- December 26, 2012
- Reader Favorites: A Countdown
The days between Christmas and New Year’s are ideal times to reflect on the topics that captured your interest the most over the past year. To help uncover the top commentaries that were discussed, shared and read, we went data mining across news and social media sources. Over the next few days, I’ll be counting down the top 10, concluding with the Investor Alert on Friday.
(If you aren’t currently receiving the free weekly Investor Alert, click here to sign up today so you don’t miss the next issue).
Bonds as an investment vehicle were about as popular as Canadian singer Carly Rae Jepsen’s “Call Me Maybe” song, with investors pouring more than $300 billion flowing into bond mutual funds while nearly $135 billion exited equity mutual funds as of mid-December, according to data from Investment Company Institute.
With the increased popularity in U.S. Global’s bond funds, I asked John Derrick to give an update on the municipal bond environment and the fiscal challenges affecting municipalities. One particular comment struck a cord with the Wall Street Journal. In “Meredith Whitney Blew a Call—And Then Some,” writer David Weidner mentioned the fact that we were skeptical of the prediction, as Whitney’s prediction hadn’t come to pass. In fact, we indicated that municipal bonds were as resilient as ever.
I wrote this commentary on January 30, following a debate I had with one of the most notorious China bears at the Cambridge House’s Vancouver Resource Investment Conference. This debate came on the heels of a year when the level of articles questioning the possibility of a “China crash” went through the roof.
I was clearly in the minority camp with my bullish opinion on China, and the cloud of negative sentiment hung around for most of the year. Beginning with this post in January, I have encouraged investors to not be distracted by headlines or short-term news as I believed the government had great determination along with a long-term focus on building the necessary infrastructure and a robust urban labor market.
Many of these ideas were featured in my presentation for Cambridge House, which was subsequently picked up and posted by Business Insider. My “EPIC” presentation invoked an “epic” response, as it garnered more than 90,000 page views.
Surprisingly, just recently, people have become more bullish on China, as economic and manufacturing data shows improvement. With the new leadership and many reforms underway, I expect to continue the conversation on what the future holds for China and what effect this will have on commodities over the course of 2013.
Speaking of China and commodities, it’s no surprise that this commentary made the top 10, as our long-time readers look forward to our updated periodic table of commodities. Sports buffs can’t get enough of players’ stats; commodity investors love to see how each resource rank from year to year.
Check back at our site tomorrow to see what surprises 2012 had in store for gasoline, oil and stock prices around the world. Or get it right in your in box by clicking here.
Come January, we’ll be talking about what 2013 holds for natural resources, gold and the companies that mine these treasures in our Outlook Webcast. Don’t miss it. Sign up today to join us on January 9, 2012.
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- December 17, 2012
- A Face-Off Between Passive and Active Investing
Exchange-traded funds continued to attract assets in 2012 while money has been exiting equity mutual funds. Still a majority of assets continue to be invested in actively managed products: As of the end of 2011, of the nearly $13 trillion invested in funds, index and exchange-traded funds comprise only about 8 percent, according to the Investment Company Institute.
As active investment managers who have experienced bull and bear markets, the financial industry’s deregulation and re-regulation, and the shifting needs of baby boomers, we are pleased that actively managed mutual funds continue to be the choice for a significant portion of portfolios.
The ETF industry has matured from its adolescent days, yet it continues to morph in puzzling ways that produce mediocre results. In my blog, I’ve discussed some eye-openers to help investors understand the risks of ETFs before putting their money in a product that might end up with unexpected outcomes.
Take the relatively new iShares MSCI Global Metals & Miners ETF (PICK), which began trading at the beginning of February 2012. The ETF is based on the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index, which is a non-diversified basket of companies located in developed and emerging markets that are involved in producing or extracting metals or minerals. Its 10 largest holdings make up 50 percent of the index, which makes it a more concentrated, potentially more volatile, portfolio.
