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EQUITY FUND OUTLOOK
P.O. Box 76, Boston, MA 02117.
Monthly, 1 year, $139.
Don't be intimidated
Thurman Smith: "Don't be intimidated by asset-allocation dogma; if their still aren't any attractive large-cap or international funds, don't buy any. A portfolio could be over-weighted in small-cap funds with less risk than with large-cap funds for several reasons. And there is much less chance of overlap in holdings among small-cap funds as there are so many small firms and as each of the better-rated small-cap funds has a selection strategy that differs from the others. Rotating out of those with no redemption fees to move to newly attractive mid- and large-cap situations should be no problem if your accounts are with brokerages that require less than a six-month holding to avoid a fee on a sale."
Libera's CLOSED-END COUNTRY FUND REPORT
725 15th St., Ste. 501, Washington, D.C. 20005.
Monthly, 1 year, $225.
Global economic trends.
Brazil Fund a Buy
James Libera: "We project overall global growth of 2-2.5% in 2003 (compared with 2% last year) and 3.5% in 2004. We think the U.S. will be the best performer among large, industrial economies, while China will lead the emerging markets. Europe and Japan will remain economic drags over the next 12 months. On the other hand, we think corporate earnings will perform a bit better than consensus expectations. With equity valuations near the cheapest levels in a decade, we think markets will show modest but positive gains this year.
Europe remains in an economic slump, and we project just one percent growth in 2003. 2004 should be better. European divisions over Iraq are revealing deep fissures over foreign policy goals and could hinder economic cooperation as well. Without coordinated economic restructuring, Europe has little chance to emerge from its uncompetitive positions vis-à-vis the U.S. and many emerging economies. However, we expect European companies to show positive earnings growth this year. With market P/E's averaging just 1012, investors should retain exposure here.
Central Europe is still nervous about Jacques Chirac's threat to block the region's entry into the EU in retaliation for its support of U.S. Iraq policy. However, we doubt he can carry through on this intimidation. We expect the convergence theme to play out, with rapid growth, narrowing credit spreads, and strong equity market returns. Although equities are not as cheap as they were a few years ago, investors should still strongly overweight these markets.
Japan is stuck in deflation, and the Bank of Japan remains unlikely to break with traditional policy conservatism. We expect little or no economic growth over the next couple of years, or until more reflationary monetary policies are adopted. Fortunately, many Japanese companies are implementing restructuring measures that will increase profits even without domestic economic growth. We recommend under weighted exposure here.
Emerging Asia was the world's fastest growth region last year, and it will remain so in 2003 and 2004. China has supplanted Japan as the driver of growth and will become increasingly dominant. We have maintained over weighted exposure in the region for some time now, and will continue to do so for the near future.
Latin America could have the world's best-performing markets this year. While there is still high risk in Argentina, Brazil and Venezuela, that risk has kept valuations low. In 2003, the region should begin to benefit from U.S. recovery and the rebound in global capital flows. We are buying Brazil Fund.
Brazil Fund (BZF): Brazilian president Lula da Silva continues to impress us with the conduct of his new administration. Lula has attempted to contain the over-optimistic hopes, particularly from Brazil's poor, by emphasizing that reform will take time. Interest rates have been raised to more than 25%, inhibiting growth but also increasing da Silva's credibility as an inflation-fighter (and with his long record of fighting for Brazil's underclass, analysts say he probably has a year's honeymoon from the left.) Because of improved confidence, Brazilian businesses are starting to invest again, at least those that can acquire reasonable sources of financing. Another source of growth has been exports, which have benefited from the previous fall in the currency. On the other hand, until interest rates come down, overall economic activity will be constrained. We project GDP growth of just 1.52% in 2003. With that relatively weak growth, service payments on Brazil's large debt will remain difficult, and a future financial crisis is not out of the question. However, we think that from an equity investor standpoint, waiting until Brazil's recovery is unambiguously on track would be too late. Coming from its low base, corporate earnings can probably grow at least 1520% this year. Equities are selling at an average 8x earnings. Recognizing the relatively high risk/reward profile, we nevertheless are moving Brazil Fund (-16%) to (buy)."
THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI 96733.
Monthly, 1 year, $350.
Japan Equity Fund:
A new portfolio addition
In a big change in strategy, Irwin Yamamoto has sold all of his positions in gold and oil and has bought stocks. One addition to his new portfolio is the Japan Equity Fund (NYSE JEQ $5.15) a diversified, closed-end management investment company.
