Oaktree Capital Management - Memos From Our Chairman

While browsing the net several months ago, I stumbled across a real treasure: Memos From Our Chairman, a series of essays by Howard Marks, Chairman of Oaktree Capital.

Memos From Our Chairman

The style of his writing is in the top tier.  It is excelled, however, by the power of his insights into all manner of things which affect the world of investors  ... and they are many.  The insights are the product of a distinguished academic background and, more important, experience gained through more than four decades of managing money.  

His memos address a variety of topics ranging from The Role of Confidence to Assessing Performance Records to On Regulation.  His insights are penetrating, going, as an esteemed former colleague of mine once used to say "beyond the beyond".  I especially appreciate Mr. Marks' ability to explore the relationship between the "institutional view" and the "individual view" (my characterization) and to arrive at some conclusions which have practical application for investors like me.  

You can subscribe to the memo series and receive updates via e-mail by accessing the above-noted link.  

I was so impressed by the quality of his writing and the strategies of the company that I decided to invest, especially after reviewing the resumes of key members of staff and checking them out further through a search on the Internet.  So far my faith has been supported.  Since the original purchase in early March 2013, the shares have risen in price by 10 percent.  This has been supplemented nicely by a dividend yield which is currently slightly north of 10 percent.  I'll leave it for you to undertake your own due diligence and arrive at your own conclusions.  

In addition to the company's regulatory filings, you can find a wealth of material about the company.  For example: insidermonkey.  A snapshot of the company is provided here: snapshot.

In this regard, you may wish to read one of his most recent memos,  The Outlook For Equities.  I am conducting an annual review of our portfolios and have incorporated some of the thinking in the memo as part of the process.  

Portfolio Update - The Financial Log Book

Most of the holdings have performed very well since the start of the year: some have gains exceeding 50 percent.  

Entity	Initial Price/ Purchase Date	Price 2013-10-11	Gain/Loss year to date %	Gain/Loss Since Purchase %
Central Fund of Canada (CEF.A)	9.77 2007-09-04	14.47	-30.7	48.11
Silver Wheaton (SLW)	12.37 2007-09-04	22.9	-35.3	85.1
Polaris Minerals (PLS)	10.70 2007-06-01	1.54	54	-85.6
MEG Energy (MEG)	44.19 2010-12-29	34.61	13.8	-21.7
Cenovus (CVE)	32.39 2010-07-27	31.01	-4.7	-4.3
Canadian National Railway (CN)	48.88 2009-04-14	109.49	22.8	126.9
North West Company (NWF)	16.23 2009-05-07	24.45	13.2	50.7
Powell Industries (POWL)	36.75 2009-11-12	64.92	56.3	76.7
Waterfurnace Renewable Energy (WFI)	28.62 2010-04-12	21.76	57.1	-23.9
ABB (ABB-N)	20.18 2012-12-13	23.38	19.8	15.7
Oceaneering International (OII-N)	52.95 2012-12-13	80.9	54.1	52.8
Deere & Company (DE)	88.07 2013-01-03	82.31	-5.4	-6.5
Rocky Mountain Dealerships (RME)	11.89 2013-01-03	11.4	-2	-4.2
HollyFrontier (HFC)	47.95 2013-01-28	42.75	-6	-10.4
Titan Logix (TLA)	1.25 2013-09-11	1.31	4.8	4.8
Kelso Technologies Inc. (KLS)	2.20 2013-09-11	2.16	-1.8	-1.8
U.S. Silica Holdings (SLCA)	25.15 2013-09-11	31.08	23.6	23.6

* Note that the performance of WFI and PLS reflects action on the original purchase. As noted in an earlier edition, I almost doubled my position in these companies when the share price neared its bottom, figuring that the companies were even more compelling investments. As a result, I have almost broken even in PLS and done well with WFI, especially considering the added boost provided by more dividend income.

Precious Metals

It's been a rough year for gold and silver.

The following article suggests that no one really knows what the future holds for the price of gold. Most of my holdings are the remnants of earlier positions which were established in the 1980's. I decided to maintain reduced holdings in bullion (Central Fund of Canada) and one royalty company (Silver Wheaton) with the thought that prices will rise once again in the event of economic or political turmoil.  It is pure speculation.

The following link provides access to two slide decks: one advancing the case for investing in gold; the other, suggesting that gold has had its day in the sun.

The Gold Debate

The truth is that no one can predict the price of gold.  Various interests have different reasons for holding gold, and in my view, commentators fail to make this distinction.  For example, central banks may hold gold to bolster their currencies while some speculators may seek to exploit short term fluctuations in the price.  As such, the "price drivers" differ accordingly.  Efforts to predict future prices are frustrated by the interaction of the various "drivers" and the fact that some drivers appear to influence the price more than others under certain conditions.

For these reasons, I believe that it is impossible to predict future prices for gold on a consistent basis.  I believe that this is why Herr Buffet and others prefer to invest in things (e.g. businesses) for which they have developed empirically "proven" investment methods to direct their investment choices.  I tend to concur and in recent years, have come to appreciate the value of investing in sound companies which pay out ever increasing dividends to shareholders.

One need only look at the accumulated 10 year returns of an investment in the Northwest Company to see what I mean.

