Leeb's INCOME PERFORMANCE LETTER
P.O. Box 97, Williamsport, PA 17703.
Monthly, 1 year, $72. www.leebincomeletter.com.

Funds for 2010: Good buys
Among mutuals and ETFs

        Philip Springer: "We think the global bull market in financial assets has entered a new phase: less exuberant but still quite promising, with more emphasis on the fundamentals and less on just momentum.
        This means that stocks should enjoy another good year.
        For bonds, though, it generally would be unwise to rely on any more than current interest payments because they will encounter price risk as interest rates start to rebound from their historic lows.
        Forget about U.S, Treasury securities. Current yields are ludicrously low, with two-year T-notes playing a miserly 0.9 percent
        Ten-year issues yield a much better 3.7 per cent. But in 2009, yields jumped from incredible lows. Through late December, mutual funds that invest in long-term government securities (maturities of 10 years or more) were down 13 percent, including reinvested interest virtually the only investment category to lose memory in 2009. This will continue in 2010.
        Yields on many other types of fixed-income vehicles dropped sharply in 2009 (with big price appreciation) as their spreads above Treasurys narrowed to levels last seen before the financial crisis. This means you're currently not getting paid enough for the credit risks, which remain significant.

Bonds for 2010

        How do you protect your principal while continuing to earn a decent yield? Here's what we advise:
        #1: Keep your overall fixed-income exposure short, such as an average maturity of five years, or less. Beyond that point, the price fluctuations from interest-rate swings get too wide. Our single best fund recommendation for safe income is PIMCO Total Return (PTTDX).

        #2: Emphasize high-quality U.S. corporate bonds. Bonds of financially strong corporations will suffer less than plain-vanilla treasurys when rates rise, and they'll hold up better than junk bonds and other lower-quality vehicles if the economy stays weak. We suggest iShares iBoxx $Invesment Grade Corporate Bond (LQD).

        #3: Invest for higher income in a superior "go anywhere" fund. Our favorite remains Loomis Sayles Bond (LSBRX). With a 2009 return of 36 percent by late December, the winning investments at this multisector fund include domestic investment-quality and high-yield corporate bonds, as well as foreign fixed income.
        While we don't like regular U.S. Treasury securities at current yields, we do favor building some inflation protection into a bond portfolio, particularly when it's cheap to by it.
        So we continue to recommend iShares Barclays TIPS Bond (TIP), With Treasury Inflation Protected Securities, your bond principal is linked to changes in the Consumer Price index. This is a rare example of bonds actually benefiting from rising inflation.

Worldy Stocks

        Moving toward equities, we advise you to invest in at least one superior balanced fund that holds both stocks and bonds, thereby providing good income and low-risk growth. The best balanced funds deliver better returns than the equities averages over the long haul, with less volatility.
        Here, Vanguard Wellington (VWELX) and Oakmark Equity and Income (OAKBX) are long time winners and core portfolio holdings.
        In this investment environment, we strongly favor shares of high quality companies that not only pay dividends but also have the wherewithal to raise them over time. So we now recommend Vanguard Dividend Growth (VDIGX).
        The primary focus here is simple: undervalued companies that pay out some of their earnings to shareholders and make it a priority to increase those dividends. These companies tend to possess strong competitive advantages that produce steady, predictable earnings and superior cash flow.
        Like most of our other recommended equity funds, Vanguard Dividend Growth has considerable international exposure, which we consider vital these days. This fund's five largest holdings are automatic Data processing, United Parcel Service, Total SA ADR, Johnson & Johnson and Cardinal Health.
        We also like growth stocks. They pay little income, but large growth companies operate in growth industries and they typically offer exposure to fast growing economies around the world.
        Our recommendations in this category are Primecap Odyssey Growth (POGRX) and iShares S&P 500 Growth Index (IVW).
        iShares S&P Global 100 (IOO) offers a well-diversified group of large multinational companies with market-dominating operations around the world. Relative stability and good dividend income are the watchwords here.
        U.S. based companies account for less than half of the portfolio. The three largest holdings are ExxonMobil, ExxonMobil and HSBC Holdings .
        Next on our global investment list are our three non-U.S. equity vehicles. With Harbor International (HIINX), we also get significant exposure to energy and industrial materials.
        At Dodge & Cox International Stock (DODFX), a large stake in emerging markets continues to play a big role in its outstanding performance. And Wisdom Tree Emerging Market High Yielding Equity Income (DEM) does exactly what its name says.
        Neither of the final two holdings in the Fund Portfolio is tied to the investment themes that we emphasize to you in each issue of our newsletter. We like them just because (1) they provide additional diversification and (2) they are excellent long-tem performers.
        Fairholme Fund (FAIRX) invests primarily in large value stocks, but it often goes into other market niches too. Perkins Mid Cap Value (JMCVX) takes us into smaller, financially strong companies.
        What to do now: Keep your portfolio of mutual and exchange-traded funds in fine form by capitalizing on opportunities for income and growth from the U.S. around the world."