"JEQ invests its assets largely in shares of companies listed on the First or Second Section of the Tokyo Stock Exchange or listed on the over-the-counter market in Japan or on other Japan stock indices. The equity of the fund trades on the NYSE. Daiwa SB Investments (U.S.A.) is the investment manager.
You have read and heard about the financial calamities in Japan. The country has been trapped in a recession for 13+ years. The stock market remains at a multiyear low. Unemployment hovers at the highest post-world War II level. Basically, the news couldn't be worse.
Still, if one looks behind the headlines, there are interesting developments occurring in the Far East nation. Prime Minister Junichiro Koizumi continues to work on structural reforms, especially on the troublesome banking system. Issues regarding the bad debts and the nonperforming loans are being addressed. And a new Bank of Japan governor is going to be selected. The new chief will likely pursue a policy of inflation targeting to fight deflationary pressures that permeate the region.
At current depressed prices, you can position yourself in the second largest economy in the world at a significant discount. The government has flooded the system with liquidity. With any hint of a major change in the banking system, money will be chasing Japan. And it's off to the races for JEQ."
UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
Monthly, 1 year, $129.
Taking on water
Roger Conrad: "Direct mutual fund bets on water stocks are rare. The exception: Pictet Global Water Fund (PGWRX, 877-470-0103, no-load, $2,500 initial minimum investment, $500 thereafter).
Launched last year, the fund typically holds 80 percent of its portfolio in global water stocks. Performance thus far has been dismal, primarily reflecting the slide in major European holdings Suez and Vivendi Environnement.
Given the high quality and stability of the sector, I expect a vast improvement this year. But until we see results, Pictet is only worthy of very small investments.
Even better, buy using DRIPS. My favorite in water is far and away Philadelphia Suburban (800-205-8314, $500). Non-water choices include: Atmos Energy (800-382-8667, $200), BP Plc (877-272-2723, $250), ChevronTexaco (415-894-7700, $250), Dominion Resources (800-552-4034, $250), Energen (800-654-3206, $250), Entergy (800-333-4368, $1,000), Great Plains Energy (800-245-5275, $500), KeySpan Energy (800-482-3638, $250), MDU Resources (800-813-3324, $50), Peoples Energy (800-228-6888, $250), Piedmont Natural Gas (800-937-5449, $250), SBC Communications (800-351-7221, $500), Southern Company (800-565-2577, $250), Verizon Communications (800-631-2355, $1,000), Vodafone (888-BNY-ADRS, $200) and Xcel Energy (877-778-6786, $1,000)."
MONEYLETTER
360 Woodland Street, Holliston, MA 01746.
1 year, 24 issues, $150.
The ins and outs of Ginnie Maes
Walter Frank: "Following up on our new allocations for the Conservative model portfolios, we're taking a look at another investment that has served low-risk investors well during tough market times: mutual funds that invest in Ginnie Maes and other mortgage securities. Before looking at a specific fund, it's necessary first to understand the underlying security Ginnie Maes or GNMAs. Ginnie Mae securities are essentially pools of mortgages that have been bundled together by banks and other lending institutions and resold as fixed income securities to investors.
The Government National Mortgage Association (GNMA) guarantees that each month you will receive timely payment of principal and interest from the underlying mortgages, whether or not the homeowner makes his or her payment. So already, we see two major benefits to GNMAs: as a government-owned corporation, your GNMA investment is backed by the full faith and credit of the U.S. government; and your principal and interest payments are guaranteed. Historically, GNMAs have provided higher yields than those on U.S. Treasury obligations with similar maturities. In fact, according to Charles Schwab & Co., since 1980, GNMA securities have yielded between 0.8% and 2.3% more than 10-year Treasury notes.
Drawbacks
As with any investment, GNMAs do have their drawbacks. First, determining the exact yield at any given point on a Ginnie Mae is difficult in fact, yields quoted are always approximate. That's because of the effect of prepayments on the amount of income investors receive each month. Prepayment risk is a real concern for GNMA investors. If borrowers prepay their mortgages faster than anticipated, the investor gets larger monthly payments (as a great portion of principal is paid off), and future payments will decrease. If the investor pays off his mortgage in full, either because he's sold his house or refinanced due to lower interest rates, the investor receives back a portion of his or her original investment. In the case where interest rates have been declining, the investor is then forced to reinvest at a lower rate.
Outlook Now
GNMAs have been outperforming Treasuries, and with interest rates at very low levels, the wave of mortgage refinancings should be nearing an end. Moreover, with rates so low, the next major trend in interest rates is likely to be higher. In that instance, Treasury bonds will suffer (remember that straight bonds' prices move inversely to interest rates). But GNMAs should hold up better. The reason? Prepayment risk is greatly reduced when interest rates head up. Moreover, mutual funds that invest in GNMAs will earn a gradually rising yield as new Ginnie Maes with higher yields replace older, lower-yielding securities in their portfolios.
