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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Monday, July 1st, 2006
Dear Client,
June was a turbulent month for global investors as markets pulled back with few exceptions indeed. Some major U.S. indices are now in red for the year and many international and especially emerging market countries, in local currencies,are back where they started at the beginning of the year. With emerging markets pulling back after a great run, some investors are questioning the potential rewards of investing in these markets because of their high volatility. Meanwhile, as key central banks raise lending rates, bond yields are rising, and that makes riskier assets, such as emerging-markets stocks, look less attractive. During the past five weeks of global sell-off and heightened volatility, investors have pulled about $22 billion from equity funds, or 1% of their total assets.
Late last week, the Federal Reserve raised interest rates for the 17th consecutive time, but its words suggested growing prospects for a pause in rate increases, helping to spark a rally in stock markets. As widely expected, the central bank boosted its short-term interest-rate target to 5.25% from 5%. But for the first time since it began raising rates from a low of 1%, in June 2004, the Fed didn't explicitly say another rate increase was under consideration -- and markets took that as a welcome signal for a month ending rally.
Our core conservative portfolio was hit by decline in gold prices but this was somewhat offset by our inverse position in Nasdaq. It is up 10.7% for the year. The global opportunity is up 7.1%, the International, 9.8%, Asia is up 12.8%, and the New Venture pulled back to is up 5.85%. Gone fishing is up 6.0%.
India has taken the worst beating and it is now up only 7% for the year in dollar terms. Meanwhile, in 2006 the MSCI World is up 5.1%, the Dow is up, 4.2%, the S&P 500, up 1.7% and the Nasdaq down 1.2%. Part of the reason the portfolios hung in there during the market turbulence has been the weakness in the US dollar. The EAFE index in local currencies is down 2% for the year while the EAFE in US dollars is up 8.5%. The World Index is negative in local currency but up 4.9% for the year in US dollars. It pays to have your investments denominated in a variety of currencies.
I believe investors need to stay calm, stay the course, and remind themselves why they invested in emerging-markets companies in the first place: outsized economic growth. But first, let䴜s put the recent downturn in perspective. The MSCI Emerging Market Index is still up 27.9% during the past 12 months. So far in 2006, the Brazil and China iShares are up 7.3% and 19.5%, respectively.
Here are the year-to-date numbers for Asian markets.
Country |
Index |
Index Level |
Weekly Return |
YTD as of 06/30/06 |
Hong Kong |
Hang Seng |
16,267.62 |
+2.92% |
+11.45% |
India |
BSE 100 |
5,382.11 |
+2.11% |
+7.18% |
Indonesia |
JCI |
1,310.26 |
+3.10% |
+21.27% |
Japan |
TOPIX |
1,586.96 |
+4.35% |
-0.35% |
Singapore |
Straits Times |
2,435.39 |
+4.97% |
+10.82% |
South Korea |
KOSPI |
1,295.15 |
+6.23% |
-0.10% |
Taiwan |
TWSE |
6,704.41 |
+5.16% |
+4.47% |
Thailand |
SET |
678.13 |
+3.60% |
5.15% |
*Source: Bloomberg. In U.S. Dollars.
While about $15 billion representing 6% of total assets has been withdrawn during the last five weeks from emerging markets, keep in mind that $32 billion was invested in these markets from the beginning of the year to mid-May. $18 billion was the net investment in emerging markets in all of 2005. If you are a latecomer to these markets no doubt you are disappointed but since starting our model portfolios in January 2003, emerging markets are up 140% even after the recent pull back.
The importance of a trailing stop loss policy has also been highlighted by this month's weak markets. Where you set your stop losses is a personal choice but they should be in the range of 8%-20%. I normally set it at 12% but in some cases ignore it with high quality countries that I know I will buy right back into to such as Germany and Japan and in the most recent pull back Hong Kong as well. The spread of emerging market yields over US Treasuries has moved up to a more comfortable 2.32% from 1.73% in early May. Growth is not really the problem. For example, Hong Kong's latest economic data indicated that the city's first quarter GDP expanded 8.2% year-on-year, after growing 7.3% in the previous quarter.
We were stop lossed out of a few positions but have jumped back into India and Thailand.
