If you didn’t pay close attention to Steve Chapman when I interviewed him here in Money and Markets last year, you may want to listen more carefully now.
He named some of the mutual funds his clients were holding, and each of those is up nicely since, even after the corrections we saw in May and June.
Plus, he said he was avoiding investments in the broad U.S. stock indexes like the S&P 500 and the Nasdaq. And sure enough, those indexes have gone virtually nowhere this year, even after the strong rallies you’ve seen in the last few days.
- The S&P 500, for example, closed last year at 1,254; last night it was at 1,298, up a meager 3.5% for the year.
- The Nasdaq, meanwhile, closed last year at 2,218 and ended the day yesterday at 2,157, down 2.8% for the year.
Not exactly a way to make good money, especially in light of the risk you’re taking with the natural vagaries of the market.
As a portfolio manager for individually managed accounts at our separate affiliate, Weiss Capital Management, Steve Chapman’s views are not necessarily the same as ours in Money and Markets. Nor does he always agree with us about the timing and direction of the stock market.
But in a broad sense, he has a similar investment philosophy. And for the past three years, his primary investment focus has been in some of the same areas we have been highlighting here: Energy, natural resources and emerging markets.
Steve works out of Weiss Capital Management’s separate facility near the PGA Resort, which is virtually across the street from my home here in Jupiter, Florida.
Yesterday I stopped by, and I grabbed the chance to follow up on our earlier discussion …
More Profits and More Risks
Interview with Steve Chapman,
Vice President and Portfolio Manager,
Weiss Capital Management
Martin Weiss: Last year, you named some of the mutual funds you had your clients in at the time such as Eaton Vance Asian Small Companies (EVASX), Fidelity Select Energy (FSENX), Oppenheimer International Small Company (OSMAX) and Goldman Sachs Emerging Markets Debt (GSDAX). What’s your position with these funds right now?
Steve Chapman: I’m staying the course. The clients in our All Star Growth program owned them then, and they own them now. My philosophy is simple: These funds have continued to deliver outstanding performance. So if it ain’t broke, why fix it?
Martin: But in May, the energy sector suffered a correction. So did the emerging markets. What did you do about that?
Steve: I made some minor, mid-course adjustments. I reduced my exposure to the emerging market debt. And I increased my cash position.
Martin: Good for you! But that was then. What about now? Any more adjustments you see on the horizon?
Steve: Yes. I’m getting ready to reinvest now, and I’m going to also look a bit closer to home — including developed, mature economies. I’m seeing a bit more risk in emerging markets, and actually, I think the entire world is getting more risky.
Martin: Please explain.
Steve: I’m wary of all the things you’ve been warning your readers about in Money and Markets. Plus I’m wary of some things you haven’t talked about very much in Money and Markets.
Martin: Examples?
Steve: You’ve talked about Iraq and Iran. But you haven’t talked about the growing feud between Japan and China. You’ve talked about overseas wars, but you haven’t talked about homeland security … or the lack thereof. You’ve warned your readers about the threat of inflation, but I haven’t heard you saying much recently about the slowdown in the economy.
Martin: So overall, you’re scared right now?
Steve: Not scared. Cautious. And not just right now, but always. I’m always very conscious of risk. No matter what’s going on in the market. I’m like the guy walking down Main Street in the Old West: I try to watch my back at every step of the way.
But that doesn’t mean I’m going to hide and sulk into a corner. Heck, if you do that, you stand to miss what I think are some of the most amazing opportunities of our era.
Take Eastern Europe, for example. Nowhere else in the world do I see higher educational standards. You and Elisabeth own the Weiss School for gifted children. You deal with education all the time. So you should know exactly what I’m talking about.
In Eastern Europe, they’re highly educated and very skilled, especially in math and science. And nowhere else do I see such utter eagerness to reach the standard of living that their Western European neighbors enjoy. They’re willing to work for extremely competitive wages.
That makes the area fertile ground for Western companies looking to outsource … and looking for acquisitions. Between the two, it’s a powerful force boosting Eastern European investments, in my view.
Eastern Europe vs.
Other Emerging Markets
Martin: Most people lump Eastern Europe with other emerging markets. But you don’t. Can you share with our readers what you think the differences are?
