On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
4 Funds for Emerging Market Growth
07/11/2011 7:00 am EST
In today's interview, Craig Hillegas of Hillegas Advisory Services tells Kate Stalter how, over the longer term, emerging nations are the place to be. He also shares some of his top picks for mutual funds and ETFs to capture infrastructure and agricultural opportunities.
Kate Stalter: We're joined today by Craig Hillegas of Hillegas Advisory Services in San Diego. Thank you so much for joining us today, Craig.
Craig Hillegas: My pleasure.
Kate Stalter: Give us your take on the current market. What do you think individual investors really need to be aware of these days?
Craig Hillegas: If individual investors just look to what's happening both here at home and abroad, whether it's Greece or Washington, DC, one disturbing fact is that our shorter-term futures are in the hands of politicians. I don't know about you, but that makes me a little nervous, because they're prone to kick the can down the road.
So, I think it's prudent at present to be a bit more cautious, and also opportunistic with investment themes. It's good to have some dry powder to be able to pick up positions on sale, and to favor some investments that provide some downside protection.
An investment that uses a covered call or put strategy, like the Gateway Fund (GATEX), would be one example. There's also a unique PIMCO investment, their Global Multi-Asset Class Fund (PGAIX) that actually buys a type of insurance-like or put protection that can come into play should the market decline in a significant manner.
PGAIX is intended to be an all-weather investment vehicle that protects against the risk of a big market decline. It includes global diversification of stocks, bonds, emerging market, real estate, and commodities, and it's run by PIMCO's chief investment officer, Mohamed El-Erian.
Kate Stalter: Are there any sectors right now, Craig, or global regions that you see as showing particular strengths that investors should be looking at?
Craig Hillegas: A couple of my favorite sectors, at least longer term, are going to be listed as the tailwind sectors, those that benefit from our global population moving from seven billion to nine billion.
They benefit from growing urbanization in the emerging-market countries such as Brazil, India, China, the rest of Asia, and infrastructure. About $40 trillion will be spent on infrastructure over the next 20 years, so that's a huge tailwind if you have $2 trillion going a year into various infrastructure projects.
There are some specialty managers and even closed-end funds that work in that area. T. Rowe Price has the Global Infrastructure Fund (TRGFX), as does Cohen & Steers.
The Cohen & Steers Infrastructure ETF (UTF) has the added benefit of going on sale, being a closed-end fund. So it sells at a price lower than the actual component securities. It's common to be able to purchase UTF for a 10% discount.
Kate Stalter: Anything right now you think investors should really shy away from because it's showing weakness?
Craig Hillegas: Well, emerging markets are pricey, expensive, and scary right now, in large part because of what could happen to China, and China's debt. They've made a lot of bank loans to local governments, and that could end up posing a threat to their banking system, and they're trying to slow down their economy.
So, based on current valuations, I'd shy away from a big exposure to emerging markets-the equities-at present. When they correct, that would be an excellent time to make some substantial purchases.
I think now is not the time. When you do want to invest in emerging markets, it's best to do it incrementally with multiple purchases over a period of months.
Kate Stalter: Let's turn to some of the investment vehicles that you are using with your clients right now, that you believe individual investors should be taking a look at.
Craig Hillegas: Okay, absolutely. In keeping with that global energy-commodity theme: MLPs, or Master Limited Partnerships that invest in pipelines, can be very generous income-producing investments.
You can get 5% to 8%-plus cashflow yields, and the hope of capital appreciation over time.
For instance, the SteelPath MLP funds enable investors to avoid the nasty K-1s that they receive for tax reporting. They issue simple 1099s, so you can get about a 6.2% yield with the SteelPath MLPs compared to about a 3.2% yield with a ten-year Treasury.
One example, in keeping with that natural resource theme, is an agricultural ETF, the Market Trust Agribusiness (MOO). I'd recommend that on a pullback.
I wouldn't buy it now, but with the world population growing, the people in China and India-one of the first things they look to do is have more protein in their diet and spend more money on food, so that should be an excellent long-term play, along with water-type resources to fuel the agribusiness. So, another symbol there is PowerShares Water Resources Portfolio (PHO).
Kate Stalter: Okay, any other funds or ETFs or any other instruments that you'd care to mention here?
Craig Hillegas: Well, closed-end funds, because they can be purchased on sale, can provide a real compelling opportunity.
Closed-end funds issue a fixed number of shares, and then they're traded on the stock exchange and so the price is determined by the market environment and the attractiveness to a buyer and seller. So it's possible to get a margin of safety by buying these investments at a 5% or 10% discount, or more, that can provide quite an added cushion and also generous income.
It's common to be able to get a 7% or 8% income yield and capital appreciation over time, so one of the best ways to access this space is just to outsource it to a specialized manager.
Cohen & Steers happens to have one called the Cohen & Steers Closed-End Opportunity Fund (FOF), managed by Doug Bond, who has offered over $50 billion during his career of new closed-end fund offerings.
Presently, that investment has a generous 7.7% distribution yield and sells at a 7% discount below the publicly traded net asset value.
Once again, same caveat: Buy it incrementally. And should investors in the market panic, I wouldn't be surprised if you'd be able to pick that up at a 10% or more discount.
Related Articles on FUNDS
Investors often ask me how to build a portfolio that holds its own in down times but hands them soli...
Real estate investment trusts (REITs) have been in a trading range the last couple of months, but th...
What a great few days at MoneyShow San Francisco! The show was larger than it had been in several ye...