Mark Serdan is keen on investing in natural-gas-related companies to fuel the performance of the $243-million BMO Resource.
"Ultimately, we felt that the natural-gas area was undervalued. It got very depressed there for a while," says Serdan. "The cold weather here helped, but we were there long before that."
Last year, he took the gold weight in the fund down to approximately 20% and increased the weight of natural-gas-related holdings to about 34%. He believes there are a number of "demand drivers" that will help push natural-gas-related stocks higher, including steady growth in industrial demand and increasing restrictions on coal-power generation in the U.S.
Serdan, a vice-president and portfolio manager, Canadian equities at BMO Asset Management Inc., expects natural-gas prices to continue to rise. "Fast-forward two years from now and natural-gas prices could still be significantly higher than where they are now."
Serdan has led the resource fund since November 2009. He manages the fund with his colleague, energy specialist Kyle Hunter. He is also responsible for BMO Precious Metals and BMO Global Energy. In total, he manages approximately $400 million in assets.
The resources and precious-metals funds each have about 70 holdings, while the energy fund has roughly 50. In selecting specific stocks, Serdan favours management that has a track record of creating value for shareholders. He invests in companies that he believes will be able to generate strong cash flow in the future. Another sought-after characteristic is growth in production or from drilling.
Serdan looks to positive catalysts to drive the prices of the stocks he invests in. To be considered for the portfolio, a stock must offer good value, using a growth-at-a-reasonable price (GARP) approach.A holding in both BMO Resource and BMO Precious Metals is Franco-Nevada Corp. FNV, a gold-focused royalty company. "The company has strong management," says Serdan, "and it's got that free cash flow that's going to continue to roll in."
About 15% of the precious-metals fund, and about 4% of the resource fund, is made up of royalty-focused gold companies, Serdan says. "Royalty companies don't take on the financial risk that producers do, because generally they are paid a straight 2% to 5% of profits or revenue right from the gold or silver mine."
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Over the two-year period ended March 31, BMO Precious Metals sustained a 22.4% loss, though this was not as severe as the 25.5% median loss in the Precious Metals Equity category. "Within the precious-metals space, it was a tough year last year," says Serdan, "but there are only so many places you can hide."
Looking ahead, "we do remain somewhat cautious on gold," he says. "It will be volatile," says Serdan. "I think that continues, going into the next 12 months."
Another holding in both the resources and precious-metals funds is Vancouver-based Tahoe Resources, Inc. THO, which operates a silver mine in Guatemala. "There's definitely risk in the country," says Serdan, "but it's still a top pick because it's a great mine and they have been able to produce there." Serdan adds that the management team at Tahoe Resources has a track record of working with the politicians and the people and making things work. "But instead of putting a 10% bet there, you might put a 3% to 4% [position] to mitigate the risk."
A Windsor, Ont., native, Serdan graduated with an honours bachelor of commerce from the University of Windsor in 1994. After graduation, he articled at then-named Price Waterhouse. In 1997, he joined the investment brokerage BMO Nesbitt Burns and worked for two years as a research associate. After two years in the firm's investment-banking division, Serdan moved to UBS Global Asset Management, where he began working on a small-cap portfolio. At UBS, he also covered natural resources and gradually became a metals specialist.
In late 2009, he joined BMO Asset Management as a vice-president and portfolio manager. He assumed responsibility for BMO Precious Metals several months after the sudden death in June 2009 of the fund's long-time manager, Bill Belovay. The research team includes Serdan, a dedicated analyst who works with him, Hunter and a larger group of analysts.
As of March 31, the Morningstar 4-star-rated fund has an annualized two-year return of 11.7%, way better than the median loss of 7.5% in the Natural Resources Equity category. Over three years, BMO Resource has a 1.1% annualized loss, faring much better under poor market conditions than the median fund's 14.2% loss.
Mostly under Serdan's tenure, the fund has also outperformed its peer group over the past five years. Serdan's strategy, which he sums up as picking "the right sectors and the right stocks," has been working well.
