- March 14, 2011
- Building Tacit Knowledge with On-the-Ground Experience
Global markets present tremendous opportunities to those who are able to sort out what’s meaningful from the background noise. It also means asking the right questions, fine-tuning our investment processes to uncover market mispricing and other inefficiencies and moving quickly to capitalize on them. It also means going where others don’t.
The year is less than three months old but our portfolio managers’ passports are already filling up with stamps. Since the start of the year, our analysts and portfolio managers have been to 17 conferences and research trips in eight countries and six states.
This research and travel is essential because it is one of two key types of knowledge an investor must have in order to be successful: Explicit and tacit.
Explicit knowledge is academic. It is what you can learn about a company at a Bloomberg terminal by examining its balance sheet, cash flow statements, valuation against peers and other key metrics. Tacit knowledge is personal in nature and much more difficult to obtain. It is acquired over time through first-hand observation, experience and practice.
In February, co-portfolio manager of the Global Resources Fund (PSPFX) Brian Hicks and I attended the African Mining Indaba in Cape Town, South Africa. With more than 4,000 executives, ministers and individuals representing more than 800 international companies and 40 government delegations, Indaba is the world’s largest gathering of influential stakeholders and decision-makers in African mining. In 2010, sponsoring companies represented an estimated $1 trillion of market value.
I was honored to be the keynote speaker on the first day of the conference and Niall Ferguson, the world-renowned economics writer and Harvard professor, provided the keynote on the second day.
I’ve been attending this conference for over a decade and witnessed its growth from a few hundred people to several thousand today. It exemplifies the excitement and opportunity the continent has to offer.
In addition to Indaba, Brian and I visited operations in Zimbabwe, Mozambique and the city of George between Cape Town and Port Elizabeth, South Africa where it was a scorching 100-plus degrees outside. More regarding our trip is coming in the following weeks so stay tuned.
Ralph Aldis, co-manager of the World Precious Minerals Fund (UNWPX) and Gold and Precious Metals Fund (USERX), traveled to the tropical climates of Colombia and Panama to see mining efforts still in their infancy. Colombia has become a new frontier for gold mining because of its abundance of known deposits. The country’s adoption of business-friendly government policies has already triggered a boom in Colombia’s energy industry and mining may be next.
Panama might be the fastest booming country that nobody talks about and Ralph was blown away. The downtown skyline of Panama City rivals those of Dubai, Singapore and other rapidly growing cities. In Panama, Ralph stepped foot in the country’s first gold-producing mine.
Evan Smith, co-manager of PSPFX, Brian, Ralph and I attended BMO Capital Markets’ 2011 Global Metals & Mining Conference in late February. The BMO Conference, which celebrated its 20th anniversary this year, had more than 100 CEOs giving presentations and 1,200 analysts from around the world in attendance. Ralph did the investment equivalent of speed dating by holding 38 one-on-one meetings with mining executives over a three-day span—that’s more than 11 hours of meetings a day. These weren’t surface-level meetings either. Ralph’s experience and knowledge of the global mining industry allows him to get to the nitty-gritty details of how those companies are growing their reserves, production and cash flow—our three key metrics in evaluating mining companies.
On Sunday in Toronto, with frigid temperatures of 10 degrees below zero outside, I gave the keynote presentation discussing how the Love/Fear Trade is driving global demand for gold at the Prospectors & Developers Association of Canada (PDAC) Conference. This has historically been one of the pre-eminent conferences in the mining industry and this year was no different. In 2010, 22,000 participants from 118 countries attended and this year that number grew to 24,000. These analysts, consultants, investors and others come to PDAC to build relationships, share ideas and showcase their mining opportunities.Meanwhile halfway around the world, our director of research John Derrick and Brian were surveying opportunities in Shanghai, China. The life of a globetrotter is a brutal one. After flying out early Friday morning and arriving in Shanghai at 7 p.m. local time Saturday, John and Brian only had a few hours to settle in before their day began around dawn on Sunday morning. They then spent 11 hours on a bus touring facilities and meeting with company executives around Greater Shanghai on a cold and rainy day.