Keep these markets a fairly small percentage of your overall global portfolio but stay the course. We need to be more selective since the markets are seeking quality and liquidity. Russia, Turkey, South Africa and Hungary have been particularly hard hit because of their fiscal imbalances and weak currencies. After being stopped out, I have reinitiated positions in India and Thailand but we also need to focus on what the markets see as higher quality safe haven markets such as Singapore which is down 12% from its mid-May highs. Please see below my Singapore pick which was profiled as the Forbes stock of the week.
Singapore is the Switzerland of Asia and its currency is emerging as the Swiss franc of Asia. Its real estate markets have revived and foreign capital seeking a safe haven and Asian growth find Singapore a nice place to park their assets.
On the other extreme, members will know my skepticism towards Russia which admittedly had done quite well before coming back sharply. To me it is a one pony trick in energy and I can give you better options to play the energy theme. Putin's drift away from any form of democracy towards authoritarianism is indisputable. The oligarchs and cronies have grabbed the energy assets and the bureaucracy has managed to take complete hold of the government. The future is also bleak from a demographic standpoint. In 1919, Russia was the worlds third most populous country but it now ranks eighth and by 2050 could fall to 18th place according to a UN projection.
Japan is still one of the most undervalued markets in the world, Brazil is at ten times earnings and a more speculative play in the middle of a political mess is Thailand at 6.5 times earnings. The South Korean market is now cheaper than Brazil.
I will also likely be selectively adding more exposure to U.S. equity markets over the next few months due to several factors.
- First, interest rates will likely stop rising as the benchmark approaches 6%. They could also soon start to fall because today䴜s inflation scare is almost entirely related to energy.
- In fact, high oil prices are already slowing demand for fuel. As demand levels out, you will begin to see oil and gas prices stabilize and even possibly fall toward the end of 2006.
- In addition, the S&P 500 index is selling at its lowest P/E ratio in 10 years, which means blue chip growth stocks are poised to recover their strength.
- Global investors will also likely move to large cap global companies as their primary vehicle to capture Asian and emerging market economic growth.
- Plus keep in mind that since 1945, the last two years before a presidential election have produced a 40% gain in the S&P 500.
New Chartwell Services for Members
We have brought on Ed Kaffel to help members with both buying and selling their life insurance policies. Ed is a smart, independent guy who sees insurance as a financial asset as well as a tool to protect your family. He has good contacts in the industry and is great on the service side. Ed has also helped several members sell their life policies for several times their cash surrender policies and helped the clients to use part of the proceeds to purchase a new better policy.
This is what the most respected publications in the world say about life settlements‰¥Ï.
"...elderly Americans with policies they do not need or cannot afford to keep have had little option but to let the policies lapse or sell them back to their insurers. On average they can get three times as much from life settlement firms as they can from the original insurers."
The Economist, May 17, 2003
"Owners let nearly 90% of all term policies lapse‰¥Ï..What policyholders sometimes don‰¥út realize is that a policy is an asset that has market value... the value of a life settlements transaction is generally at least three times the underlying cash value of the policy.
The Wall Street Journal, September 21, 2004
If you want to talk to Ed about buying or selling a life policy, please call him at 719-264-1503.
Also, many members have asked me for better ways to track their ETF portfolios. I have found a tracking service that also offers a deep bench of research and easy to use "point and figure" charting that I use to evaluate ETFs. The service is provided by MyPortfolioView.
Some key features include:
- The ability to track unlimited portfolios. (Build all the models your heart desires.)
- Unique scanning features that identify momentum changes in individual holdings as well as entire portfolios.
- A record of every transaction for future reference.
- Pull up and evaluate a chart on any Stock, ETF, or Mutual Fund in the US Markets.
- Unlimited Technical Support and training.
Click here if you are interested in the special offered to Chartwell ETF Advisor member.
Would you like to convert your portfolio of individual stocks into a low cost, tax efficient and compact ETF portfolio? Or maybe you need your annual portfolio review? Take advantage of my personal and customized index services which leads to a clean portfolio designed to outperform the garden variety benchmarks. Call me at 719-264-1503 for more information.
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