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Investing in the French Socialist Paradise

Written by Nicholas Vardy, CFA.

SNAG Program-0829

As I write this, I am on the Eurostar train whizzing back from Lyon, France's "second city," to London. I've just spent a few days touring Bourgogne (Burgundy) — arguably the center of the most exclusive wine region in the world.

It also gave me a chance to read and watch the local media in a country that many Americans may visit, but few would ever invest in.

Today, the French economy is in a funk, a blot on the euro zone's economic recovery, despite the economy expanding by 0.6% in Q1 following zero growth in the previous quarter.

Not surprisingly, the educated French are voting with their feet. Thanks to the French socialist government's policy of charging income tax to high earners of up to 75% until December 2014, London is now chock-full of French expatriates. In my London neighborhood of South Kensington, you hear French almost as much as you do English. And as I saw on my last visit there, Silicon Valley is also chock-full of French engineers.

Things looked a lot different in 2007 when French voters gave the son of a Hungarian, Nicolas Sarkozy, a sizable mandate to pursue market reform.

Opponents of Sarkozy derided him as an "American conservative with a French passport." Libération, a left-leaning newspaper, described him as "Thatcher without the skirts."

As well-known left-wing commentator Bernard Guetta noted on French radio:

Almost 30 years late... France has at last taken the liberal turn that Margaret Thatcher and Ronald Reagan gave the world. Others will say that after three decades of resistance, France has been caught up by international change — the retreat of the state and the pre-eminence of the market, which it could no longer avoid. Some are rejoicing, others are deploring it but the fact is there.

Well, the left got its wish.

Five years later, Sarkozy was ousted and France lurched back to the left after the election of socialist Francois Hollande in 2012.

And France's economy is paying the price...

The Surprisingly Productive French

Take politics and economics out of the equation, and France does have a lot of things going for it.

Most obviously, the French are remarkably thin and healthy-looking. This despite the fact that smoking has not gone out of style. The women are elegantly dressed. We Americans and Brits look positively frumpy in comparison.

The trains run on time. And they are fast as heck. The distance between Paris and London is about 307 miles, and it takes about 2 hours and 15 minutes to travel between them. That's roughly the distance between Philadelphia and Boston — and what is at best a five-hour train ride.

Stores, at least in small towns, are more often closed than open. You have to organize your day around the few hours you'll actually find someone available to sell you something. It is almost as bad as trying to get the attention of the smoking and bantering waiters at a restaurant.

With this kind of work ethic, you may be surprised to learn that France is one of the most productive economies in the world.

I suspected that was because they get a lot more done in the few hours that they do work.

Statistics confirmed my suspicion. In 2013, output per worker in France was 13% higher than in the United Kingdom. But because Brits work longer hours than the French, on a comparison of Gross Domestic Product (GDP) per hour, the difference jumps to a whopping 27%.

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A Golden ‘Catch-Up’ Opportunity

Written by Nicholas Vardy, CFA.

SNAG Program-0828

This week, I want to share with you the insights of a seasoned global investor and friend, Carl T. Delfeld of Blackthread. Carl has a unique "boots on the ground" perspective on the investment opportunities in Asia and has led dozens of investors on exploratory investment trips to the region. I value his opinions, and I'm sure you will too.

By Carl T. Delfeld

When my Blackthread group of investors soon visits Singapore, we'll begin our adventure with a Tiger beer at the famed Raffles Hotel's long bar. Built in 1887, the hotel reeks of colonial ambiance and is named in honor of Sir Stamford Raffles, who founded the trading port of Singapore in 1819 with William Farquhar.

And during the long flight to Asia, I'm encouraging members to read Victoria Glendinning's great new biography, "Raffles: And the Golden Opportunity."

Raffles was an ambitious political entrepreneur keen on offsetting growing Dutch influence in the region from its base in Java (Indonesia). Largely on his own initiative, Raffles wisely decided on the island of Singapore and then signed a Treaty of Friendship & Alliance with the Sultan of Johor just nine days after landing with his party.

Singapore was a huge success from the get go as a free port with no customs duties and open to ships from all nations.

Raffles would be amazed to come back today and see what Singapore has become.

While only one-fifth the size of Rhode Island and three times the size of Washington, D.C., Singapore is the "Switzerland of Asia," boasting the world's biggest budget surplus relative to economic output. It is perhaps the most strategically important global trading, finance and service nexus in Asia.

Singapore is the busiest port in Asia, situated next to the vital trading channel of the Straits of Malacca, through which 37% of global shipping and 80% of China's oil pass. Singapore's annual trade volumes are a stunning four times the size of its economy.

It is one of only seven countries in the world to enjoy an AAA credit rating. Surprisingly, some firms are moving manufacturing centers from China to high-cost Singapore due to its infrastructure, logistics and laws protecting intellectual property.