Once on the ground, John and Brian heard that China’s tightening policies are having an impact but the government won’t stop until consumer price inflation (CPI) starts trending lower for a few consecutive months. Despite construction figures softening in recent months, a day of exploring all over the city unveiled the area is still booming with construction projects everywhere.During the trip, Brian and John surveyed 12 companies ranging from miners to mobile phone makers. After some high profile blowups and instances of fraud in recent years, investors are cautious and skeptical. This means that developing our tacit knowledge by meeting companies on their home turf, listening to local investors and seeing operations firsthand becomes even more important.
That said, one thing evident from the visits is that Chinese companies are rapidly mimicking and copying U.S. business models and methods. There is still some maturation that needs to take place but it is clear Chinese companies are quick studies and are catching up with the U.S. and others very quickly.
Investors must marry the facts (explicit knowledge) with the feelings (tacit knowledge) in order to create a rich knowledge matrix. We do this by monitoring and tracking the fiscal and monetary policies of the world’s largest countries both in terms of economic stature and population. We also apply both statistical and fundamental models (explicit knowledge), including “growth at a reasonable price” (GARP), to historical and socioeconomic cycles in order to identify companies with superior growth and value metrics.We then overlay these explicit knowledge models with the tacit knowledge obtained through first-hand observations such as the ones we’ve just discussed. Both forms of knowledge are important when it comes to investing, but it is our tacit knowledge that sets us apart from our peers, and how we strive to create alpha for our fund shareholders.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
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- March 9, 2011
- Turkey a Model of Middle East Stability
Turkey lies north of Syria and across the Mediterranean from Libya. Because of its proximity to the unrest in North Africa, Turkey has been punished by equity investors. The country has gone from one of the best performing emerging markets in 2010 to levels not seen since March 2006.
In addition, there are concerns that rising oil prices will negatively affect Turkish imports and curb export demand from key partners such as Libya and Oman—those two purchase a quarter of Turkey’s exports.
We feel that this punishment has been overdone and think the country’s history of political stability and solid long-term fundamentals will help Turkey emerge unscathed.
Turkey’s foundation as an economic force was forged nearly a century ago. In the 1920s, Mustafa Kemal Atatürk, the first president of Turkey and “The Father of All the Turks,” dramatically changed the country’s political structure from a dictatorship to a democracy.
Atatürk was instrumental in altering many aspects of the country: He chose a new capital, renamed Constantinople to Istanbul, pleaded with women to unveil, changed the Turkish alphabet to improve communication abroad and literacy at home, and moved the day of rest from Friday to Sunday.
Atatürk’s successful development of a new Turkish identity has been memorialized with a statue bearing his message: “Turk! Be proud, hardworking and self-reliant!”
Since the days of Atatürk, Turkey has increasingly become an economic role model in the region, most recently leading many emerging countries in the recovery from the global crisis.
In 2010, Turkey GDP grew about 8 percent, faster than many of the country’s emerging market counterparts. A quarter of that GDP was from industrial production, which increased significantly in December. Turkey manufactured a record number of cars (761,000) in 2010, 37 percent more than the previous year. That follows a 13 percent rise in auto production in 2009.
The March Manufacturing PMI output survey shows the trend has continued into 2011. Real GDP growth is now more than 12 percent and motor vehicle sales, which include both passenger cars and light commercial vehicles, increased 88 percent on a year-over-year basis to an all-time high in February.
Meanwhile, inflation, a key concern for any rapidly growing country, hit a 41-year low in February. The inflation rate is currently just above 4 percent but it is expected to rise along with oil prices.
We think there’s still room for growth based on the improving confidence felt among Turkey’s consumers and businesses over the past two years. Access to credit has been a big driver of this improving consumer sentiment.
This chart from Credit Suisse compares the pace of lending growth across emerging markets. Most emerging markets have recovered from the recent dip, but Turkey is leading the way. Loan growth in Turkey is just under 40 percent on a year-over-year basis, nearly ten percent higher than number two Brazil and well above the majority of emerging markets which are in the 10 to 20 percent range.
The amount of credit being offered to these confident consumers is an important driver of consumption for goods such as refrigerators, furniture and air conditioners.