Steve: Gladly. They’re far removed from the line of fire, from the turmoil you see in other regions. Their culture and people are more modern, without lots of the obstacles to growth you see elsewhere. Their political systems are stable and, remarkably, very democratic.
And if they’re not already a member of the European Union, they’re at least taking some firm steps in that direction.
One of the big risk factors in emerging markets is the stability of the currency. So when you have an anchor, like the euro, which they’re trying synch up with, that helps make me a bit more comfortable, especially in a shaky world.
That’s why I’ve had some of my clients in the Metzler Payden European Emerging Markets Fund since August 2005. The fund specializes in countries like Russia, Hungary, the Czech Republic, Poland and Romania. It gets five stars from Morningstar. It gained 27.84% this year through August 16. And its three-year return is a nice 47.37%.
BRIC Countries
Martin: Last time we spoke, you also liked Latin America, India, China, Has your view changed?
Steve: No. Latin American countries have vast natural resources. Demand for these resources continues to increase. Supplies remain constrained. They’re hooking up with China. And I think their companies are in the right place to benefit from this demand-supply squeeze.
I’m also a big believer in the BRIC countries — Brazil, Russia, India and China. The way I see it, these four are likely to outperform all other emerging markets, excluding the Eastern European countries.
Martin: What do you see driving the BRIC countries’ growth?
Steve: China. But I think investors need to ask two questions: “What does China need? And what does China NOT need?”
We know China does not need labor. They have plenty, and they’re doing a lot of the world’s heavy lifting.
Most people may not realize this, but they also don’t seem to need steel. China has a surplus of steel. So that’s not where I’d put my money right now.
Meanwhile, look at all the world resources China is gobbling up: Among the world’s five major commodities, China is the number one consumer of every single one except for oil. That’s one heck of an appetite.
(Editor’s note: It’s “only” the number TWO consumer of oil.)
And they’re just warming up. Right now, for example, reliable sources estimate that …
Only 18% of rural Chinese own refrigerators.
More than 64 million people in China live on only $117 a month, a population larger than the UK’s.
A staggering 300 million citizens currently lack potable drinking water.
Oil Correction Again?
Martin: Oil is down in the last few days. Once again, we’re hearing talk about lower prices ahead. What do you think is really happening here?
Steve: A couple of miscellaneous items: They supposedly declared “peace” in the Middle East. They downgraded the forecast for hurricanes for this year. They came up with a couple of reasons, but none of that trumps the key factor here.
Martin: Which is …?
Steve: We have no evidence yet of a fundamental change in habits in America. The overwhelming majority of Americans are driving the same cars they drove months ago, the same distances and in the same way. So my view is that the oil price decline you’ve seen in recent days is just one of those natural market fluctuations.
Moreover, the oil stocks I like are still coming out with record-smashing earnings and are still valued very fairly in my opinion. Low PEs.
Martin: So how do you play those?
Steve: I use Fidelity Select Energy (FSENX). Also, I have Fidelity Select Energy Services (FSEXX). And I’ve kept these in the portfolio pretty much since I launched my All Star Growth strategy in August 2004.
India Catching
Up to China
Martin: Last time you told us why you like India. For the sake of readers who may have missed it, can you give us your reasons again?
Steve: It boasts the largest, highly educated, lowest-cost, English-speaking work force in the world. I think that’s even better than Japan’s work force at the dawn of its postwar boom. I think it’s even better than the Chinese workforce that’s had such an impact on the world economy in this decade.
Plus, I think the Chinese revaluation of the yuan, however small, is bound to have a substantial spill-over effect on India.
Martin: Because Indian goods will now be more competitive than Chinese goods?
Steve: Yes. But also because China itself will be buying from India, as a mega-customer.
Martin: And to invest in India, you are using …
Steve: Eaton Vance Asian Small Companies (EVASX) plus the Oppenheimer International Small Company Fund (OSMAX). Year to date, they’re up 19% and 13.6%, respectively. Down from their peaks. But on the comeback trail, in my humble opinion.
Martin: All this raises a very important question: Suppose this turmoil in the world drags down the stock market as a whole? Wouldn’t that hurt even the strongest sectors and the strongest foreign markets?
Steve: Probably. But that’s why investors hire Weiss Capital Management to manage their money. That’s why we watch over their accounts. That’s why we aim to spread out the risk. When investments are not performing, we aim to move on to those that are.