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THE MONEYLETTER
479 Washington St., P.O. Box 6020, Holliston, MA 01746.
1 year, 24 issues, $180.

Tackling the International frontier

        Walter Frank: "Investors always seem to be looking for the next best thing, and much attention has recently turned toward emerging markets. In a recent BusinessWeek interview, Mark Mobius, emerging markets portfolio manager at Franklin Templeton funds, noted that one reason investors have flocked to equities, and emerging markets in particular, is a lack of yield on dollar deposits in the US. Also, he cites fundamentals: "If you look at any time period...emerging markets have outperformed US and global markets. Their economies are growing faster."
        He adds that during the Asian crisis (1997-1998), emerging markets policymakers "realized they needed strong balance sheets at the national and the company level, and had to build up foreign reserves, which they've done." He also notes that despite recent gains, these markets are only "halfway toward the previous high of 1997." Below we introduce three emerging/frontier markets ETFs. Keep in mind that these funds do carry more risk owing to potential liquidity, political, economic, social and other risks.

Claymore/BNY Mellon Frontier Markets (FRN)

        In June 2008, Claymore Securities launched this fund to "provide investors with access to up to 41 countries that are less developed than traditional emerging markets - often referred to as the 'frontier markets.': Frontier markets are often thought of as tomorrow's emerging markets. They offer the potential for greater investment gains owing to greater inefficiencies in information and valuation.
        This fund's index, developed by the Bank of New York Mellon, contain all companies in the 41 countries with float-adjusted market capitalizations of more than $100 million that have depository receipts that trade on US or London stock exchanges, subject to additional liquidity and price criterion. The fund is well diversified by country. About 45% of assets are in large caps, and another 45% mid caps. The portfolio holds 39 stocks, with about 55% in the top ten. The fund gained 50.3% 2009.

Market Vectors Africa (AFK)

        In July 2008 Van Eck Global launched this first ETF to be exclusively Africa. Its base index is the Dow Jones Africa Titans 50 Index, described as a "pan-African index [that] spans 11 countries - from the more developed South Africa, Egypt and Morocco, to frontier regions of Nigeria, Ghana, and Zambia." The index includes 50 publicly traded companies domiciled in Africa as well as "offshore" companies that generate at least 50% of their revenues in Africa. The latter accounts for about 21% of assets. Firms must have a market cap of more than $200 million, and meet liquidity and trading requirements. Individual holdings are capped at 8% of assets, and there is a maximum of 15 companies per nation.
        The region supports vast natural resources and is benefiting from rising commodities prices, debt reduction, an inflow of investment, capital, and better economic management. The fund advanced 35.0% in 2009.

SPDR S&P Emerging Middle East & Africa (GAF)

        As with other SPDR funds managed by State Street Global Advisors, this one tracks a specialized S&P index, the Mid-East and Africa BMI Index. The Index is a market capitalization weighted index based on investable publicly traded companies domiciled in emerging Middle Eastern and African markets. The focus on market capitalization means nearly half the portfolio is invested in large caps, and 42% in mid caps. That also results in a portfolio where the Middle East is strongly represented by Israel, and Africa by South Africa, as these nations dominate all others. There are just over 100 stocks in the portfolio; top holding Teva Pharmaceutical accounts for 11% of Assets. The fund advanced 47.4% last year."

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