Bruce Jackson, managing director of Barrantagh Investment Management Inc. and co-manager ofGGOF Resource, knows the resource industry from the ground up. One of his first jobs was as a welder in the Alberta oil service industry.
He has also spent a significant portion of his career with firms that specialize in financing junior resource companies, which has helped him to know the players in the industry as well as their properties. In addition, a significant number of Toronto-based Barrantagh's private clients are Alberta oil entrepreneurs, who can be a valuable source of information. "We have a 12-call rule when we're considering an investment," says Jackson, who co-manages the fund along with fellow Barrantagh managers Wally Kusters and Peter Comber. "We talk to four suppliers, four competitors and four customers. There tends to be a lot of circular confirmations in what we do."
Launched in January, GGOF Resource differs from its competitors in that its portfolio consists of 50% resource stocks and 50% resource income products, including income trusts and corporate bonds. The income portion is overseen by Guardian Capital LP's John Priestman and Steve Kearns, while Barrantagh picks the stocks.
While totally abandoning resource stocks in tough times is impossible for a resource fund manager, Jackson can moderate exposure to the actual commodities by increasing exposure to industrials like Canadian Pacific Railway ( CP/TSX), Caterpillar Inc. ( CAT/NYSE) or TransCanada Corp. ( TRP/TSX), and service companies like Calfrac Well Services Ltd. ( CFW/TSX).
On the other hand, he has the freedom to invest in junior companies with a market cap of less than $100 million if he sees an opportunity, and can hold up to 20% of assets in private ventures. "We actively research private companies, and our network of contacts through management teams, board members and industry analysts is critical to our success."
The fund invests in energy, base metals, service companies and materials stocks, but currently is avoiding forestry stocks due to unfavourable supply/demand factors. Gold companies also do not fit its criteria.
"The problem with gold is that it doesn't get consumed. It provides no cash returns to the governments that hold it, and supply will increase as they sell their holdings," Jackson says.
Jackson has been close to the resource industry throughout his career. After graduating from the University of Western Ontario in 1986 with a degree in business administration, he worked for what is now CIBC Wood Gundy as an oil and gas research analyst.
He later moved to Loewen Ondaatje McCutcheon & Co. to work in institutional sales and in 1989 was a founding partner of Goepel, Shields & Partners Inc., working in the Toronto office.
In 1993 he joined Calgary-based Peters & Co., and in 1995 returned to Toronto to oversee institutional sales at Griffiths, McBurney & Partners. Crossing over to the "buy side," he joined McCutcheon Comber Investment Management Inc. in 2002. A year later, the firm was renamed Barrantagh, a Gaelic word meaning trustworthy, as well as signifying the support beam of a barn.
Jackson says Barrantagh has a "five-silo" approach to evaluating companies. First on the list is the quality of management, and "integrity in every aspect is crucial." He looks for a credible strategy, superior expertise and a cohesive team. He likes to know the company principals long enough to be able to measure whether they do what they say they will. He also intensively analyses the board of directors; "they are not just names in the annual report."
Other silos include operational ability and how a company manages growth. The profitability of new capital invested is measured against previous success. Financial management is also important, with cash flow being the most revealing yardstick. "We are cash flow fanatics," Jackson says. "Understanding cash flow involves an unwinding of all the accounting garbage."
Once he identifies companies he likes, Jackson likes to hold a significant position. The average weighting is around 4%, and 8% would be big position for the fund. On the equity side, the number of holdings ranges from 25 to 40. Barrantagh's historical turnover rate averages about 30% a year. Companies are reviewed when they hit their target price, or when there is a change in management or strategy.
Jackson says resource companies must have special expertise in promotion and communication, including relationship building within the communities where they do business. "If you don't manage relationships at every level -- from government down to local fishermen -- you may find yourself with a project that doesn't go anywhere."