Plus, never forget cash equivalents. Most managers think their job is to always keep nearly all of their clients’ money invested. So they wind up holding and holding even while the markets are falling and falling. I don’t agree with that strategy. Cash is not just a parking place, in my view. It’s also a very valid investment, especially when you can get nice, rising yields.
Naturally, losses are always possible. But our role is to actively manage with the goal of minimizing the downside risk.
No End in Sight to
Commodity Boom
Martin: Last time you talked about surging commodities. Do you think that’s going to continue?
Steve: Yes. But no trend stays exactly the same, and the shift I see coming now is toward food. Because now certain agricultural products are not only used to feed mouths, they’re also being used to fill up gas tanks. I’m talking about corn, soybeans and sugar cane, which are used to make ethanol and bio-diesel.
Another advantage of the food sector: I think it’s relatively recession-proof.
Remember: These countries with big populations are not just growing. They’re modernizing. They’re not just going to need more food. They’re going to want more cars, driving up the demand for gasoline and alternate fuels. They’re going to want more homes, driving up the demand for timber and cement. The kind of demand growth you normally see in years is happening in months.
Martin: And if the trend changes unexpectedly?
Steve: That’s why investors should diversify. No matter what trend is hot right now, you’ve got to stay on the look-out for the next major trend. You can’t fall in love with any particular sector or investment.
46.5% Portfolio Growth
From August 2004
Through June 2006
Martin: Is your program dedicated exclusively to energy, commodities and international?
Steve: Since inception, they’ve been my major concentrations and they’re largely responsible for our performance to date. But I’m not married to them, and I also have some exposure to other sectors.
Martin: Can you give us more info on your performance?
Steve: Since inception — August 6, 2004 — we’re up 46.5% through June 30, 2006. On an average annual basis, that’s 22.3%.
Martin: Is that net of all of your fees and all of the broker’s commissions?
Steve: Yes. That’s the net, net return to the investor.
Martin: So an investor who began with you at the outset would be up about 46% at the end of the second quarter.
Steve: Yes, including all dividends and reinvestment of dividends. I hasten to add, though, that’s all in the past. You can’t hop on a time machine and start investing with us on August 6, 2004. The future, meanwhile, is always uncertain when it comes to investing. We could continue on the same course. We could do better. We could do worse. Or we could go in the opposite direction, and our clients could lose money.
Martin: Understood. But from what I recall from our last interview, some of the funds you use are load funds. Like the two Asian funds, for example. They charge loads, right? So how do you achieve that kind of high performance if the client is paying a large fee to get into the funds?
Steve: Our managed clients do not pay the loads. That’s one of the advantages of this program, one of the advantages of using us as your adviser. The reason is we’re participating in a “no-transaction-fee” mutual fund platform. So our clients can get access to many of the best mutual funds and to some of the most highly qualified portfolio managers. All with no load.
Martin: No fees?
Steve: No, I didn’t say that. We still charge our management fee. That’s the only way we get paid. But our annual fee is far less than the one-time loads you’d have to pay if you bought the fund shares directly yourself. Besides, the 46.5% cumulative performance from inception through June 30 is net of all fees.
Martin: Can you explain a bit more how it works?
Steve: In this program, I don’t pick individual stocks. I pick what I consider the best mutual funds with the best portfolio managers in the areas or sectors I like the best. They pick the individual stocks.
In other words, my role is to monitor and manage the managers. And for me, beating the so-called “benchmarks” isn’t enough.
Martin: Please elaborate.
Steve: I want positive performance. For example, a small-cap specialist could be beating all of his benchmarks for small caps and doing a great job of it. But if the whole small-cap sector is down, it’s no victory for the client.
The sector could be down, say, 30% and the manager could be down only 10%. So he’s beating his benchmark by 20 percentage points. That’s supposed to be “great.” But for the investor, it’s a defeat. Your goal should be to make money — not to lose less money.
Martin: Of course. Where can investors get more information?
Steve: Just give us a call at 800-814-3045. And before you do anything based on this e-mail, be sure to carefully read our important disclaimers.
Martin: OK. Please let us know when you see any major change — so we can talk about this again.
Views expressed by Steve Chapman in this interview are his solely.
For more information and archived issues, visit http://legacy.weissinc.com
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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