Singapore is a good proxy for many investors, since its companies invest heavily in neighboring countries. Over dinner with the CEO of Singapore's premier private bank, our discussion seemed to move back and forth like a ping pong match between the challenges facing America and the incredible boom in Southeast Asian wealth.

An Opportunity for Catch-up Profits in Vietnam

But if Raffles was a young man today, there is no doubt in my mind that he would head to a country like Vietnam for fame and fortune. Why? A just-released, fact-filled report from the Union Bank of Switzerland (UBS) does a nice job of making the case for investing in Vietnam right now.

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Why ‘Smarter’ is Always Better

Written by Nicholas Vardy, CFA.

SNAG Program-0827

Some things just get better with age.

Other predictions prove prescient, confirmed with the benefit of 20:20 hindsight.

Both of these clichés apply to my views on the recent explosion in "smart-beta" exchange-traded funds (ETFs).

First, over the past several years, "smart-beta" ETFs just keep getting both better and smarter. New strategies continue to emerge that are consistently outperforming traditional, market-cap-weighted indexes.

Second, the trend toward better and smarter in the ETF world is something I expected would take firm hold of the investment community. What was dismissed 18 months ago as a passing fad is the driving force behind ETFs overtaking hedge funds in terms of assets.

Back in November 2013, I gave a presentation, "Why Smart Beta is Intelligent Investing," to a group of elite financial advisors in London.

I summarized my speech at that time in an issue of The Global Guru.

At that time, I told my audience that smart-beta ETF assets had grown an astonishing 43% during the first nine months of 2013 versus 16% growth in total ETF assets. I also wrote that these funds had attracted $45 billion in new investment during 2013.

Fast forward 18 months, and smart-beta ETFs remain all the rage in the investment world, proving that in terms of marketplace popularity — "smarter" truly is better.

A Banner Year for Smart Beta

According to data from Invesco PowerShares, 2014 was a landmark year for both the ETF world in general and for smart-beta ETFs in particular.

The data shows that smart-beta ETFs accounted for more than 17% of net domestic ETF inflows in 2014. That's a remarkable statistic when you consider that smart-beta funds represent less than 11% of the total ETF asset pool.

At last count from Invesco PowerShares, there were about 350 smart-beta ETFs available to U.S. investors, and the total value of those assets is more than $230 billion. That figure is up from a mere 212 smart-beta funds in 2010 that had less than $65 billion in assets.

Smart-beta ETFs now have become popular among the general investing public, and not just with savvy investors and "early adopters" like yours truly who saw their value years ago.

Today, institutional investors, public and private pension and endowment managers and all sorts of professional money managers rely on smart-beta funds to be, well, "smarter" than the market.

So, what are smart-beta funds, how do they work — and why do I think you should be invested in them?

The Heart of Smartness

I wrote the following when describing smart-beta funds in the aforementioned Global Guru issue dated November 26, 2013.

Traditional index funds provide investors exposure to the performance — or beta — of any market. The strategy is straightforward. You buy all of the securities in an index and weight them based on their size or market capitalization.

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE

April 2015

The "Ivy Plus" Investment Program gained 1.26% for the month.
The "Global Gains" Investment Program rose 4.85% for the month.
The "Double Your Dividends" Investment Program added 1.98% for the month.
The "American Alpha" Investment Program dipped 0.36% for the month.
The “Masters of the Universe” Investment Program gained 3.01% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
SOLID MONTH LED BY FOREIGN STOCK GAINS


The "Ivy Plus" Investment Program gained 1.26% for the month. The program is up 4.68% year-to-date, through April 30. Twenty-two out of 26 positions have posted gains for the year.

Strong performing global stock markets helped the “Ivy Plus” Investment Program generate solid gains in an otherwise weak month for mainstream U.S. markets. Among U.S. stocks, only the S&P 500 Equally weighted strategy eked out a 0.41% gain.

Emerging markets led the way rising 7.41%, with Emerging Markets Small Cap and Low Volatility not far behind with gains of 5.67% and 5.46%, respectively.  International Real Estate also posted gains of 5.08%. Developed small cap and large cap markets generated solid gains of 4.29% and 3.87% respectively.

Of special note so far this year are the unusual trifecta of double digit gainers in 2015- Developed Market Small caps up 10.45%;  Private Equity up 10.35% and International Real Estate up 10.52%.

