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Cash Cows

08/20/2004 12:00 am EST


Neil George

Editor, Profitable Investing

Neil George, editor of Personal Finance is no stranger to controversy. He will often take contrary positions and debunk the myths that he sees discussed by Wall Street pundits. Here, he discusses the need to focus on "cash cow" investments.

"Over the past few years, we have seen a tremendous amount of discussion and platitudes by so many gurus, pundits, Wall Streeters, etc. that the dollar is doomed and that dollar-denominated investments will be doomed to the same extent. That really is bothersome to me. I come from an international background. I was educated abroad, my first job was working for an Austrian bank, and I’ve dealt in the four corners of the globe. One of the major themes that have been around the advisory community is that the dollar is going to collapse and the US economy is going to go away. They fear that debt will crush us or that the trade deficit will crush us and that you have to get out of the dollar and send your cash overseas. That really is simply hype from my perspective. Those fears don’t match up with longer-term reality.

"What people typically forget is that while the dollar is in jeopardy, they will often advocate the alternatives, such as the Euro. For the past several years, our central bank was slicing and dicing interest rates whereas in Europe they were keeping interest rates relatively high. This allowed traders to step in and buy Euros and sell dollars. But if we look at the current environment, the US has seen a dramatic surge in rates, making the dollar that much more valuable. Further, growth in the US is 3% while Europe is just barely coming out of recession. More net investment is now going into the US and this is principally coming from Europe. So from my perspective, the Euro is more likely to be the currency that will suffer and the dollar will be the currency you increasingly want to have.

"More important is the Chinese remnibi, which is fixed to the US dollar. There has been a lot of speculation that the Chinese will change the peg against the dollar. The hype suggests that this will be Armageddon for the US, because once the Chinese abandon the peg, they will abandon buying our Treasuries and interest rates and inflation will go to the moon. But the Chinese also recognize this. Their bread is buttered by US buying of their goods, while the US is also providing their technology and management expertise. From my perspective, the Chinese currency is going nowhere. The other major trading partners of ours are Mexico, and relative to the peso, the US dollar has been climbing quite nicely, and Canada, where despite ebbs and flows we are pretty much where we have been for the last 20 years. Overall, against our major trading partners, the US is not seeing any major currency calamities, contrary to what is being peddled.

"Overall, I think most people are looking at the worst possible things that could go wrong. Right now, we have some fairly significant woes. We have fears over interest rates, there is concern in the oil and gas markets, and we have the war on terror. Given the reports from Homeland Security, that will only get worse and that will weight very heavily on the marketplace. We also have the election one of the most bitter elections in modern history. There is nothing positive that we can see during this vicious battle and it will not be good for the market. Therefore, from my perspective, from now through year-end, the market will react negatively in general.

"For now, I would focus on interest-bearing instruments, particularly in the bond market. During a period of time when the stock market is not doing well or when there are concerns, the best way to get through the problem times is to get paidfrom coupons and dividends coming in every month. Make sure you have a base of cash cows companies and funds that are paying you a lot. That is what is going to provide performance for you, particularly for the rest of this year and into the early part of next. And that is basically where I have core closed-end bond funds. Here are our favorites:

"The first is the PIMCO Strategic Global Government Fund (RCS NYSE). This invests, first and foremost, in US agency securities. It then uses that as a base to invest in other markets throughout the world, capitalizing on their knowledge. The fund is now trading at discount to the actual value of its bonds. It pays off a very nice high single-digit yield and I think that will head higher. The next of our four ‘cornerstone’ bond investments is Templeton Global Income Fund (GIM NYSE). It has a fairly nice yield. This fund invests in US and primary governments around the world. And your can now buy this at a discount, after the correction we had back in April. The more aggressive of my picks is Emerging Markets Income Fund (XEMDX NYSE). This basically provides us with an opportunity to gain some growth. As the world in general expands its economic growth we tend to see the credits and ability to pay improve for governments like Brazil, China, and Korea. As the world expands, they have more credibility, the ability to pay their dividends, their credit ratings improve, and therefore, their bond markets do quite well. In the meantime, they pay a nice dividend. Lastly is the Morgan Stanley Global Opportunity Fund (MGB NYSE). This is something that is fairly attractive right now. The fund throws off a nice dividend yield, and is actually performing quite well.

"As an aside, I don’t suggest going out any buying them in one lump. If you were going to buy these, rather than just picking one, I’d recommend looking at all four of these. Each one has a different focus. The PIMCO fund gives you a lot of US exposure and is the safest and most secure of the four. Templeton Global Income provides with a little more of the international focus and the Templeton Emerging Market gives you a little bit more growth. The Morgan fund will give also give you a little more of that aggressive performance when times are improving. Therefore, the combination of these four will give you fairly good exposure to the overall bond market.

"Within commodities, the petroleum industry has been creating a lot of fervor and we are seeing a lot of hype. I think the biggest gains are already behind us at this point. My general view is that if you are going to be in the oil and gas market, and be in the speculative areas of the market such as exploration and drilling, you need to be very careful. Those stocks go up very nicely during bullish periods, but they fall out of bed when gas and oil head in the other direction. You can lose just as quickly as you gain. An alternative approach is to buy Canadian corporate trusts as a cornerstone of an energy portfolio. The companies that I recommend in this area are long-term buy-and-hold positions. They turned out nice dividends and profits when gas and oil prices were much lower. These are companies you can buy and profit from now and not have to worry when oil prices return to a level of normalcy.

"Among our ‘cash cow’ energy holdings we have three Canadian trusts Advantage Energy (AVNNF Other OTC), Bonterra Energy (BNEUF Other OTC), and Vermillion (VETMF Other OTC). These companies have properties that produce gas and oil. They basically pay the expenses to pump and the administrative costs. They service the bank debt, etc. What’s left overafter setting aside some funds to purchase and develop additional properties is profit, which is paid to us as the owners. All three of these are in the gas and oil industry. All three pay a very substantial dividend. And they all profit quite nicely when oil and gas are doing well. But more importantly, they also will be profitable if oil and gas prices fall to 1998 and 1999 levels. Remember when oil was in the teens? These companies were still quite positive and provided very nice dividends along the way."

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