Here is a re-print of my latest research piece . . . Enjoy!!!
Scout International Fund – UMBWX
Lee Munson and Lorn Davis interview James L. Moffett
In the world of mutual funds, only a handful of names stand out and James L. Moffett, CFA stands tall among them. Running the Scout International Fund (Ticker: UMBWX) since its inception in 1993, Mr. Moffett has garnered a reputation for running a tight ship that repeatedly beats its competitors and the domestic market over the long term. His strategy has remained consistent and simple: look at the international economic, political, and market conditions to choose which countries to invest in. Then, select the best blue chip companies each country has to offer in view of each economy’s prospects. Read the rest of this entry »
I was right about BAC – buying this morning. But doesn’t mean it will go up . . . You should all be scarred when Goldman uses your money to trade for their own account and swing for the fences. . .
Co-Written by Lee Munson, CFA, CFP®, and Lorn Davis
Though investors are constantly preoccupied with the future, it is always beneficial to take a moment and look backwards to rediscover the things that have fallen through the cracks. One such thing that we at Portfolio Asset Management have recently revived from the history books is the un-weighted average percentage gain of all traded stocks on the NYSE. It’s a great indication of the overall sentiment in the market and can be used to create an index to compare with the S&P 500 and the Dow. This index is then used in detecting divergences with the Dow and S&P 500. So, for example, if the Dow and S&P 500 are in the middle of a rally but the average stock’s average gain is comparatively weaker or negative, we can then presume that the rally is deteriorating and narrowing down to the large-caps only, this comes from the S&P 500 and Dow giving a highly skewed image of what is happening in the market due to their weighting system which allows for a handful of Goliath-sized stocks to be the primary data for the calculation of the index. If the average stock’s average gain is leading, we can presume that there is broad participation in the rally and action is lively even for the smaller stocks.
It used to be that you could get the average stock’s average gain easily through the ticker symbol QCHA (Quotron Change) as legend “Buzzy” Schwartz relates in his book “Pit Bull”. But with the proliferation of more focused indices, information regarding the average stock seemingly lost its appeal to investors and consequently the QCHA or any other alternative faded into history. So when we decided at the firm that we wanted to include this indicator in our arsenal we needed to figure out a method to calculate it ourselves, which entailed getting the closing quote table for all traded stocks on the NYSE each day and calculating the average percentage gain from that data. But because we have found this information so useful in our trading, we have mentioned it to others in the investment community and found them to be so intrigued that they wished to include the average stock’s average gain in their indicator set as well. Keep in mind Barron’s runs the QCHA numbers but only at the end of the week, not each day like we do. This prompted us to consider the usefulness of this indicator in this modern age may be directly related to the crowded arena of overly specific indicators and indices tracking minute market details that had originally led to the QCHA demise. Therefore we believe it to be of value for the rest of the investment community to take a closer look at this “dated” indicator and, from its utility, realize that there is always merit in looking backwards. And not just to price histories and annual reports, but also to the techniques and approaches that were used in the past.
Here are the tapes from today’s interview regarding how to make money off of swine flu. I know, that sounds bad, but it could be a great opportunity to buy stock in firms that sell off more than they should based simply on the fear. But, remember that if things get bad out there, you really could make your portfolio sick . . . Boy, I almost didn’t make it to the show due to the Albuquerque Balloon Fiesta. The streets were clogged due to an emergency landing in the street.
Matthews Pacific Tiger (MAPTX): The Real Deal
Co-written by Lorn Davis
Investors looking to recuperate losses from last year’s painful descent in the equity and fixed-income markets have been quick to jump on the BRIC bandwagon as it started rolling quickly in March. However when dipping their toes into the volatile and dangerously risky emerging markets, excellence in investment technique and analysis becomes even more important. At Portfolio Asset Management we hold a sizeable position in Matthews Pacific Tiger Fund (MAPTX) which invests in the large region of Asia with the exception of Japan. Our Chief Investment Officer, Lee Munson, generally prefers Asia oriented funds when searching for emerging markets versus a wider scope. Part of this is a bias against the soviet block that tends to be more of a kleptocracy than a wild free market experiment like China. Investing in Asis, however, needs a specialist that can focus on the region. Since short selling and diversification are not as widely practiced or culturally ingrained in Asia the fund has a long only bias. While our firm does not like long only posturing, we understand this as a reality in investing in Asia, at least for the time being.
Matthews is the largest Asian markets only collection of funds in the U.S. Launched in 1991, MAPTX has a long-term viewpoint that is key to investing in a region that is relatively new to deregulation and business growth under free market practices. These economic developments have certainly attracted interest from investors but have also led to serious volatility and confusion concerning cultural and governmental influence upon the markets. With the increasingly delicate relationship of the Chinese government with its own economy, not to mention with the global economy, we should treat China with caution and true fundamental analysis as opposed to blind optimism. This reinforces why we think an institution dedicated to understanding and intelligently investing in this region is so attractive. The next question we must ask ourselves as investors is: who are the managers and how much trust (i.e. capital) can we put in them as our gateway to this treacherous investment landscape?