The “Ivy Plus” investment program positions performed as follows:

 

Monthly Gain

YTD Gain

Equities

 

 

 

 

 

US Large Cap

0.62%

2.29%

US Mid Cap

-3.40%

3.77%

US Small Cap

-2.04%

2.96%

Developed Large Cap

3.87%

9.70%

Developed Small Cap

4.29%

10.45%

Emerging Markets

7.41%

9.89%

Emerging Markets Small Cap

5.67%

8.29%

Emerging Markets – Low Volatility

5.46%

9.89%

Private Equity

5.40%

10.35%

Business Development Companies (BDCs)

0.89%

6.15%

S&P 500 Equal Weight

0.41%

2.07%

S&P 500 Dividend Payers

-1.04%

-0.40%

Initial Public Offerings (IPOs)

-0.78%

6.32%

Corporate Spin-offs

-0.97%

5.05%

 

 

 

Fixed Income

 

 

 

 

 

US Treasuries

-0.32%

1.29%

Foreign Bonds

1.96%

-2.11%

Inflation Protected

0.68%

2.10%

High Yield Bonds

1.52%

4.05%

 

 

 

Real Assets

 

 

 

 

 

US Real Estate

-5.85%

-1.40%

International Real Estate

5.08%

10.52%

Timber

-1.21%

1.93%

Agriculture

0.98%

-0.41%

 

 

 

Hedge Funds

 

 

 

 

 

Global Macro

0.95%

0.54%

Hedge Fund Long/Short

-1.29%

5.46%

Managed Futures

-1.47%

0.14%

Hedge Fund Managers

1.45%

1.80%

THE "GLOBAL GAINS" INVESTMENT PROGRAM
GLOBAL MARKETS RALLY STRONGLY


The "Global Gains" Investment Program added 4.85% for the month. The program is up 8.35% year-to-date, through April 30. All 10 positions have posted gains for the year.

The Global Gains Program had its strongest month in recent memory, with emerging markets breaking out strongly to the upside. Investing in the cheapest stock markets in the world, Global Value soared 9.16%. Emerging Markets and Emerging Markets low volatility also jumped an impressive 7.26% and 5.46% respectively. The first two of these positions are now up by double digits in 2015, and are joined by non-US. small cap stocks, which are up  10.45% in 2015.

Also of note is the fact that all positions in the “Global Gains” Investment Program are up by at least 8.69%, with the exception of Frontier Markets, which have struggled to remain in the plus column in 2015.

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Why Investing in Japan is Still a No Brainer

Written by Nicholas Vardy, CFA.

SNAG Program-0826

Financial markets enjoyed two significant milestones last week.

The first one occurred in the United States. The other happened across the Pacific Ocean in the Land of the Rising Sun, Japan.

In the United States, the NASDAQ hit its first new all-time high since the dotcom bubble peaked in the year 2000.

In Japan, the benchmark Nikkei 225 closed above 20,000 for the first time since March 2000.

The gains in the Japanese stock market have been particularly robust, with Japanese stocks near the top of the 46 global stock markets I monitor daily at my firm Global Guru Capital.

NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

As of yesterday's close, the unhedged bet on Japan — the Japan Index MSCI iShare ETF — is up a cool 18.15%.

The WisdomTree Japan Hedged Equity Fund (DXJ), a fund that's pegged to the Japan market and also effectively hedges out the negative impact of a falling yen relative to the U.S. dollar, also delivered nicely for subscribers to my Bull Market Alert advisory service.

It was last Nov. 2 that I recommended subscribers add DXJ to their portfolios. At that time, the fund traded at a dividend-adjusted $49.34. As of Monday's close, shares traded at $57.91, which translates into a solid gain of 17.4%.

The good news is that those kind factors are still in place, even as other positive factors emerge to support the stock market surge in the Land of the Rising Sun.

Fueling the Japanese Equity Flame

As I wrote in November, a remarkable divergence surfaced between the monetary policies of the central banks of the United States and Japan.

The very same week the Federal Reserve shut down "QE4," with its announcement that its bond-buying program had ended, the Bank of Japan (BoJ) fired up its printing presses to inject trillions of yen more into its financial system.

The BoJ's move last November was a big surprise, both in terms of its timing and its size. Overnight, the BoJ upped its annual target for expanding the monetary base from 60 to 70 trillion yen to 80 trillion yen ($724 billion).

To put that in perspective, this meant that the BoJ was now committed to purchasing the equivalent of more than double the amount of new bonds actually issued by the Japanese government.

To use Ben Bernanke's famous metaphor, it was like throwing money out of helicopters to stimulate the economy.

If that weren't enough, the Japanese Government Pension Investment Fund, the world's largest pension fund with approximately $1.1 trillion in assets, announced that it was increasing its allocation to stocks. The fund boosted the overall equity allocation to 25% from the previous allocation of 12%.

While I thought betting on the Japanese stock market going up was a no brainer, I caught a lot of flak from folks who disagreed with my analysis.

And besides, weren't the Kyle Basses of the world actually shorting Japan?