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Resources front and centre for this index beater

Lamarche's $280-million Front Street fund has been top performer over past decade

FUNDS REPORTER

It isn't easy being an index beater.

But fund manager Normand Lamarche has managed to do so in his Front Street Special Opportunities Fund by focusing on thematic investing, and smaller resource companies.

The $280-million fund is now the top performer over the decade ending Oct. 31, with an annualized return of 26 per cent, and a 121-per-cent return year to date. The S&P/TSX composite index has posted an average annual return of 4.1 per cent.

"The index is a reflection of the past," says the 47-year-old portfolio manager at Toronto-based Front Street Capital. "We are interested in what the index is going to look like five years from today...

"We look at new emerging opportunities that could some day create economic momentum that can deliver a company or group of companies to represent a significant part of the index five to seven years from today."

Given continued market uncertainty, we asked Mr. Lamarche for his market outlook and views on commodities.

The markets have rebounded since the March lows. Will we retest them?

I don't think so. I think that what led to the obscene lows and the distressed period was a point in time where the whole financial system broke down...I think the financial system underpinned by the banking system is in greater shape today because of the enormous fiscal and monetary measures that governments and central banks worldwide have thrown - not only at the economy - but also at the banking system itself.

In this market, where do you see the opportunities?

We are focusing on energy and basic materials. The massive growth profile of the BRIC nations [Brazil, Russia, India and China] have had a profound impact on commodity demand worldwide...But we also find the supply side just as compelling. This whole industrialization has enriched, and more importantly empowered commodity-producing nations like Russia, Venezuela and the Middle East...

The net of it is that it has become very difficult for the Western world's resource companies like BHP Billiton and Exxon Mobil to do new business as access is not only difficult, but also expensive as these governments want a piece of the action. The Chinese are also buying [commodities] they deem to be of strategic value to them longer term. Part of our strategy is to own the types of things that they deem to be of significant and strategic value.

Do you believe in the peak oil theory suggesting the world is running out of oil?

No, I don't buy that concept. I think the biggest impact [on a higher oil price] has come from geopolitical reasons. It's the result of guys like [President Hugo] Chávez in Venezuela, who has been nationalizing Western companies out of their assets, and guys like [Prime Minister Vladimir] Putin in Russia who have been playing strong-arming companies out of their assets...And Alberta has effectively imposed draconian new fiscal terms, and pushed out new growth. That has had a greater impact on the supply side.

Do you think oil is going back to $150 (U.S.) a barrel?

"I don't see that any time soon. The world today probably has inventories that appear excessive short term...I wouldn't be surprised to see oil prices in the $80- to $100-range in a couple of years. If the economic growth worldwide continues to surprise us and grows at a faster clip than we believe, oil can go higher.

You are not bullish on natural gas. Why?

There is too much supply largely because of the evolution of new technologies that are allowing oil and gas companies to produce and recover natural gas from difficult horizons. The shale plays in the United States are substantial. In Canada, we have Horn River and Montney shale plays.

What is your outlook for gold now that it has shot past $1,000 per ounce?

There is clearly a lot of momentum behind it, and at any one time there are a multitude of investors who will play gold ... The momentum you are seeing today is driven by the perception of a weak U.S. currency. Gold stocks have been a big part of our portfolios, but are down from where they used to be...We like the mid-cap players and some developers...It wouldn't surprise me to see gold beyond $1,500 next year.

What advice would you give investors now?

Volatility is part of our lives in the capital markets, and sometimes it comes at you when you least expect it. Stay focused even during euphoric times. Don't stray away, and keep rebalancing your portfolios according to where you are in your life, and the risk metrics you can withstand and sleep with...Eighteen months ago, investors seemed to focus on opportunities, and seemed to forget about the risks inherent in investing. In the last little while, the focus has been on risks as opposed to opportunities. Easier said than done, but investors have to remain balanced in their approach to risk and opportunity evaluations.

******

Three picks from Lamarche

Bankers Petroleum Ltd. (BNK-T)

The energy company has a heavy oil field in Albania, and it is trying to boost production using more modern-day technology. "There is execution risk, but the early results are spectacular," he says. "We could see production going from over 8,000 barrels a day to 20,000, and up to 50,000 barrels a day over the next bunch of years." The share price could double over the next 18 months, he said. The stock last closed at $5.

Crew Energy Inc. (CR-T)

This energy company, which is doing business in Alberta and British Columbia, has historically been viewed as a natural gas company, but the "exciting" part is its oil fields acquired a few years ago in Alberta, he says. Using new drilling technology, the oil assets alone could justify a $20-a-share stock over the next few years, he adds. "On top of that, they probably have some of the sweetest natural gas reserves and production in the B.C. Montney lands that could prove quite interesting in a better gas market." The stock last closed at $11.36.

SouthGobi Energy Resources Ltd. (SGQ-X)

The company, which is majority owned Ivanhoe Mines Ltd., has a coal mine in Mongolia near the Chinese border. It recently attracted a $500-million (U.S.) investment from China's main sovereign wealth fund. "SouthGobi is going to produce two million tonnes of coal this year, and you could visibly see production ramping up to five- and 10-million over the next three years," he says. The stock, which will be listed in Hong Kong in January, could hit $25- to $28-a share within 12 months, he suggested. The stock last closed at $14.

Shirley Won

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Normand Lamarche

Title: Co-founder, partner, senior portfolio manager at Front Street Capital

Hometown: Cochrane, Ont.

Education: Chartered Financial Analyst; economics degree from Carleton University

History: 1987-1995: portfolio manager with Altamira Management Ltd.

1996: Established Tuscarora Capital Inc., one of Front Street's two founding companies, with Gary Selke.

2006: Dubbed by The Globe and Mail as the "best mutual fund manager you've never heard of."

Present: Manages the Front Street Growth Fund, Front Street Energy Growth Fund, Front Street Special Opportunities Fund, the Front Street Small Cap Fund and the Front Street Canadian Energy Fund.

© 2007 The Globe and Mail. All rights reserved.

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