The fund is managed by Richard Gao and Sharat Shroff, both of whom have extensive backgrounds in working in the Asian market with an emphasis on China. Mr. Gao began working for the Bank of China in 1989 and soon headed FOREX trading for import/export companies. He remained at this position until 1997 when he transferred over to Matthews to become a China Analyst. His experience working with import/export companies will be critical now as China attempts to stimulate its export based economy with falling worldwide trade. He quickly ascended to the position of Portfolio Manager after 2 years as an analyst running the China Fund and then MAPTX in 2006. Mr. Shroff provides another perspective to the fund as he spent most of his career prior to Matthews working as an Equity Research Associate for Morgan Stanley and holds the CFA charter which fulfills our expectation for the kind of bottom-up fundamental analysis the fund utilizes. The co-portfolio manager, Mark Headley, was on the team that launched the first SEC-registered open-ended Asia (without Japan) fund and has been on the MAPTX team since 1996. These managers have all had careers centered on the Asian markets and are each involved in managing different country specific funds which should help in bringing a synergy of expertise to Matthews Pacific Tiger. The research team provides many “windows” into their current market thoughts through monthly and weekly reports which comment on topics pertaining to the Asian Pacific region and respective markets. This information gives the investor an articulate look at how professionals view the Asian markets and provides a level of transparency that aids in gaining trust and capital.
The fund’s Q2 performance was 41.53% vs. the MSCI All Country Asia ex Japan Index which rose 34.98% and the YTD performance for MAPTX is 37.56% vs. 35.87%. But because this is intended to be a long-term, fundamental play these numbers, though impressive, shouldn’t hold as much weight as the longer term track record. That’s where the fund really shines in comparison to its benchmark. Since inception in 1994 the fund has returned 7.67% vs. 2.09% and again for 10 years the fund outperformed the benchmark 10.29% against 5.39%. Quite a significant difference and a testament to the reason managers are what make the fund in this field. The fund might not have been the best performer on a quarter to quarter or year to year basis in the past compared to funds that were overweight in Chinese equities, but it also fared far better than those funds when the pullback happened last year. The fund’s portfolio suffered in Q3 of 2008 but still beat its benchmark by a wide margin, thanks to exposure to Indian financials and consumer staples. This is why we like this fund and think it wise to avoid 90-95% of mutual funds in general. Most funds can’t even beat their benchmark and as such cannot add value to an investor’s portfolio. The team behind Matthews Pacific Tiger has a clearly defined long-term, value-oriented viewpoint that has been consistent in the past and managed not to blow up like the rest of the market did. That still doesn’t mean we don’t fluctuate in our weighting of MAPTX in our clients’ portfolios, adding and pulling out capital depending upon our own macroeconomic views, but we know the managers at the fund are good at doing their jobs and we can always rely on them to handle a region we don’t necessarily understand and a long-only strategy we would not employ ourselves.
In their 2009 second quarter commentary the managers discuss the recent Asian markets’ equity rally that has been developing into the third quarter and expressed contentment about their strategy of pursuing growth from domestic consumption that has been hitting their earnings expectations. Interestingly enough they are finding there is relatively more stable demand from smaller cities and rural areas which benefit from consumer related companies. They believe this comes from the increasing price of agricultural commodities and improved availability of credit. Retail sales are making positive advancements in China, India and Indonesia. However, the method the Chinese use to report their numbers may convey an overly optomistic outlook. One particular example that affects the retail sales number is the reporting of shipments as being sold when in reality it may take a while for those products to actually be sold in the market.
Promising long term developments in the macroeconomic outlook for the Asia/Pacific region exist including the first instance of a mainland Chinese company investing directly in a Taiwanese company and could be a sign of greater integration between the two economies. Furthermore, the political developments in India and Indonesia have positive implications. Those that are in power now have a more serious inclination to promote freer markets. This had a definitive impact on the performance of the portfolio recently as the fund is overweight India and Indonesia and underweight China and Taiwan relative to its benchmark, though the decision to be so had nothing to do with political prediction but rather good old fashioned fundamental analysis of the growth potential of the markets. This kind of foresight will probably buoy the fund as we start to see investors regain risk appetite and start speculating in Asian markets en force.
Ultimately, we invest in MAPTX for the long-term growth opportunities in a foreign market that is managed with a long-only strategy, by managers who have a clear view on what is going on in the region and are not just following a trend like so many other funds. The relative performance of the fund since inception is impressive and this year’s strong performance shows us the managers are working hard to continue their positive track record. We like that the fund is currently underweight in China because, we’re wary of the Chinese lending practices and don’t wish to get caught in a major pullback if an asset bubble bursts.
