently posted a survey on investor interest, and Battery Metals ranked higher in investor interest than both Blockchain and Cannabis...
SP - ...Battery Metals ranked higher than Blockchain or Cannabis?
JM - Yes. For you, when you are looking at the make-up of your portfolio, what are you looking to weight higher?
SP - We try to maintain a diversified portfolio, so keep that in mind, but Battery Metals is definitely a sector we have been quite active in for a couple of years, and continue to be. The newer thing is Blockchain, and we have been and intend to continue to be quite active in that.
JM - Do you find there is enough opportunity to invest there?
SP - Well, there is also the “crypto currency” side of it, which has done really well, but I’m not too much a fan on that side of it, I think it is wild speculation. The blockchain technology has a lot of different applications, and new deals are popping up all over the place. In a lot of these situations, it is the promoters getting penny shares, and the retail investors are going to get laid out on a lot of those. I like companies, like Leonovus Inc (TSX: V.LTV, OTCQB: LVNSF, Forum), that have a core technology or business, and are using blockchain technology to enhance their product offering. It is still early days of generating revenue, and they have started to sign some significant customers.
JM - Are there any sectors that you have no interest in?
SP - I have little interest in the Cannabis space right now. We do have some exposure, but not in a big way. I like the companies that have ancillary businesses, one of the boxes that I like to have checked is something that is proprietary – a company with a greenhouse somewhere, there is nothing proprietary to that. There is nothing special about building a greenhouse and growing cannabis other than getting the Health Canada license. The government continues to give out licenses to produce and there are over 70 now. We believe funded capacity of the industry already exceeds potential demand. It is also inevitable that margins will get squeezed. We have preferred to invest in the space in companies that have something more unique such as Tinley Beverage (CSE: TNY, OTCQB: QRSRF, Forum). That’s a play in the Cannabis space but it is different, as it is focused on Cannabis beverage offerings. The company would argue that because they have the former leader of Cott, and their own formula, and some pretty cool branding, that they have a proprietary angle. That’s one that we’ve owned for a while. We also owned Radient Technologies (TSX: V:RTI, OTCQB: RDDTF, Forum), the one that Aurora Cannabis (TSX: ACB, OTCQB: ACBFF, Forum) bought into, which performed very well. They have a proprietary technology for extracting oil. I like the niche technologies that are a play on the space.
JM - Looking at commodities, where are you bullish?
SP - We have focused on investments in cobalt, lithium, graphite, zinc and vanadium, so we are very diversified. One thing I’ve done a little differently in this cycle is invest in companies with assets in secure jurisdictions. For example, I don’t have much interest in investing in something like a gold or graphite asset in Africa. There are a lot of quality assets in First World countries that have lower risks. Most of our recent investments have been North American focused.
JM - Looking back at 2017, how would you summarize it?
SP - This Blockchain mania has caught a lot of people by surprise – how well a lot of these stocks have performed in such a short period of time. They have evolved much quicker than the cannabis stocks. A lot of people are realizing that blockchain is going to be big, and those who got in early are doing very well.
JM - How would you categorize your fund management style? What is the portfolio turnover?
SP - I don’t really track turnover. In a good market, it tends to be higher, as things are working out, there is liquidity to sell winners and reallocate capital – during the 2012-2015, there was next to nothing working out for investors in the small cap space, liquidity was very poor across the board, so you had to wait a lot longer. Now that stocks are making big moves in short periods of time, you can get out, and reload on another early stage situation with a better risk/reward profile. That’s a key thing for us, is to minimize the downside by getting in early, then maximize the upside. We participate in a lot of private placements where we pick up warrants for additional leverage.
JM - How active are you with private placements right now?
SP - Very active. Right now we have 10 PPs closing in the next two weeks. There’s technology, healthcare, gold, diamonds, cannabis… some of those technology are Blockchain related. A lot of stuff we will hold for several years looking for a big win, 10x or more, but if there are trading opportunities where we can make 10 or 20% in a few days, we will take it.
JM - Your thoughts on other sectors – Energy or Precious Metals?
SP - I’ve never been a big gold guy. Our resource fund has struggled a bit this year. Part of the reason is that we added to our gold position in the summer, and that was premature. I thought there was going to be a trading opportunity there. I still think there will be, but I was too early. We have a little bit of oil exposure, an early stage producer, but in terms of the commodity price, I don’t see significant upside from current levels, so I prefer battery metals, as the sky’s the limit on some of those. The natural gas price in Canada is a disaster, so we have also avoided gas-weighted names.
JM - Any advice to retail investors? If you were a wealth manager, how would you advise on how to split a portfolio with small cap exposure?
SP - Personally, I’ve typically had ALL my money in small cap. Some would say that is crazy, but over the long term it’s done really well. I accept the volatility knowing that I will do really well over the long term. The allocation to small cap depends on the person’s risk profile. I think that everyone, particularly at this point in the cycle as the junior market is recovering, should have a small cap allocation. My grandmother had an allocation to my fund, when she was 95! She was not reliant on the funds in our Fund to live. It was being managed for the next generation. One thing retail investors will sometimes ask me: if I’ve heard of “xyz” company, as they’ve heard the pitch from a friend or someone, and I find they know about a quarter of the story, at a very superficial level. What they don’t know about are the cheap shares the promoters have, the competitive landscape, the company financials or anything about management. Most of the companies we invest in, we meet with management, and I look them in the eye. There is a lot of guys who are “BS-ers”, and meeting every investment in person really helps. Most retail investors don’t have the chance to meet with management, or hear the full story. Whenever you are investing without full information, you are basically competing against a guy like me, who is sitting here doing this all day, all week: meeting management, talking to other guys in the industry…the fund managers clearly have an advantage.
JM - What specific companies are you expecting to be your big winners in 2018?
SP - There are many companies in the portfolio that I have high expectations for, but you never know which ones are going to click in a certain timeframe. NTRP [Neurotrope] I like: they are developing a potential Alzheimer’s drug – that could be big – there is almost nothing you could find with greater potential than a drug which would reverse Alzheimer’s. Another space that is going to gain more interest is the A.I. (artificial intelligence) space. AnalytixInsight (TSX: V.ALY, OTCQB: ATIXF, Forum) is an example of a stock that has not performed for the last couple years, but has recently perked up. Investors seem to be starting to figure it out.
JM - Yes, and we are seeing hyperactive activity for both Health and Technology companies on site right now, too. Steve, thank you so much for your time, and congratulations on a great year!
SP - Thank you, Justin.
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