By comparison, as of November 30, 2012, the top 20 holdings in the Global Resources Fund (PSPFX) make up 43 percent of the overall portfolio.
In theory, one chooses a natural resources investment to gain access to the companies that stand to benefit from the world’s growing needs of natural resources. In addition, commodities offer portfolio diversification, as they have historically had a lower correlation to the overall market.
However, in a faceoff, PSPFX would steal the puck from PICK, as the Global Resources Fund has outperformed the ETF by nearly 13 percentage points since PICK’s inception in January 2012.
PSPFX also added significantly more return with less risk compared to the ETF over the same timeframe. The Global Resources Fund experienced an annualized standard deviation of 15.95 percent compared to the PICK ETF, which had an annualized standard deviation of 24.34 percent, according to Morningstar Direct.
You can also compare two gold equity investment vehicles. Although gold miners have had a challenging year, the Gold and Precious Metals Fund outperformed the Market Vectors Gold Miners ETF (GDX) by 400 basis points.
As I often remind investors during presentations, there is no free lunch on the commodities table—every investment comes at a cost or a risk. When it comes to emerging markets and commodities, there are inefficiencies that we believe give active managers an edge. In emerging markets, the capital markets are not as sophisticated as in developed markets and the information can be less uniform and straightforward. Managers who have an explicit and tacit knowledge of the country and its way of doing businesses are likely able to flush out the best opportunities. We believe it is worth paying a bit more in management fees to get the expertise needed for these specialized markets.
The Eastern European area is a good example of a nuanced market. While the presidential reelection of Vladimir Putin in Russia caused markets to stress over how he would lead the country, Turkish stocks have experienced substantial growth. U.S. Global Investors’ Eastern European Fund (EUROX) benefitted from its ability to invest in the entire area: Russian stocks make up only about 37 percent of the fund while Turkey comprises 17 percent of the fund. See the fund’s regional breakdown here.
We believe this is why we have significantly outperformed the Market Vectors Russia ETF year-to-date as of December 13, 2012:
Indexers often argue that active managers have periods of underperformance. Fellow Canadian Wayne Gretzky has been called the greatest hockey player ever, holding or sharing more than 60 records that he collected during his 20 seasons of playing in the National Hockey League. He holds the NHL record for the most hat tricks—achieving three goals in a single game more than 50 times—and when he retired, Gretzky was inducted into the Hockey Hall of Fame.
However, under asset management’s rigid standards for active managers, the “Great One” might be considered a loser, as his team won the Stanley Cup “only” four times.
From time to time, active managers underperform; yet, they have the opportunity to add alpha. ETFs, on the other hand, are built to only match the benchmark and are never expected to beat it.
While ETFs offer instant execution, liquidity and lower fees, certain passive investments may not get you where you want to go over the long-term. The “hat trick” equivalent that Global Resources, Gold and Precious Metals, and Eastern European Funds has been able to achieve this year against their respective ETF peers is more diversification, better historical performance and less volatility.
Outlook on Natural Resources
Learn what our investment team believes will drive gold and natural resources in the new year by joining our Outlook 2013 webcast. Sign up today and email us with your questions, so we make sure we cover what’s on your mind.
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- November 12, 2012
- A Portrait of Two Presidents
Last Friday, President Obama addressed the two topics that have been on many equity investors’ minds since election night: the economy and the dreaded “fiscal cliff.” In his speech, he delivered his familiar plan to combine spending cuts with increasing revenue by raising taxes on the wealthiest Americans. That’s “how we did it in the 1990s, when Bill Clinton was president,” says the president.
Clinton’s legacy was forged under a very different global scenario. He took the reigns just after the end of the Cold War in 1991. As the Soviet Union collapsed, we saw the very beginnings of globalization, with the world opening up to capitalist markets. There were lower labor costs around the world, so companies outsourced, encouraging global growth.
