By Bob Wood, MMNS
In reviewing the topics covered in this space in recent weeks, I find that I have spend more time suggesting what “not to do” rather that what “to do” in your current investing. So this week, I’ll change that tack and turn to the positive side.
Do keep in mind that just because I select a particular investment vehicle does not mean it will rise in price soon after you buy it. Also remember that I could sell any one of these recommendations soon after recommending it, though I always look for long-term positions rather than something to buy and sell quickly.
Also be well aware that I buy these recommendations for my managed accounts and possibly own them myself, as well. As a general rule, taking stock tips from anyone is a losing venture. Doing your own leg work is always preferable.
With that said, let’s look at what I think can be today’s positive holdings. The obvious place to begin is with those asset classes I’ve advocated for the past few months, actually for the several years I’ve been writing this column: commodities — primarily energy and precious metals.
Actually, both of these asset classes violate my primary buying rules: it is always better to ‘’buy it when it’s quiet’’ or “buy what few others find interesting and are discussing.” Yet I think these recommendations still make sense. I also advocate investing in assets classes that are enjoying secular bull markets, and energy and precious metals are certainly in the midst of wonderful, long-term rallies.
While these commodities show prices that are much higher today than they were a few years ago, the underlying fundamentals still look as good as ever. For example, we are hearing about shortfalls in energy production. OPEC producers Venezuela, Iran and Nigeria, as well those in Russia and Mexico, are reporting lower production figures than those from recent years. Former member nation Indonesia has left OPEC, since it is no longer a net exporter of energy — a requirement embedded in the OPEC label (the “E” stands for “exporting”). Adding rationale to this recommendation for owing energy stocks or funds is that many of the leading companies show price-to-earnings ratios that are well under the overall market average. (Interestingly, some have noted that the recent, scorching run higher in energy prices began at about the same time the U.S. Federal Reserve began dropping “helicopter money” on financial services firms under threat from their own greed and stupidity.)
Currently benefiting from massive money printing, which is stoking inflation in the U.S., as well as around the world, are those precious metals — primarily gold and silver. Though not a fan of the ETFs created to serve this market demand for metals exposure, I have found plenty of alternatives. They include owning small amounts of bullion and the closed-end funds, The Central Fund of Canada (CEF) or IShares Gold Trust, (IAU). Just about any mutual fund in this sector should work well too. Given the nasty volatility in this sector, think in terms of smaller allocations, perhaps a 10 to 15% position, as related to the size of your portfolio.
In the past, I have recommended bear market mutual funds as a hedge against falling domestic markets. But I have become so disenchanted with U.S. markets that I now refuse to be involved with them — from either the long or short side. I will continue to hold shares in the Prudent Bear fund on general principles as much as anything else.
I think now that inflationary forces have pumped both our stock and bond markets higher. How else can you justify 10-year Treasuries yielding 4%, when inflation is running as hot as it is today? And what drives investor enthusiasm for stocks when the S&P 500 sells at an average P/E of 22 (according to my latest copy of Barron’s)?
And the “short side” of the market has become very crowded with far too many hedge funds, and they are now joined by traditional mutual fund families using goofy ‘’130/30 funds.’’ This arena allows shorting stocks, too, which adds too much traffic for short sellers like me. In addition, many hedge funds are using quantitative trading strategies, typically run by computer programs, that add buying activity — regardless of underlying fundamentals. I’ve had a good run shorting domestic shares over the past few years, but I lack any desire to stay involved in a market that currently makes little sense for individual investors.
That point leads me again to those favorite things to own on the long side of my accounts, and next are international and emerging markets shares. A very recent buy is the Indian bank, ICICI Bank (IBN). I had held these shares in client accounts for a couple years but sold them late last year and took nice profits. Since those shares have tumbled in price in recent weeks — below the price they returned last year, I find them attractive again — as Morningstar has quoted the stock’s forward P/E at 9. For a fast growing bank, IBN looks like a good risk/reward opportunity.
Another bank stock that holds potential is the Irish bank, Allied Irish Bank (AIB). Sure, the Irish economy is facing the same headwinds as our own with a housing bust also developing there. And Ireland sits awfully close to Great Britain, whose economy may be in worse shape than ours. But the bank has little exposure to the sub-prime mortgage mess, which has endangered the future of our banks and lenders, and has operations in places like Poland, which looks promising. Add with a valuation where shares sell at about six times earnings, this looks like another decent opportunity.
For the less adventurous types who prefer more diversification in their portfolios, consider some closed-end funds in markets that are better valued and also in economies that are much better managed than ours. Asian markets look like good places to add exposure, if you’re not already there. Singapore’s market is one example, and shares in The Singapore Fund (SGF) now reside in some of my managed accounts.
One of the better fund managers in the Asian market is Mark Mobius, and you can buy shares in the fund he manages at a substantial discount to its underlying value. The Templeton Dragon Fund (TDF), which still sports a discount of about 10%, is a core holding in some of my managed accounts. When you can get services of a solid manager at a discount like that in one of the most vibrant parts of the world, it’s almost too easy!
I am also becoming more involved in markets in Northern Europe, given their lack of involvement in the housing mess and their relative valuations, which appear to be among the cheapest anywhere. With so many investors chasing performance with the ‘’BRIC’’ countries (Brazil, Russia, India and China), those markets are flying well below most investors’ radar screens. Markets in small countries like Belgium, The Netherlands, Norway and Austria look enticing now. Perhaps one of the best ways to buy into those countries may be the Fidelity Nordic Fund (FNORX). Some closed-end funds also invest in those countries, and you can find those in listings in the “Market Week” section of Barron’s.
Keep in mind that these recommendations are not what most investors should consider their ‘’core holdings.’’ But they can be used to fill out a portfolio holding solid core funds to build around. Also keep in mind that there is always the possibility of losing money on any of these recommendations. Well, that’s too bad for you–and for me, too, as I run the same risk. I can make no guarantees about whether these choices will work, but “We puts our money down and takes our chances,” as the old adage goes.
Hopefully, you can see that there are opportunities where most others don’t look or simply ignore after their former big runs higher — as in energy and gold. For me, as usual, the road less traveled is where the best opportunities can be found.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., email@example.com.