Total return to the end of January 2013, the financial statement date for this company, was 10.93% and 21.29% per year over the past 5 and 10 years. The portion applicable to dividends was 6.26% and 8.42% over these periods. The portion applicable to capital gains was 4.67% and 12.86% per year over these periods.  http://spbrunner.blogspot.ca/2013/10/the-north-west-company.html

Note that I have not done my own due diligence to check the veracity of the entry cited above.  The company remains as one of the core positions in my portfolios for three main reasons:

• good management
• its competitive "moat" in the isolated communities it serves
• an appreciable dividend

Energy-Related Holdings

With the exception of Oceaneering International, an off-shore services company, stocks have been consigned to a "waiting mode".  The oil sands companies are on pause, pending the results of applications for more pipelines which should result in better prices for their products.  If the American economy improves and the demand for oil increases, prices should increase and improve the companies' bottom lines.  When I established positions in the oil sands companies, my investment horizon was in the range of 10 to 15 years - this on the premise that discovery rates for comparably priced oil resources (to extract and ship to markets) appear to be declining with the possible exception of some non-conventional fields in parts of the U.S. 

I regard the increase in the U.S. Silica Holdings as pure luck with timing.  (Its recent growth is due to an increased demand for sand for fracking operations.)

Rail-Related Holdings

CN continues to chug along very nicely, aided by ever-increasing shipments of oil.  I noted this possibility two years ago and have been rewarded nicely with some additional follow-on investments.  The rail safety companies (Titan and Kelso) are still in wait mode.  As the companies are tiny and somewhat volatile, I'll watch them more closely than some of their crew mates in the Financial Log Book.  

Agriculture-Related Holdings

Rocky Mountain Dealerships and Deere have been stalled for the last several months due to concerns about reduced returns to farmers, chiefly as a result of lower corn prices.  I don't tend to get worried by year-to-year variations and concentrate, instead, on longer decades-long trends.  In this case:

• the continued trend to larger agricultural holdings (about 70 percent of U.S. farmland will turn over in the next 20 years as boomers retire)
• the drive to improve efficiencies and yields through the implementation of new technologies
• the apparent trend for farmland in North America to maintain its productivity in the face of climate change in comparison with Africa, the Indian sub-continent and China where impacts are greater and where countries have lower levels of investment, farmer education and the ability to implement adaptive technologies)

I am also looking at Cervus Equipment, another equipment company which has a business model somewhat similar to Rocky Mountain Equipment and which has expanded its operations to New Zealand and Australia.  Its product line differs from Rocky Mountain in that it sells Deere, a member of the Financial Log Book.  The company supports a nice dividend for those awaiting the results of its expansion.  My only reservation is the increased debt it took on to finance its expansion.  As usual, I'll take my time to investigate the company before making a final decision.  

An interesting observation:  both companies have, so far, resisted expansion into American markets - perhaps an indication that management has concerns about the time, effort and risk and failed expansion ventures on the part of other Canadian companies.  

Toronto Public Library - Never Ceases to Amaze

The Toronto Public Library is the largest neighbourhood based system in the world and in a global context, ranks first in visits per capita and second in circulation per capita.  In fact, 74 percent of Torontonians use the library at least once each year.  This has been achieved in a cost-effective manner when benchmarked against systems elsewhere.  Truly, it is one of our civic treasures.

A recent annual report can be accessed here:  2011 Report

Library management has been highly effective in adapting its services to meet changing needs:

• it has a fabulous and growing catalogue to address the needs of non-English speakers
• it has expanded the number of computers available for free public use, thus providing wider access to the Internet - this in addition to free WiFi service
• it has expanded the range of services to facilitate the settlement of new arrivals to the city and embedded itself as valued neighbourhood centres

In recent years, the TPL has increased the range of its offerings by including ebooks and a variety of on-line music services.  I especially like the arrangement whereby card holders can log in to the main site and then navigate to Naxos, a music publisher whose catalogue presents a mind-boggling variety of high quality music in many genres.  For more details on Naxos see Naxos

The site is well designed and easy to use ... and well worth visiting.  Toronto Public Library

Shortly after assuming office, Mayor Rob Ford and his brother, Doug, indicated that they would close many "liberry" branches (their pronunciation) "in a heartbeat" as part of their quest to stop the gravy train at City Hall.  This resulted in an outpouring of protest from Torontonians. As a result, no branches were closed.  However, in the last budget, cuts amounting to the loss of 137 jobs were exacted and the prospect of yet more cuts are on the horizon - this at a time when library usage is increasing.  

The Ford notion of libraries as book repositories is based on an ignorance of their true function. Here are some of the services performed by library branches:

• community centres: meeting places for a wide variety of functions and valuable for all of that since they are within easy walking distance of the neighbourhoods they serve
• study centres: quiet places where students can study and undertake research projects
• mother loads of information for local businesses and other enterprises
• repositories for archival information for local neighbourhoods
• agents for the promotion of local culture e.g. exhibitions of art, architecture etc. 

library functions

Meanwhile, the incredible saga of the Ford Brothers continues to unfold.

Has there ever been an instance where a mayor has been watched by aircraft as part of a criminal surveillance operation?  If you think that I am making this up, read this:  Ford Brothers Antics  ... and now this: Pot for Phone