Today’s recommendation comes from Ian Wyatt’s $100k Portfolio, which is taking a contrarian bet on the situation in Europe. The new recommendation is followed by an update on a Scarcity & Real Wealth recommendation that is being acquired.
“There’s no doubt: the Eurozone is a mess. The rain in Spain may or may not stay on the plain. Greece continues to be a drag, and Italy has its own problems. All told, equity prices in Europe have been falling, falling and falling. That’s the perfect time to buy, buy and buy, as many contrarian or value investors tend to do. As a result of falling equity prices, stock values are cheap and trading now at a substantial valuation discount.
“According to Professor Jeremy Siegel, in a recent article for Kiplinger’s, the last time Europe saw prices this low was in the 1970s, a time of soaring interest rates and double-digit inflation. Siegel states that shares of large companies in the Eurozone trade for eight or nine times estimated 2012 earnings. By comparison, stocks in the U.S trade for a much higher multiple of forward earnings. For example, the S&P 500 Index trades for approximately 12 times 2012 estimated earnings.
“These discounts don’t come without risk, especially currency risk to the extent the value of the euro falls further. That said, it could be argued that current valuations already factor in a worst-case scenario for the value of the euro.
“What’s more, international stocks — both developed and emerging market — have substantially underperformed the U.S. market during the past few years. So one could argue that increased exposure to international equities is also supported by a simple ‘reversion to the mean’ argument. ...
“Can things get worse in Europe before they get better? Absolutely. In fact, trouble is more likely than not. That said, I’m in for the long haul. ... Plus, I’m not worried about exact timing. You know the old saying about buying at the absolute bottom and selling at the absolute top, don’t you? It can’t be done, except by liars! I just need to be approximately accurate and I think I am with this call. In a three-to-five year time frame, I expect to make double-digit returns on my international investments. That should be significantly more than the overall market in the U.S.
“The vehicle I’ll be using to increase international exposure in the $100k Portfolio is Tweedy, Browne Global Value Fund (TBGVX). I like this fund for several reasons. First, it’s managed by one of the most experienced teams in the industry, which has worked together for more than 25 years. The managers’ interests are also closely aligned with shareholders, as two of the managers each own more than $1 million of the fund, while the other two own shares worth more than $500,000.
“Second, the risk-adjusted performance for Global Value has been exceptional. Over the trailing three-, five- and 10-year periods, the fund not only ranks at or near the very top of the Foreign Large Value category in performance, it also owns the category’s lowest Morningstar risk scores. Third, Tweedy, Browne is a deep-value investment shop. The company’s investment approach derives from the work of legendary investor — and Warren Buffett mentor — Benjamin Graham. ...
“Fourth, although Global Value is a diversified international equity fund — which can even own some U.S. securities when opportunities in the U.S. appear more attractive — it is primarily invested in continental Europe. That’s where I believe (and the fund managers apparently agree) that the greatest opportunities currently exist. Of the fund’s top 20 holdings, for example, 18 are European companies, headquartered in France, Netherlands, Switzerland, the UK, Germany, and Norway. Furthermore, exposure to the troubled countries and economies of Italy and Spain are limited to less than 2% of the fund’s total. What’s more, the fund owns no Greek companies. ...
“Of course there are other ways to gain exposure to Europe. We could have played a broad-based ETF or individual stocks. But with Europe still a volatile beast, I prefer to put my money in the experienced hands of a manager who’s been in the game during good times and bad. And while individual stocks can be attractive, I like the diversity offered by a mutual fund. In fact, the Global Value fund is spread among consumer discretionary, consumer staples, health care, and financials, to name a few. ... Suggested Action: Buy Tweedy, Browne Global Value Fund (TBGVX).”
- Ian Wyatt, $100k Portfolio, November 2012