With lower military costs, the U.S. was benefitting from a “peace dividend,” allowing President Clinton to reallocate the spending from military purposes to domestic reforms. He deregulated the telecommunications industry, which helped unleash the Internet.
The confluence of global events combined with policymaking that encouraged business expansion and job creation helped Bill Clinton to be able to boast “the lowest unemployment rate in modern times, the lowest inflation in 30 years, the highest home ownership in the country's history, dropping crime rates in many places, and reduced welfare rolls,” according to the White House’s biography of the former leader.
Clinton also declared that “’the era of big government is over.’ He sought legislation to upgrade education, to protect jobs of parents who must care for sick children, to restrict handgun sales, and to strengthen environmental rules,” says the White House.
Over the past four years, we have not seen the same sort of government policies from Washington. The concern from business owners lately has been an issue that I’ve expressed over several months. When questioning whether an Obama win was a negative for equities, Credit Suisse pointed out that there was apprehension around a less business-friendly environment of “big government financed by taxation, more regulation etc.,” such as the additional cost incurred because of Obamacare.
To increase government revenue, it’s proposed that the top tax rates on dividends would increase from 15 percent to 39.6 percent for those earning more than $200,000 a year. He also wants to increase the tax rate on capital gains from 15 percent to 20 percent.
If this happens, Credit Suisse estimates that these tax increases would take about 5 percent off of the fair value of the S&P 500 Index, as “a third of the U.S. equity market is owned by individual investors who earn more than $200K a year.” Rather than reinvesting dividends and capital gains back into the stock market, these investors will be instead handing the money to the government.
Credit Suisse believes that even if a Mitt Romney administration would have been more business-friendly, there are two aspects to a reelection of Obama that equity investors might want to consider: 1) an Obama win means the Federal Reserve will continue to pursue its current policy and 2) a “fiscal cliff” compromise should be easier with an Obama victory compared to “a narrow Republican victory.”
The upcoming debate over the “fiscal cliff” is a new chance for the newly reelected president to show leadership, reach across the partisan table and work out a bipartisan solution. I believe a resolution to this important issue will be positive for markets.
As Credit Suisse says, “It is worth remembering that Clinton was able to do a deal with the Republicans in his second term (with a Republican House and Senate) after the lack of compromise in his first term led to a government shut-down.”
John Derrick, Director of Research, contributed to this commentary.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
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- October 10, 2012
- Infectious Ideas for a Connected World
With a greater international exchange of ideas, goods, services, and talent today, our world has never been more wired and connected. Globalization has wholly transformed how people across continents absorb information and interact with each other. I believe it also has subtly changed how we think and act as individuals.
Take the unfortunate consequence of globalization after the anti-Muslim “movie” was posted online. Middle East violence against the U.S. erupted because of drastically conflicting ideas between freedom of speech and derogatory insults against a religion. In a recent Foreign Policy blog, Abdulaziz H. Al-Fahad calls for mutual tolerance in our “shrinking world,” explaining, “The world is increasingly pulled together by the relentless push of modern technology and integrated economic systems on the one hand, and simmering conflicts periodically manifested on the cultural realm, on the other.”
Events need not be so significant to make a difference. I recently revisited the ideas from one of my favorite business books, The Tipping Point, in which bestselling author Malcolm Gladwell uses real-world examples of little things that spread like wildfire. He says that “the best way to understand the emergence of fashion trends, the ebb and flow of crime waves … or any number of the other mysterious changes that mark everyday life is to think of them as epidemics.”
Facebook has been incredibly infectious. Since its miniscule beginnings at Harvard eight years ago, the social media site’s popularity as an online place to connect and exchange ideas and photos has proliferated, attracting 1 billion monthly active users today. This figure is nearly 15 percent of the world and three times the size of the population of the United States.
According to ITU World Telecommunication, 2.3 billion people worldwide were using the Internet at the end of 2011—that means that a significant portion of the online world has a Facebook account.
