Both require the willingness to spend hours doing homework.
Foster is the portfolio manager for the $1.7 billion Van Eck International Investors Gold Fund (INIVX) and is also strategist for the $7.2 billion Market Vectors Gold Miners Exchange-Traded Fund (GDX).
Foster moved to the financial side of the business after initially starting out as a geologist working for mining companies in Nevada. He went back to school to earn a Masters in Business Administration when his geology position was eliminated as gold prices declined in 1985. Upon completing his MBA, he took another job as a geologist with Pinson Mining Co., when gold prices moved back above $500 an ounce, and was responsible for new mine reserves. After eight years, he was "ready for a change" and landed a job as an analyst with Van Eck's gold fund in 1996. He began managing investments in 1998 and currently oversees all of Van Eck's long-only managed accounts.
The fund manager says a constant "quest for knowledge and discovery" has been a key in both of his careers.
"When I was working as a geologist, you're always looking for another gold deposit….You're analyzing the geology, the geochemistry and geophysics and looking for the next discovery. It's sort of what drives you.
"It's the same thing as a financial analyst. You're looking for the stocks that are going to outperform. You're looking for the next company that is going to make the next discovery, or surprise on the upside with their operating performance."
Foster operates on the premise that success comes from "thorough due diligence in anything that you're doing."
His background in the mining industry has often given him a leg up over the years. As a sector fund, all of the investments involve gold or silver. So with "all of your eggs in one basket," the objective is to fare better than other gold funds.
"When we analyze companies, I'm looking at all of the things I dealt with when I was working in mining," he said. "You're looking at drill results and engineering reports and metallurgical studies. Sometimes, we make site visits and talk to the geologists and engineers on site.
"Where we hope to make a difference is in recognizing ounces before the market does. The more ounces these companies can find, the more value they can create."
One of his fund's top performing stocks during 2010 was Red Back Mining. The company was bought at a premium to its stock price by Kinross Gold Corp., which was optimistic that Red Back's gold discoveries at its Tasiast mine in the African nation of Mauritania could be even greater than many analysts expected.
The Van Eck gold fund had been accumulating shares of Red Back for some time, and Red Back was one of the fund's top 10 holdings. Foster had toured the company's mines and felt "the market wasn't giving them full credit for these properties."
The fund relies upon fundamental factors, rather than technical charts, for 90% of its decision-making, Foster said. Technicals are mainly used on a trading basis to determine whether a stock might be overbought or oversold in the short term, as well as forecasting near-term gold prices.
When it buys a stock, the fund tends to hold it for the long term with a low turnover. This is especially the case with junior-mining companies, since it takes a long time to develop a gold mine. "Once we decide we like a company with its project, we're willing to hang onto that company until they either reach production or the company gets taken out by a larger company," Foster said.
His main advice for beginning investors in the mining arena is to "do as much research as you can," cautioning that gold mining can be a risky business.
"You don't have to worry about it so much with larger companies that have diversified themselves with mines all around the world," Foster said. "But when you get into the smaller stocks (companies) that only have one or two or three properties, you have to do a lot of due diligence and find out as much as you can about the properties and determine how they might perform in the future."
Many reports are accessible over the Internet, including those companies must file with regulators, Foster said. Those without industry experience might want to personally visit mining properties to get a better feel for risks in the business, if possible, he added.
The performance of funds that invest solely in one sector, such as gold, tends to be strong in bull markets. But should a bear gold market occur, fund managers have to try ways to limit any losses to still outperform other gold funds.
There are few ways for such funds to be defensive, but one is to increase cash holdings, Foster said. Another is to invest more heavily in bullion itself rather than mining stocks.
Mining stocks tend to outperform gold itself in bull markets, Foster explained. Suppose gold prices were at $1,400 an ounce, and suppose a mine's profit is $500 an ounce. If gold rises 10%, it gains $140. But that $140 gain now means a 28% increase in the company's profit per ounce to $640. Furthermore, at higher prices, more ounces of gold become economically viable to mines, enabling companies to add to their reserves.
Conversely, when gold prices fall, companies' earnings tend to decline at an even greater rate.