It remains to be seen how much of an effect increasing oil prices will have on Turkey’s imports and exports, but we believe these concerns are already priced into Turkish stocks. We believe Turkey remains a dynamic country with considerable opportunity and the country will continue to play a considerable role in our Eastern European Fund (EUROX).
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
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- July 19, 2010
- The Case for Emerging Markets
One of the best selling points for investing in emerging markets is growth potential, but like any other sector, this growth must come at a reasonable price.
Emerging market stocks are cheap these days. The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8x, which is 15 percent below the P/E for the MSCI World Index. As you can see on the chart below, this valuation has rarely been more attractive – it is 15 percent below the long-term average.
On top of that, significant sales growth is expected in global emerging markets – 15 percent and 10 percent, respectively, for 2010 and 2011. The EMEA (Europe, Middle East and Africa) region is expected to lead the way – within EMEA, Turkey is seen as the star with nearly 30 percent sales growth this year and 17 percent in 2011.Other emerging market standouts in expected sales growth: Taiwan (28 percent), Russia (15.8 percent) and India (15 percent). At 5.5 percent growth, the Philippines is expected to be the laggard.
Sales growth and margin expansion drive earnings growth – UBS predicts a 34 percent jump in earnings for emerging-market equities this year and another 12 percent in 2011.
Emerging market companies also have cleaner balance sheets and lower leverage compared to global peers. Debt-to-equity levels are low and heading lower – UBS sees a drop to 22 percent in 2011 from 28 percent this year. This balance sheet strength gives those companies strategic advantage in raising dividends and targeting their capital expenditure toward areas with the highest potential for return.
Public Sector Debt % of 2010
GDP ForecastPercentage Point
Increase 2007 - 2010Source: JP Morgan Developed 
United States 92.4% 30.6% 
Japan 197.2% 30.1% 
United Kingdom 83.1% 36.1% 
Germany 77.1% 12.1% 
France 83.0% 19.2% 
Italy 118.4% 14.9% 
Greece 133.4% 37.7% Emerging 
Russia 7.9% 0.5% 
South Africa 38.2% 9.3% 
China 19.0% -2.7% 
India 41.1% 0.2% 
Brazil 61.7% 2.9% 
Turkey 49.0% 1.9% 
Indonesia 32.5% -3.8% The table above from J.P. Morgan shows public-sector debt of selected countries in developed and emerging markets. The contrast is staggering, particularly the rate at which debt is growing in the largest economies – more than 30 percent this year in the U.S., Japan and Britain.
Among emerging markets, only Hungary and the Dominican Republic are expected to see double-digit increases in public-sector debt. China and Indonesia should see a decrease in 2010, while India and Russia are seen as pretty much flat.
This trend represents a major reversal from the past, when investors in developing economies often had to factor in large sovereign debt, high default risk and wildly fluctuating currencies. Government policy changes have contributed greatly to stronger economic fundamentals in many emerging nations, while policy moves by governments have been a source of weakness and uncertainty in the developed world.
Emerging markets have outperformed the world market by 400 basis points since April, when Europe’s sovereign debt crisis accelerated. The key factors discussed above – greater sales growth, cleaner balance sheets and cheaper valuations – make a good case for emerging-market equities to continue this outperformance over the longer term.
John Derrick, director of research, contributed to this article.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
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- July 16, 2010
- A Kinder, Gentler View of Outsourcing
Forget the conventional notion of job outsourcing to emerging markets as just exploiting the world’s most economically vulnerable – a new study from a major labor group finds that many of these jobs aren’t bad after all.The International Labor Organization (ILO) says that service-oriented jobs are of “reasonably good quality by local standards.”
These are jobs like call centers, data-processing shops, financial back-office operations and the like. Worldwide, it’s a $90 billion market and it’s growing fast.
Geneva-based ILO based its assessment on in-depth studies in South America, India and the Philippines. It found that the typical worker is young, well-educated and female.
Indian workers in these service areas make nearly double the average local wage, and in the Philippines, the pay is about 50 percent higher.ILO did have some criticisms – many of the jobs require night duty to accommodate employers on the other side of the world, workloads can be onerous and stressful, and as a result turnover is high.
