Newmont Mining (NEM) One Of The Largest Holdings In Prospector Opportunity Fund (POPFX); Find Out What The Portfolio Manager Has To Say
July 19, 2010 - The Wall Street Transcript has just published Small Cap Investing and Other Investing Strategies Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Kevin R. O'Brien has been a portfolio manager at Prospector Partners Asset Management, LLC since 2007. Mr. O'Brien has been a portfolio manager or securities analyst for more than fifteen years. In April 2003, Mr. O'Brien became a portfolio manager of Prospector Partners, LLC. Mr. O'Brien received a B.S. magna cum laude from Central Connecticut State University in 1986. Additionally, Mr. O'Brien received a Chartered Financial Analyst designation in 1995.
TWST: What type of company do you look for concerning capitalization?
Mr. O'Brien: In the Prospector Opportunity Fund (POPFX), we focus on small to medium capitalization companies with market values between 150 million and 15 billion. If you were to look at our small cap holdings, say under 2.5 billion in market value, we tend to own a lot of banks. As of March 31, we had just under 50 names that were small cap, and about a third of those were banks, which makes up the majority of our bank holdings. The common theme among our small banks would be that they are overcapitalized. They operate with copious amounts of excess capital and they tend to manage that capital efficiently. They buy back their shares fairly consistently; they have relatively clean credit profiles; and they are located in geographies that are stronger economically. We don't have much exposure right now to places like Florida, Nevada, or Arizona. Our banks tend to be located in the Mid-Atlantic or Northeast regions. New Jersey, Massachusetts, and Pennsylvania make up the majority of our holdings.
TWST: What shifts in emphasis or changes have you been making to the portfolio over the last 12 months to reflect the macro events and stock market volatility?
Mr. O'Brien: There has certainly been increased volatility, but we're paid to anticipate not react after the fact. We haven't had to make many adjustments in our portfolios, primarily because we tend to be defensively positioned. The other side of that coin is that we're not going to change our stripes and all of a sudden run out and buy a bunch of cyclical companies because it looks like the economy is improving. We are not comfortable with a strategy of violent sector rotation. As a result, our relative performance is most often outstanding during difficult markets. We tend to make our bets and stick with them. Our portfolio turnover is probably lower than a good deal of our competitors. Consistent with our defensive positioning and concern about global economic instability, we have a substantial position in gold in both of the funds and we have had those positions since inception. Newmont Mining (NEM) is one of the largest positions in the fund. Our purchases were, at least in part, due to concerns about geopolitical instability. We believe that gold will continue to be viewed more and more as a default currency, as a place where you can place your funds and have more trust in the value as opposed to paper currency from poorly managed nations.
TWST: Can you tell us about some other companies that you feel are representative of your approach and the reasons you found them attractive?
Mr. O'Brien: We own several Bermuda-based reinsurance companies and maintain a substantial overweight position in this industry. If we look at the actions that the companies are taking and where they are valued, we find them quite attractive. As a side note, a couple of the companies are quite well positioned for what we believe will be a period of rising energy insurance rates in the aftermath of the BP Rig loss. Platinum Underwriters (PTP) is a Bermuda-based reinsurer that trades at a discount to book value. We believe in the integrity of their loss reserves. We're comfortable with the conservative nature of the assets that they own on their balance sheet. Platinum's assets are fixed income securities with a very short duration. We currently have a bias towards companies with shorter duration bonds due to our longer term concerns about rising inflation.
So we pay close attention to not only the quality of the assets that the reinsurers hold but the duration of those assets.In other words, we want their fixed income portfolios short and the credit to be clean. The reinsurers do write substantial property limits on a global basis. When the ground shakes or the wind blows, they can have exposure. This makes it all the more important for them to have their assets conservatively invested so that if they need to pay claims, the funds are on hand. The other point that I mentioned earlier is that we like companies that actively manage their capital. All the reinsurers we own have been buying back their shares aggressively at discounts to book value, which increase the book value per share, and helps grow the per share book value at a more rapid pace. Another holding would be Lancashire Holdings (LRE), which writes reinsurance and primary insurance. They are traded on the London Stock Exchange and they have a substantial exposure to the energy sector.
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