From the June 2010 issue of Investment Advisor • Subscribe!

Mutual Fund Spotlight: The World Their Oyster

Starting life as financial planners, Marshall Berol and Malcolm Gissen turned their investing acumen into the world-beating, go-anywhere Encompass mutual fund

The two men--who are both RIAs with over 28 years of investment experience each and who launched the Encompass Fund in 2006--look to invest exclusively in relatively unknown and undervalued companies that have the potential for great returns somewhere down the line, regardless of the companies' size or geographic location. It is a strategy that they use to manage around $190 million in separate accounts for individual investors and one that has paid off more than handsomely for Berol, Gissen, and their shareholders, because in 2009, the Encompass Fund had a stunning total return of 137% and ranked first in Morningstar's World Stock Fund category. The fund also outperformed its Morningstar benchmark by 106 percentage points and its entire category by over 100 percentage points, and had returned 92% for the 12 months ending March 31.

Evidently, it pays to have the world as your oyster.

"Unlike other funds, we are not constrained to investing in only large cap or small cap or technology or any other single category," Gissen says. "We are set up so that we can invest in any kind of company, in any sector and in any country. We are focused on capital appreciation so we look for companies whose share values are undervalued but will grow over time."

Spanning the Globe

SouthGobi Energy Resources is one example of the kind of company that the go-anywhere fund finds. Encompass invested in the Canadian company a few years ago, at a time when it was expanding its resources, Gissen says. Now, SouthGobi owns three significant coal projects in Mongolia. Its flagship Ovoot Tolgoi mine, which is located 20 miles from the Chinese border, is operating 24/7 in order to feed China's seemingly insatiable demand for coal, and this has sent SouthGobi's stock price soaring.

Similarly, Encompass invested in Leisure Canada, a Canadian real estate company that some years ago bought land in Cuba and is now actively working on developing a parcel of that land to build a luxury hotel in downtown Havana.

The investment is a longer-term play for Encompass, Berol says, but one about which both he and Gissen are extremely enthusiastic. Many Canadians have been traveling to Cuba in recent years, he says, and there is a strong chance that the Obama Administration will ease some of the restrictions currently in place vis-?-vis Cuba, thereby making it easier for Americans to travel there and increasing the prospects for the hotel business.

Leisure Canada, like many of Encompass's investments, came directly to Berol and Gissen via the company's management team, whom the duo knew. An important part of their approach, in fact, is getting to know companies as closely as possible, so that they can get first dibs on exciting new projects and ventures. They attend conferences and company presentations and make it a point to meet up regularly with company management. They keep abreast of any private placements of the companies they are either invested in already or in which they are looking to invest. They read voraciously and they also travel extensively (although they have not yet been to Mongolia) to meet with company managers on the ground and to check the status of businesses and projects that their holdings--or prospective holdings--have under way.

Furthermore, Berol and Gissen have close contacts with numerous brokerage firms that are familiar with Encompass's approach and know to bring them the kind of lesser-known, not-so-closely-followed-by-the-mainstream kinds of companies that they are looking for and that fit their investment themes.

"We are also contrarians and we are looking for companies and industries that are out of favor, because they have more chance to go up," Berol says.

Biding Their Time

Moreover, it does not matter if it takes a while for those overlooked, under-valued industries to go up and for the companies within them to start performing. This is particularly true for the resource companies that Encompass currently favors, Gissen says. Some of the firm's holdings in that sector--gold mining companies, for example--have not started to make money as yet, he says, but they are sitting on what will eventually turn out to be major cash cows.

Uranium Energy Corp., for example, one of Encompass's main holdings, has not even started producing uranium as yet, but based on the expectation alone that it will become America's leading producer of uranium when it finally starts producing toward the end of 2010, the company's stock price tripled last year, he says.

Encompass first invested in Uranium Energy in 2007, and over time, has been adding to its exposure every now and then.

"Even if the stock price tripled last year, we are still keen on the company and so we are holding onto it," Gissen says. "We believe the company is making excellent progress and we are confident that it will continue to do well and reward our shareholders."

Holding onto companies and even increasing exposure to them until they are deemed to be at fair value is a common practice for the Encompass Fund. The team evaluates each company individually based on its business plans, the quality of its management team, and the state of its balance sheet, and they set neither a target price for the stock nor a specific time to sell the stock, Gissen says. "Because so much can happen to these companies, we continue to monitor them until we feel they have reached fair value," he says.

Of course, things don't always work out the way that Gissen and Berol would like them to, and in the last half of 2008, stocks across the board were slammed by the financial meltdown, which made things tough for the Encompass Fund. At the end of that year, the partners carefully reviewed all their holdings, selling off those they thought would not regain ground in 2009, but they were a little late getting out of a couple of names, Berol admits, in particular REITs and some specialty finance companies that had invested in mortgage assets.

"We were still in them when they were going down but we held on because we thought that they would improve and that the situation was not as bad for their industry as it actually turned out to be," he says. "If we had gotten rid of those names sooner, we would have done better."

Considering Real Estate

Nevertheless, Encompass did hold onto one REIT, Ashford Hospitality, a hotel REIT that went down during the crisis and then came back up. And now, the fund is looking carefully at opportunities in real estate, particularly in commercial real estate, which Gissen and Berol believe is a sector that is currently undervalued and has great potential.

In addition to sticking with its focus on metals (precious and industrial) and mining companies (particularly the more junior, lesser-known players), Gissen and Berol are also looking to increase their exposure to healthcare companies, partly because demographics promise great opportunity, Gissen says, but also because the sector, in their opinion, is an innovative and rapidly growing area.

Encompass has been in healthcare since 2006, when the fund debuted, and one important holding that has done well by the fund all along and promises to deliver even more is Delcath Systems, a leader in the treatment of localized cancer that pioneered a promising treatment to shrink tumors in the liver.

"We became familiar with Delcath Systems even before the fund came into existence," Gissen says. "We invested in it for some of our individual accounts and we have added to it through the years."

A few weeks ago, though, Delcath became one of Encompass's top five positions because the company announced positive results on the Phase 3 clinical trial of its system, thereby shooting the stock price up from eight cents a share to 15 cents.

"We felt that Delcath had not been fairly valued and had not been well understood by Wall Street," Gissen says. "Now, the market has recognized it, our investors have been rewarded, and our return has been five times more than what we invested."

There are about 50 stocks in the Encompass Fund, which is on the high side compared to the past, Berol says. The duo, who work with two other highly skilled investment professionals, manage money for a number of celebrity clients like members of the Los Angeles-based rock band Counting Crows. But Berol and Gissen are also keen to have regular folk benefit from their strategy, so about a year ago, they dropped their initial investment minimum from $10,000 to $5,000.

Both Gissen and Berol--and their wives, they point out, which no doubt adds to the pressure to remain a top performer--are invested in the Encompass Fund. Gissen founded his investment advisory firm, Malcolm H. Gissen & Associates in 1985, and has been managing separate accounts since 1999. Berol has been an investment manager in San Francisco since 1982 and became Malcolm H. Gissen & Associates' chief investment officer in 2000. He also has his own investment firm, BL/SH Financial.


Savita Iyer-Ahrestani is a freelance business journalist currently based in New Jersey. She can be reached at siyerwriter@yahoo.com.
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