The Super S-Curve in global population is also significantly affecting our ideas, opinions and ways of life. While it took about 150 years for the world population to grow from 1 billion to 3 billion people, it took less than 15 years to add the next subsequent billion. Now there are 7 billion of us, with many people on the planet acquiring a little more wealth every year. The World Bank said that about 1.3 billion people around the world live on less than a $1.25 a day. This is the lowest number of people ever.
Back when the world only contained 3 billion people, the economic and political footprint of India and China did not exist. Now the two most populous countries in the world are pursuing policies that are encouraging economic growth and improving standards of lives for their residents. I believe these countries are creating a domino chain of reaction felt around the world.
In The Washington Quarterly, William Overholt from Harvard’s Kennedy School of Government outlined his view on how China’s economy will develop as the pyramid of power shifts to new leadership. He says many see China as a “successor to British and U.S. leadership through globalization,” and one final step in that global direction is to develop a “globalization of talent” in the country.
To that end, China insists that all residents must take seven years of English before graduating from high school. Many elite families in the country have children in Ivy League universities, and Chinese vice ministers much spend a semester at Harvard “to ensure their understanding of global best practice.”
In addition, more than 70 percent of Chinese university presidents and research lab heads obtained Ph.D.s from foreign institutions, says Overholt.
Time will only tell whether China takes over as the world’s largest economic superpower. What’s important for investors is to be aware of the ideas and behaviors that are catching, and how our social networks can be contagions, as suggested by Harvard’s Nicholas Christakis in a recent TED Talk.
Likewise, Gladwell shows how minor changes in our external environment can have a dramatic effect on how we behave and who we are.
Next time you read a headline on your TV, phone or newspaper, I hope you are inspired to think of ways that local and global biases and opinions infiltrate your world.
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- September 28, 2012
- Is Negativity Contagious?
Negativity persists among investors, as evidenced by the ongoing stream of money leaving equity funds into bond funds. It’s challenging to pinpoint the origin of the pessimism because it comes from all over the globe. Daily polls finding Americans at an extreme political division, scenes of anti-austerity riots in Greece and Spain, and the Shanghai Composite Index falling to new lows are only three recent examples.
On one of my frequent visits to ted.com to seek different ways of thinking about very familiar subjects, I came across a presentation by Harvard University Professor Nicholas Christakis called, “How social networks predict epidemics.” I was fascinated by how he helped shed light on this unrelenting feeling of doom that has left so many people lacking confidence in equities.
Christakis showed how our world has an embedded social network fabric with various interconnections. Each person’s position in the social network varies, depending on his or her friends, families, coworkers, as well as genes. Where we are structurally located in this global network can impact our health, emotions and attitudes, he says. We all recognize how viruses spread through a network but don’t realize how a problem like obesity can also be contagious.
What does catching the flu or gaining weight have to do with negative sentiment? If you don’t think connections matter, consider the difference between a pencil and a diamond. Although these two common objects are both made of carbon, the atoms are arranged differently, causing the graphite to be soft and dark and diamonds to be hard and clear.
“So, similarly, the pattern of connections among people confers upon the groups of people different properties. It is the ties between people that makes the whole greater than the sum of its parts. And so it is not just what’s happening to these people—whether they’re losing weight or gaining weight, or becoming rich or becoming poor, or becoming happy or not becoming happy—that affects us; it’s also the actual architecture of the ties around us.
“Our experience of the world depends on the actual structure of the networks in which we’re residing and on all the kinds of things that ripple and flow through the network. Now, the reason, I think, that this is the case is that human beings assemble themselves and form a kind of superorganism. Now, a superorganism is a collection of individuals which show or evince behaviors or phenomena that are not reducible to the study of individuals and that must be understood by reference to, and by studying, the collective.”
Christakis suggests that if we understand how social networks form and operate, we can understand how major events such as crime and warfare happen, how economic events including bank runs and market crashes occur, and how investor pessimism can persist.
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