Chartwell ETF Investment Letter
Article Overview
The Chartwell Global Investment Letter describes model portfolio performance, allocation changes, updates on global markets and economic and political trends that I am watching closely. This section also summarizes strategies outlined throughout the website.
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Saturday, April 1st, 2006
Dear Clients,
All of our portfolios made progress during April. The Core is up 4.35% so far this year, the Global, +8.4%, International, 10.3%, Asia, +11.4% and the New Venture up a nice 10.2%. Keep in mind that 15% of the Core allocations move opposite the market. In contrast, the S&P 500 is up 4.1% and the MSCI World index is up 6.7%.
I have mentioned this before but please let me know if you have an unneeded life insurance policy. I was recently able to help a member receive more than four times the cash surrender value of his policy. He was 68 years old and received $260,000 for his million dollar policy. If he would have surrendered directly to the issuing life insurance company, he would have only received $58,000.
Looks like Japanese and eurozone growth and consumption are picking up some momentum. GDP growth is the last quarter of 2005 came in at 5.4% with consumer spending up 3.5%. Apple sold 14 million iPods in Japan during the last quarter of 2005 and Coach sales were up 20% as well. The signs are promising.
I still like Germany primarily because so many dislike it. The German iShare has first class global companies, interest rates are very low, its high savings rate has to come down and will fuel consumption and growth plus home ownership at 42% will also surely rise as well.
The U.S., with 5% of the world's population, buys 20% of world production right now. Having Germany and Japan consume more helps everyone and will bring things more into balance.
The China iShare (FXI) is up nicely so far this year. I am not crazy about the 24 companies that make up the basket since they are almost all state-owned industrial companies. No doubt the disconnect between China's growth and its stock market performance is driving investment in this convenient ETF.
My primary concern about China is that the Communist ruling party and leadership is unable to bring itself to relinquish control over money and investment in the country. Capital controls, stagnant state-owned companies, lack of private financing options for private companies, and weak property rights all lead to abnormal savings rates and under consumption. The Chinese currency issue is really the symptom of these problems and the imbalance of trade with the US - not the cause.
If China does not address these issues, economic growth will not be enough. Meanwhile, the Chinese are cozying up to the soviets and signing oil, natural gas and pipeline deals as well as causing mischief with Iran
China is gaining ground attracting foreign investment in crucial R&D sector. Despite the perception that China is nothing more than one giant manufacturing platform, it is steadily developing R&D capability. Much of it is backed by foreign companies such as Dell, Motorola, Microsoft and Novartis. China churns out about 1 million science and engineering graduates each year - many of them very talented. Good luck protecting intellectual property.
China's cabinet is targeting spending 2% of its GDP (US at 2.7%) on science and technology and the budget is growing at a 20% clip.
Secretary Rice's visit to Indonesia and Australia was terrific and I encourage you to see my article below on Indonesia in particular. It has recovered nicely since budget crisis last year and its market is one of the strongest in Asia this year. When it gets the ExxonMobil Cepu project up and running it will become an energy exporter.
Malaysia is one of the most undervalued markets out there. It is a solid middle income country with an appreciating currency. Since decoupling from the US dollar last year, the Malaysian Ringgit has gradually strengthened and is up 2.4% this year. Its central bank recently announced that it will allow "market forces" to determine the ringgit's value.
Malaysia is cutting expensive fuel subsidies and GDP growth is expected at reach 6% this year after posting 5.3% in 2005.
President Bush's India tour seemed to go well with the usual focus on security issues. This was unfortunate since the commercial opportunities for American firms and the barriers blocking them are so important. I looked in vain in the press for agreements and breakthroughs on trade issues. One exception was the opening up of our market for Indian mangoes!
Nevertheless, the India stock market steams ahead with the Sensex Index of the top 30 companies crossing 10,000 and then 11,000 for a 16% rise this year. Valuations are getting frothy at 16-18 2007 times. Foreign investment is fueling this rise with foreign investors buying $3.5 billion worth of shares so far this year after $10.7 billion in 2005.
Holding this together is the expectation that corporate earnings will stay at the 15-17% level and I sure hope they do. Smart investors will take some profits off the table but keep something in IIF and Matthews Fund.
One area I like is infrastructure. India needs at least $150 billion in investments for new infrastructure and what could be a better play on this need than Tata Steel. It is trading at seven times earnings and in the past power, ports, roads and housing have accounted for 40% of steel consumption. One advantage for Tata is that it has coal and iron reserves equal to about 25 years of supply needs. It also inked deals with Thai and Singapore steelmakers.
Speaking of infrastructure, we added the iShares transportation sector index fund to two portfolios this month. I look at it this way, even with $800 billion trade deficits someone still has to move all these imports around. 25% of our GDP is attributed to production and logistics/transportation. I am sure we spend more money moving goods than producing them. UPS, Fed Ex shipper etc are all part of this ETF which is up 12% already this year.
As you will see in the article below, I could not be more impressed with the way the Singapore economy is run. Its consistent performance and forward looking management makes me view it as one big global company. It is amazing that this is primarily due to heavy government involvement - a rare exception to the norm. Also a recent KPMG study determined that Singapore and Canada are the most inexpensive places to conduct a business. The US was ranked 7th cheapest (not bad) although New York joined Frankfurt London and Tokyo as the most expensive cities.
Toyota stock keeps moving ahead and Asian automakers collectively have developed a commanding lead despite contrary market share data. GM's union deal will help but check out this amazing statistic: of the total market cap of all world automakers, Toyota, Nissan, Honda and Hyundai account for 73%. This group also sells 43% of all passenger cars.
Toyota's market cap is double that of GM, Ford and DaimlerChrysler combined! The markets are telling us the winners already. If US automakers do engineer a turnaround, investors coming in now will make a killing.
Toyota stock is trading at 13.5 times earnings and it has an impressive $30 billion in cash reserves. At present levels, I would rather buy Honda which is trading at 10.9 times earnings and has $10 billion in cash.
The S&P 600 small cap index has now beat the S&P 500 for six straight years. It could go the other way but I think only marginally so unless some events force investors to seek more stable earnings and much more emphasis on value over growth. A study by a couple of Harvard guys pointed out that 75% of the value of a global brand company like P&G is not even captured in its financial statements. For example, brand name, goodwill, staff, international network and distribution relationships etc.. Some of these companies like Dell are relatively cheap.
China has now surpassed France and the U.K. to become the fourth largest economy in the world. The profile of 2005 economic output was similar to the previous year: robust economic growth was underpinned by exports and fixed asset investments, which surged 28.4% and 25.7% respectively; meanwhile industrial production and retail sales grew more modestly at 16.4% and 12.9%, respectively.
India's government has taken a small step towards fully opening up India's nascent retailing industry to foreign participation by allowing single-brand retailers to own a 51% stake in retail joint ventures. In a separate move aimed at improving the existing infrastructure, the government has awarded contracts for privatization of two of India's key airports, New Delhi and Mumbai, to private operators.
Japan's GDP growth in 2005 was second to only America amongst members of the G-7 and the numbers in the fourth quarter were especially strong. Economic growth was up 4%, capital spending up 7% and personal consumption up 3%. Housing starts and bank lending also going in the right direction. The question is whether all this is already priced into the market and what will happen when rates inch up? The greatest opportunity is in the area of mergers and re-organizations.
Lastly, I have decided to launch the first ETF dedicated hedge fund with a focus on the country-specific iShares. This will allow me to use more risk management techniques and the opportunity to take some short positions in markets I feel are overpriced. This is an exciting opportunity and I will keep you informed regarding size and timing.
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