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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Sunday, January 1st, 2005
Dear Client,
In 2005, a global strategy worked for the third straight year. While the Dow Jones was down slightly, NASDAQ up 1.4% and the S&P 500 index up 3%, the MSCI World index was up 7.56% and the MSCI World ex-USA index was up 11.85%. The strongest markets were in Latin America with Brazil up 63% and Mexico up 52% and in Asia with South Korea up 54% and Japan staging a late year rally to break 40%.
Europe also did well with shares reaching a 52-month high.
Chartwell's model portfolios did well with the Core Conservative up 6.15%, International, up 16.28%, Global up 12.79% and Asia up 9.98% The Core Conservative did well despite two positions that move opposite markets and a hefty 25% cash position.
In terms of specific ETFs, the year's top performers were in order Brazil, the Latin America 40, South Korea, Mexico, Dow Jones Oil & Gas and Japan. The worst performers were some of the bond ETFs such as the Lehman 1-3 Year Treasury ETF and the telecom sectors ETFs.
The Comex Gold Index was up 17.98% and the Nymex oil index was up 40.48%. Goldman Sachs expects gold prices to reach $640 in the medium term. We will stick with 10% allocation for core portfolio.
Going forward I am making only minor changes to portfolios and have decided not to re-balance portfolios to let winners run. Global liquidity will stay strong at least through first half of year though incremental rate increases in all regions will lead to a slight headwind. While benchmark rate in US is 4%, it is only 2.25% (raised last month and likely to go to 2.5% in 2006) in the euro zone, 5% in China, 2% in Singapore and Taiwan and 0% in Japan.
I expect oil prices to move higher and commodity prices in general to stay strong due to shortages and cotinued high demand from China.
South Korea's amazing run was fueled by low relative valuations, lowering of temperature in North Korea and perception of becoming the partner of choice by Beijing. Japan could go either way depending on whether Japanese investors jumps into the market (see article below). A Merrill Lynch poll suggests that risk in the markets is at a three year high. 63% of US fund managers are underweight the US and 63% are overweight Japan.
This is just what concerns me about the Japanese rally - it is fueled almost entirely by foeign investors. According to Tokyo stock exchange, overseas investors bought a net $79 billion of Japanese stocks through November 18th. This sets a record. Meanwhile Japanese institutional ivestors are net sellers! Interest rates will likely move up very slightly (from zero) and the Yen will strengthen against the dollar. Thus my recommendation to sell some of your Toyota position with its shares nearing an all time high. GM took a beating in 2005 but I would wait until it hits low teens before buying. Ford also got hit hard being down 46% and it might be smart to nibble at Ford at these levels.
I have added modest positions to Taiwan iShare believing it undervalued and political risk of China intervention lower going into 2008 Beijing Olympic Games. More on Taiwan next month but together with Hong Kong and Australia represent the best way to play the China growth story. Malaysia and Thailand look cheap at ten and eleven times earnings. India seems a bit expensive at least in the blue chip arena and valuations need to come down for long-term investors.
Europe has a good head of momentum but will most likely slow a bit as year progresses and earnings growth slows to about 4% and margin expansion weakens. Austria has come back into attractive levels and we will stay with Switzerland in core portfolio. Europe share valuations are now roughly equal to US and if the Fed backs off after one more 0.25% interest rate increase the big surprise could be that US markets lead the world. Some analysts believe the S&P 500 is undervalued by about 20%. Look for gains in mid cap and perhaps blue chip areas with small caps lagging. Emerging Fund Portfolio Research out of Boston notes that this year $72 billion net has gone into international funds while only $27 billion into US funds. American investors, as usual seem to be chasing higher international returns because of the performance gap.
The Chartwell Global 30 did well in 2005 being up 16.25% after 28.45% run in 2004 for a two year compounded return of 61.8%. We are working on making investing in this portfolio easier for members and have re-balanced holdings on an equal weight basis dropping Royal Dutch Shell, Sony and Sierra Health and adding Starbucks, Statoil (Norway) and Novartis (Swiss).
Unprecedented global liquidity continues to drive markets and real interest rates continue to stay low despite rate hikes in US. Risk premiums - what investors have demanded before investing in riskier assets - is very low and history shows that these types of periods end in disappointment. Please make sure you have a healthy allocation to the Core Conservative portfolio and cash to avoid what could be a volatile 2006.
We are in the middle of upgrading members' website so that I can easily update articles, portfolios and recommendations on a weekly basis if not daily rather than forcing you to digest a long letter each month. This should be in place by the end of January and this will greatly increase the value and timeliness of our information.
Money market rates have moved into 3.5%-4.0% range and this should be the bulk of your cash position. The Asian Advantage CD has a rate of 3.55% but the Yen and NZ Dollar have both become weaker due to steady rate hikes in te US. I believe that the Japanese Yen which has weakened almost 15% this year will go the other way.
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