What a year. There were some great lessons learned including how ups and downs are magnified by leverage.
The goals of this educational service are threefold.
#1: Help each subscriber improve their creative skills for developing investment ideas that serve their specific needs.
#2: Help investors learn how to stick to their good ideas and get out of their bad ones.
#3: Help investors understand multi currency investing because as you will see below…we may need this ability more than ever now.
The Green Portfolio has just been breathtaking on the way up and down. What can we say about this? Big problems create big opportunity. Environmental concerns are one of humanity’s biggest problems and the world is just catching on to that fact. The July drop of over 100% gives us a moment of pause, but as a percentage of the portfolio this drop was less than that of the other portfolios we tracked. In short this was simply the top performer during the good times and bad.
Another significant lesson we can perhaps gain has surfaced in the last several month…the final departure in performance between the US dollar short and US dollar neutral portfolios.
Since this service began in 2006 we have featured both dollar short and neutral type portfolios. I always expected dollar short portfolios to outperform dollar neutrals. They did not…until now.
In 2006 the US Dollar Short Portfolio rose 10.43% and the US Dollar Hedge Portfolio 11.46%. This is not much difference though the performance slightly favored the US dollar, the opposite of what I believed would happen.
In 2007 the Dollar Short and Dollar Neutral continued to vie to be top dog. The world seemed to be struggling with the big question “Is the US dollar the reserve currency of the world or not?” Despite the ups and downs, until early September the performance of these two portfolios tracked closely (see above). The dollar in fact showed strength during the July – August panic.
However once this latest investor stampede slowed down…it seemed that the word went out….dump the buck! From there, the downfall is easy to see. The dollar neutral portfolio still had terrific performance. A 38.67% rise is world class in anyone’s book. Yet 48.19% for the US Dollar Short Portfolio is even better.
This may have been the last time in our lives, that we will see a rush for safety into the US dollar. Many investors and institutions do not agree with this opinion so we shall see. Which ever way the dollar goes we can expect a period of global currency instability that makes multi currency investing more important than ever.
Emerging markets? We were flabbergasted last year (2006) when our two emerging market portfolios rose as they did. The Emerging Market Portfolio rose
42.93% and the Asia Emerging Market portfolio 114.16%. We lumped these two portfolios together for 2007 and the end result was even higher performance!
Obviously Latin equities did well also.
I wish I could sing my praises over such performance…or at least sing the praises of Thomas Fischer and the Jyske team that were responsible for the actual portfolio makeup. I can certainly sing theirs more than mine as they selected the final funds and shares. But let’s not sing too loudly. Yes a huge amount of work, thought, skill, research and experience went into the buildup of these portfolios. Yet this performance is unusual…not to be expected and most likely not repeatable.
A portion of this outstanding performance came from skill, research, good judgment etc. yes. The rest of the performance though came simply because we are riding a wave that would be described by most investment managers in three words…increased risk tolerance.
What most will say is “in recent years, investors have been willing to invest in areas that have greater risk”.
I have a different view. The perception of investors and business worldwide is changing. The old view was that America and Europe were safe places to invest. Emerging markets had the higher risk. I believe a new view is that emerging markets and economies are safer than the old. This is supported by many facts.
The old economies are…old…brittle…slow…all the things that old means. The new economies are young and growing. That is the way things have always seemed to be.
A recent article by the well know investment analyst Jimmie Rogers stated that he was abandoning the US dollar.
My question is “what took him so long”? The idea we have correctly supported in our reports for decades is “the US dollar is headed down and emerging markets are on the rise”.
History is pretty clear on this now. Over the last year the emerging markets index (in US dollars) is up 58.99% compared 23.05 for the world index. Over three years the emerging market index is up 37.88% versus 17.27% for the world index. The emerging market index is up 35.63% compared to the world’s index rise of 18.43% over five years.
Demographics and patterns of business support emerging markets as well. The global economy grew 5% last year. Emerging economies are catching up because the mature economies are growing only 2.3% each year. Yet there is huge room for more growth in poor countries. 1 billion people still live on a dollar a day. 2.5 billion people live on two dollars a day. Western worlds cannot compete with low cost labor like that!
Plus emerging countries tend to be the big exporters now and 20% of all merchandise that is manufactured passes a border. World trade is growing at 10% per annum while world GDP grows at 5%.
This leads to three ideas. First emerging markets remain a good value. Second the US dollar may be weak. Third green investing is in the beginning stages of a mega trend.
With these thoughts in mind here are the 2008 portfolios and the basic idea behind each. You’ll note we broke our promise to track five portfolios and have added a sixth. We could not help it! There are so many good ideas that we are like kids in a candy shop. We could have also added a commodity portfolio, an oil portfolio and an aggressive dollar short portfolio…we thought about each…but we can’t do everything.
Here are the ideas.
Green Portfolio. Environmental investing is a beginning mega trend. We had shares of good value in the 2007 portfolio with share values supported by earnings and growth prospects so we have not touched this portfolio. We have however reset the value. This portfolio began again November 1, 2007 with $100,000 invested and $200,000 borrowed in Japanese yen.
Emerging Market Portfolio. The same fundamentals apply here as with the Green Portfolio. Good values are supported by growth and earnings keeps this portfolio in our basket for a third year. We did make one rather major change by eliminating the 15% Far Eastern Equities and increasing the Turkish equities from 10% of the portfolio to 25%. We also eliminated the Czech koruna loan and borrowed 50% Swiss francs and 50% Singapore dollars instead.
Asia Dollar Short Portfolio. Since I have closed all my loans personally, Jyske accepted my suggestion to try one portfolio without leverage. This is the one we chose. We reduced leverage but dropped bonds and invested in a spread of global equities instead. This is not really a dollar short portfolio…rather a portfolio of non US dollar equities that gives a broad distribution around the world that should do well if the greenback weakens more.
Danish Health Portfolio. Health is such a big issue world wide that we want to see what an investment in this sector will do. Denmark has some great health oriented companies so we chose this portfolio.
Infrastructure Portfolio. London Bridge is falling down. So too are bridges in Minneapolis and all over the Western world! Roads are crumbling, airports are inadequate and more. America ’s and Europe ’s infrastructure needs to be renewed and the companies selected may profit from this.
Blue Chip Portfolio. One prominent feature we saw in the portfolios we tracked these last two years has been the panics. The world is not convinced yet that emerging markets are the places to go. Plus emerging markets are highly leveraged, especially with Japanese yen loans. One lesson we learned from the panics of the last two years is that equities recovered the best after each panic. There are many scenarios we can imagine that will cause a 2008 panic including further fallout from the sub prime loan disaster, a slowing US economy and over $100 a barrel oil. Last go round investors fled to US dollar bonds. As noted above the flow to US dollars last July could have been the last time in our lives, that we will see a rush for safety into the US dollar. If there is a 2008 panic we are thinking that investors will flee into Blue Chip, mainly non US dollar, equities…and this portfolio will do well.
Thomas Fischer just wrote:
“Attached our new sandwiches – they were set -up with the prices from October 30th and they have thus all minor movements. The Danish Health is down about 3% as Neurosearch was down 5% yesterday. We have another exciting year ahead of us and I look forward to track the sandwiches and participating in your events in 2008. Thomas”
2008 looks exciting for sure and we look forward to sharing it and these ideas with you. See the attached file.