Gerald Sparrow of Sparrow Capital Management manages one of Covestor’s newest models, Hard and Soft Commodities. Gerry hails from St. Louis, Missouri where he is a registered investment advisor with over 20 years of experience. He also personally owns a farm in the country.
Gerry’s Hard and Soft Commodities model will use “in-the-field” research based on his farm experience and discussions with other rural Missouri farmers. It’s designed to hedge against inflation:
This is a commodity driven model, trading both hard commodities like Gold and Silver as well as soft commodities like Cattle or Grain. The model will only buy long ETFs such as the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).
The strategy uses a top down/bottom up approach, considering both macro-economic factors as well as fundamental analysis.
We had a chance to ask Gerry a few questions about his new model.
Q. What was the impetus for you starting this new portfolio?
GS: I noticed over the past ten years of owning a farm that the price of metal and other raw materials like lumber and cattle go through cycles, and when the prices increase the activity regarding these commodities picks up. For example, I recently rented my fields to a local farmer so he can feed cattle because he is realizing a higher price for his livestock. So by being aware of these activities you can start to get a feel for prices from changes in supply and demand. All of this on-the-ground education was developed by my interest and passion for land and playing in the dirt.
Q. How do you expect your model will differ from some of the popular mutual funds and ETFs available currently to investors?
GS: I will combine Wall Street’s research with my own “in the field” research, and I believe that’s unique.
My primary research includes speaking with commodity suppliers and buyers within Missouri to gain a sense of supply and demand. Secondary research screens use databases such as Value Line, Zacks, and Reuters for industries and companies that show consistent earnings power over multiple economic cycles.
Q. When you consider the role of precious metals vs. soft commodities in the portfolio, what are you looking for in terms of prudent allocation between those two? Do you imagine that will be a dynamic allocation process for this portfolio?
GS: Diversification in good, but making money dominates. So allocations may be higher in percentage terms that normal between the soft and hard commodities. For example, we are now (as of 6/3/11) 50% gold and 50% silver because of expected inflation.
Q. How does the recent (speculative?) action in silver affect your thinking on SLV?
GS: I take a very long term view, in perhaps 5, 10, or even 25 year increments. With this in mind, I believe as governments spend and borrow beyond their means, hard assets like silver and gold will increase in value relative to local currencies like the dollar.
Q. Do you expect oil to be part of the model?
GS: I do expect oil to be a part of the portfolio because it is used by everyone, and we need to protect ourselves from higher oil prices.
Q. The stated goal of the portfolio is to hedge against inflation. The dollar has been falling hard the past few months, with most commodities rising sharply during this period, due at least in part to QE2. But headline CPI hasn’t risen so much, and Ben Bernanke insists “the surge in oil and other commodity prices probably won’t cause a permanent increase in broader inflation.” Your thoughts? Do you expect inflation to rise and commodities to continue to surge? How does this impact the portfolio?
GS: I will attempt to thread the needle with specific inflation components like currency risk with gold, and gas pump prices with oil. Bernake cannot control Congress and seven billion consumers worldwide, so I prefer to follow much broader indicators.
Sources:
“Bernanke Sees Temporary Inflation Gain From Commodities” Scott Lanman and Joshua Zumbrun. Bloomberg, 3/2. https://www.bloomberg.com/news/2011-03-01/bernanke-sees-temporary-inflation-growth-from-crude-oil-commodity-prices.html
