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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Thursday, June 01, 2006
Dear Client,
May was a tough month. Global markets, and especially emerging market, encountered greater volatility and capital outflows. Equity funds tracked weekly by Emerging Portfolio Fund Research (EPFR) lost $10 billion due to investor outflows in the week ending May 24 (Wednesday) and shed another $65.4 billion due to tumbling share prices globally. The emerging market equity funds were responsible for a whopping $5 billion of the net outflows during the week, or 1.74% of total assets, their worst outflows since May 2004.
Our core conservative portfolio lost little ground and is up 11.7% for the year. All the other portfolios lost some ground but with the exception of the global opportunity, beat their benchmarks by substantial margins. For the year, the global is up 6.6%, the international, 7.84%, Asia is up 11.5%, and the new venture is up 7%. Gone fishing is up 6.1%.
While the fallback hurts, keep in mind that a fair number of markets are still up nicely this year. Ireland is up 15%, UK, up 10%, Malaysia, up 9.1%, Indonesia (we sold earlier this year), up 22%, Sweden and Switzerland, up 9%, Austria and Canada, up 10% and Germany, up 12%. All of these returns were helped by a weakening US dollar.
India has taken the worst beating and it is now up only 7% for the year in dollar terms. Meanwhile, in 2006 the MSCI World is up 5.1%, the Dow is up, 4.2%, the S&P 500, up 1.7% and the Nasdaq down 1.2%
The recent pullback in international and emerging markets blunts momentum but highlights the need to search for value worldwide.
While we had already trimmed some holdings and raised some cash over the past few months, we still had significant exposure to these markets. But helping us to limit our exposure and lock in gains is our firm policy of putting in place a 15% stop loss provision - in other words, a position is automatically sold when it declines 15% from its high. This policy takes the emotions out of it and forces us to take a fresh look at a region or country before making a decision. Since you have purchased these positions at different times and prices, your stop loss triggers will be different.
During May, the stop loss has been triggered for India (MINDX) & (IIF), the Latin America 40 iShare (ILF) and South Africa (EZA). I am now looking at all of these with a fresh perspective and will make decisions looking ahead and as a fresh investment.
Importantly, our stop loss policy enabled us to preserve some nice gains. The Matthew's India Fund (MINDX) went out at $13.50 with a cost of $10.50. The Morgan Stanley India Fund (IIF) went out at $47 with a cost of just under $31. South Africa (EZA) went out at $105.5 with a cost of $79, and the Latin America S&P 40 iShare (ILF) was removed at $139 versus a cost of $80.7.
Of my eight rules for ETF success, none is more important than the stop loss strategy - especially for emerging markets. A close second is the need to separate your core portfolio from your capital growth portfolios. Our core conservative portfolio has only one country specific ETF in it - Switzerland.
After the dust settles a bit, I will likely move back into some of these countries as investors overreact leading to great buying opportunities. India still seems overvalued despite its significant hit. Multiples for the SENSEX index are still in the high teens. Meanwhile, Thailand’s SET index is now trading at just a seven times earnings
India's economy grew 9.3% in the quarter ended March 31 from a year earlier, marking a broad display of momentum on par with China's red-hot growth. Growth in India's fiscal fourth-quarter - fueled by surprisingly strong farm production and vibrant consumer spending - beat the forecasts of most analysts as well as the official estimate. During the past three weeks, foreign institutional investors have been net sellers of about $2.5 billion in Indian stocks, according to the Securities and Exchange Board of India. The Sensex has tumbled as much as 22% from its record on May 10, and finished trade yesterday at 10398.
According to data from Emerging Portfolio Research, international money managers, who were pouring each week this year an average $1.6 billion into emerging markets invested only $43 million in the week ending May 17th.
Clearly, at least temporarily, momentum is going the other way which is why you need stop losses in place to lock in your gains.
But this long anticipated pullback may a blessing to global investors since some of the valuations were out of whack. For example, India's SENSEX index was trading at multiples in the high teens.
No doubt the sell offs are leading to some attractive value plays as markets overshoot on the downside. We have identified nine countries that look attractive.
One is Sweden (EWD) with a market trading at less than twelve times earnings.
The Swedish economy is unusually well diversified and fueled by commodities like iron ore and wood, world class companies in telecom (Ericsson), autos, (Volvo) and pharmaceuticals (Astra). Its nine million citizens are renowned for their high educational standards and global outlook. 45% of Sweden's GDP come from exports.
One of the cheapest markets in the world is Thailand with its SET index trading at just over seven.times earnings. With a land area more than twice the size of Wyoming, Thailand is a youthful solid middle-income country with a consumer-oriented middle class. Its economy is well diversified, is rich in natural resources, and has a vibrant manufacturing sector and strong exports.
Admittedly, the political situation in Thailand is murky. The courts have ruled that the April parliamentary elections were invalid and called for the scheduling of new elections. The election commissioners are resisting. The result is political limbo.
But this unfortunate situation will not last forever and the symbolically powerful King of Thailand, Bhumibol Aduljadej who has presided over Thailand since 1946, will likely be forced to actively intervene to end the impasse.
History shows that that the Thai market is both resilient and explosive. Thailand's benchmark index rose 115% in 2003.
I like the Thai Fund (TF) managed by Daiwa Securities which is trading at a 2% discount to its net asset value.
The need for a global perspective in building your portfolio should not be a casualty of the recent sell off in global markets. Hang tough and look for value opportunities as the world continues to fill in.
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