But “the bottom line is that this is an industry with the potential to offer a model for a future of good quality service sector jobs and high-performing companies in the global economy,” ILO writes.
India remains the leading destination for outsourced jobs from North America and Europe, but the consulting firm KPMG says China is now getting the biggest chunk of the business from Asia and the Pacific Rim.
A survey of companies across Asia found that more than 40 percent had a service center in China and 40 percent had contracts with a Chinese third-party service provider. Singapore and India ranked second and third.
KPMG says China’s outsourcing market grew from $7.5 billion in 2007 to $20 billion last year, and that it will more than double by 2014.
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- October 3, 2011
- Extreme Divergence Between Coal Rocks and Stocks Unwarranted
The Dow Jones Industrial Average experienced its worst quarter since the beginning of 2009. The S&P 500 Index fell 14 percent during the third quarter, with the materials sector as the worst performer, falling 25 percent. Many base metal commodities saw double digit declines, but not surprisingly, gold increased 8 percent over the quarter. It appears that fear of a “2008 repeat” drove investors from stocks despite positive long-term fundamentals.Coal was relatively flat for the quarter, but what’s interesting is that coal companies were severely discounted. Over the last two years, coal stocks and the commodity have closely tracked each other, until this summer, when worries about a global slowdown caused coal stocks to fall off a cliff, not once, but twice, in August and again in early September. This extreme divergence between coal companies and the commodity seems unwarranted when the long-term drivers of coal remain supportive.
We discussed coal in May in Coal Use in China Shines Light on Growth, and highlighted how the price of coal was supported by strong demand from reconstruction projects in Japan along with reduced supply from floods in Australia, Indonesia, South Africa and Colombia. As the largest consumer of coal in the world, China was expected to continue to demand a significant amount of coal over the long term.
This long-term driver hasn’t changed, even with China’s concentration on controlling inflation this year. Coal inventory levels at China’s top loading port have dropped, hitting a new low at the end of September, reports Macquarie Research. In mid-September, the Daqin Railway was under maintenance for a few weeks, causing reduced deliveries, which put further pressure on the country’s inventory. As the world’s largest coal transport railway, the Daqin line transports coal from northern China to Zinhuangdao for shipping to manufacturing centers in the south and the east.
Throughout the world, coal demand is expected to rise significantly over the next 25 years. According to the U.S. Energy Information Administration’s (EIA) recent International Energy Outlook 2011, total coal demand will be driven largely by the non-OECD economies, which are primarily emerging markets. Specifically, the Asian non-OECD countries are projected to account for nearly all of the increase from 2008 through 2035, with China averaging 5.7 percent each year and India averaging 5.5 percent per year, says the EIA.
Today’s worries about a global slowdown shouldn’t impact China’s consumption levels for many commodities. In fact, a worldwide slowdown may spur additional demand from China. Macquarie explains that China’s government tends to “de-synchronize” the country compared with the rest of the world, creating an inverse relationship. This means that when the world is growing, China becomes so concerned about rising costs and inflation, that it moves quickly to slow growth.Conversely, when world demand for commodities slows, China ramps up its infrastructure projects and scoops up unwanted commodities. In China-The Great Stabilizer, I showed a Macquarie chart indicating how China’s demand for many base metals has run counter to world demand over the last 10 years. Most recently, in 2008, the de-synchronization took place when China first moved to slow growth to combat increasing inflation. As the global crisis caused a significant slowdown, “authorities moved quickly to substantially ease monetary and fiscal policy,” says Macquarie. Due to its long-term planning, China can start and stop infrastructure projects at will.
In addition, Macquarie says that potential growth of the country generally outpaces its energy and resources capacity.
The recent dramatic decline in coal stocks has been driven by concerns of a global slowdown, but with equities already down 40 percent from their July highs, we feel this negative sentiment is already priced in. Given the encouraging long-term fundamentals, along with the fact that the underlying commodity has roughly stayed the same over the past few months, it appears that fear is the driver. This is often when opportunity knocks.
John Derrick, director of research, contributed to this commentary.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies
None of U.S. Global Investors Funds held any of the securities mentioned in this commentary as of 6/30/11.
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