One Of The Best
When investing in GNMAs or other mortgage-backed securities, a mutual fund is generally the way to go. After all, the reinvestment of those principal and interest payments is done for you. And one of the best is the TCW Galileo Total Return Bond fund (TGLMX 800-386-3829, $2,000 min.). Don't let its name fool you. While it does not sound like a GNMA/mortgage fund, it is. Until May 2002 its moniker was the TCW Galileo Total Return Mortgage-Backed Securities Fund, but the name change in no way affected its mortgage orientation. Instead, the TCW Galileo team changed the name to reflect the fund's benchmark, the Lehman Aggregate Bond Index, which is also the benchmark for most core bond funds. (The Lehman Mortgage Index is its secondary benchmark.) The idea is to keep the fund competitive with both plain government mortgage funds and intermediate-term bond funds.
Lead portfolio manager Jeffrey Gundlach emphasizes that the managers aim to outperform both the PIMCO Total Return Bond fund and the Vanguard GNMA fund over trailing three-year time frames. Thus, he keeps the fund's duration targeted between the shorter Lehman Mortgage-backed securities index and the longer Lehman Aggregate. The managers also aim to structure the portfolio to be better able to withstand the impacts of changing interest rates and prepayment volatility. They tend to eschew modest-premium 30-year securities in favor of adjustable-rate pass-throughs, prepayment penalty pass-throughs, and 15- and 20-year pass-throughs. Why? Typical newly issued 30-year securities would have a higher level of prepayment risk. The team emphasizes government- or agency-backed securities, although about 18% of the portfolio is in non-agency securities, which are all rated AAA. That's a typical stake for the fund.
Gundlach and TCW team have certainly been successful. For the trailing one-, three-, and five-year periods ended March 13, the fund has outpaced at least 96% of the funds in its Lipper category U.S. mortgage funds."
THE INTELLIGENT FUND INVESTOR
26106 Tallwood Dr., North Olmsted, OH 44070.
Monthly, 1 year, $179.
Traders-video trading
Dr. Gary Harloff: "The markets are very volatile with a lot of trading still driven by rumors and war video. The financial news stations are now actually war news stations. And the traders watch this minute by minute. This means that trends are hard to find, are temporary, and it is hard to make money in this kind of market. The hedge funds and the cabal control the majortity of the market's dollar flow. These groups are short term traders. Ever wonder why the markets open up or down 200 points? These professional traders control the action before the markets open; long term investors are still on the sidelines in money markets. Large equity price swings in both directions seems to be the norm for now. The Vix index is low and this suggests we are not near a market selling climax. Perhaps the worst bear market that living investors have experienced is over.
Our analysis clearly shows we are in a better market than in March. "Our S&P500, Gold, US10 year bonds are all in bull markets. Our NDX model just went on a sell. This is inconsistent with our HVI rating system so we will watch this timer.
Utilities, SOX, Pharmaceutical, health funds, and bull funds are looking good. The equity markets of Germany, London, and EAFE are also bullish now. The dollar is recovering. The four corners of the style box are all positive with growth beating value. It is time to be more aggressive on the buy side."
ALL STAR FUND TRADER
P.O. Box 203427, Austin, TX 78720.
Monthly, 1 year, $249.
www.AllStarInvestor.com.
Health Care tops rankings
Ron Rowland: "The health care sector has quietly moved to the top of our rankings. For most of the past year, we have been writing about the divergence among the various health care industries. That is starting to change as each of the major health care industries and funds have steadily improved their relative performance the past few months. By far, the most intriguing of the bunch is Fidelity Select Medical Equipment & Systems (FSMEX). This fund bottomed last July and has been on a slow, but steady, upward trend for the past eight months. The below average volatility is another plus in this volatile market. Biotechnology funds are typically the most aggressive and most volatile funds within the health care segment. Rydex Biotechnology (RYOIX) is currently at the top of our Rydex fund rankings but its risk rating is almost twice that of Fidelity Select Medical Equipment & Systems. Diversified health care funds, and those focusing on the pharmaceutical industry, are now at overhead resistance levels where they have been turned back three times during the past eight months. A breakout could signal the start of a bullish run for these funds. Even Fidelity Select Medical Delivery (FSHCX), the fund representing the beleaguered HMO industry, is in the top half of our rankings, indicating an above average performance the past few months."
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