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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Monday, March 1st, 2006
Dear Client,
To start off I would like to restate the mission of this investment letter, website and portfolio consulting services: to help investors build wealth and independence by building successful ETF global portfolios. Many of you are familiar with all the advantages of ETFs but may have overlooked that for the fourth straight year, iShares has distributed zero capital gains to investors.
February did not show much movement in the markets and the same went for our portfolios. Oil prices were flat, gold is up 8.6%, and the market has been lead by the financial services area and resilient small cap stocks. The S&P 500 and the Dow Jones Industrial Average are up 2.5% this year while the MSCI World index is up just over 4%. For the most part our model portfolios treaded water with year to date returns of 3.6% for the core and 6-9% for the other portfolios. Asia and the New Venture portfolios are the strongest at 8.84% and 8.7% respectively. The best performing iShares so far this year are Brazil, +27%, Latin America 40, +17%, China, +18%, and MSCI Emerging Markets, +11%. We need to keep a close eye on emerging markets because while growth is strong and balance sheets improving, interest rates are creeping upward draining some global liquidity.
China has now surpassed France and the U.K. to become the fourth largest economy in the world. The profile of 2005 economic output was similar to the previous year: robust economic growth was underpinned by exports and fixed asset investments, which surged 28.4% and 25.7% respectively; meanwhile industrial production and retail sales grew more modestly at 16.4% and 12.9%, respectively.
India's government has taken a small step towards fully opening up India's nascent retailing industry to foreign participation by allowing single-brand retailers to own a 51% stake in retail joint ventures. In a separate move aimed at improving the existing infrastructure, the government has awarded contracts for privatization of two of India's key airports, New Delhi and Mumbai, to private operators.
Japan's GDP growth in 2005 was second to only America amongst members of the G-7 and the numbers in the fourth quarter were especially strong. Economic growth was up 4%, capital spending up 7% and personal consumption up 3%. Housing starts and bank lending also going in the right direction. The question is whether all this is already priced into the market and what will happen when rates finally need to go above zero?
While Japan and South Korean markets have taken a breather this year, China's has shown surprising strength followed by India and Indonesia up over 10% and Thailand up 8% despite the turmoil over snap elections.
Regarding oil and energy prices, we will stay with our positions. I think that it will take about 3-4 years for supply to catch up with growing demand. It may be smart to take a position in the Powershares Clean Energy ETF to hedge the development of new technologies.
I am adding the new Deutsche Bank Commodity ETF to the Core Portfolio. The Deutsche Bank Commodity Index ETF (DBC) started trading just last month on the AMEX with an expense ratio of only 0.95%. The ETF gives investors exposure to a basket of the most liquid and deep commodity markets in the world. The current weightings are: 35%, light, sweet crude oil, 20% heating oil, 12.5% aluminum, 11.25% corn, 11.25% wheat and 10% gold.
In addition, I added small positions in the iShares Global Financials (IXG) to the global and international portfolios this month. This ETF has exposure to some great global banks that seem undervalued and have limited downside risk. With rates relatively stable, these banks have considerable economies of scale and margins should expand.
Also, consider the Everbank Icelandic three month CD with an annualized eye popping rate of 8.24%. The Krona has lost about 3% against the US Dollar this year but it value tends to track the Euro which could easily go the other way. We will put half of our cash position in this CD.
This month we highlight opportunities in India in conjunction with President Bush's visit this week. As much as I like India long-term, the valuations of the leading Sensex index companies is now in the low twenties and this makes me a bit apprehensive. The financial sector in India is of particular interest and I hope President Bush pushes hard to accelerate market opening steps. Right now the Reserve Bank of India only allows foreign banks to open about ten branches per year.
This month, I also highlight commodity plays and more info on Starbucks and Toyota story.
Both stocks continue to do well. Starbucks prospers despite paying prices for coffee beans 23% above market prices and providing comprehensive health care and stock options to all employees working more than 20 hours a week. Incredibly, the company pays more for health care than for coffee beans. The stock is up 6,400% since going public in 1992.
Lastly, I have decided to launch the first ETF dedicated hedge fund with a focus on the country-specific iShares. This will allow me to use more risk management techniques and the opportunity to take some short positions in markets I feel are overpriced. This is an exciting opportunity and I will keep you informed regarding size and timing.
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