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February Portfolio Review – A Tough Month for Emerging Markets

By Rob Marstrand on March 8, 2013

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Emerging market stocks fell during February after a strong start to the year. Most of our recommended investments fell with the broader markets.

The Value Beta Portfolio – our diversified emerging market ETF portfolio – was up 15% at the end of January. But our gain was 11% at the end of February – still a great result after just five months. Eight of the nine funds fell during the month, with the exception of the Market Vectors Vietnam ETF (NYSE:VNM), which was flat.

Most of our individual stocks fell too. Although Suntec Real Estate Investment Trust (SIN:T82U)/(PINK:SURVF) has continued to rise. This owner of retail and office buildings is now up 59% since recommended in August 2010, including dividends. It retains a “hold” rating in the portfolio, as it’s just 4% shy of my fair value estimate.

Sterlite Industries India Ltd. (NYSE:SLT), our Indian copper mining company, fell again in February to $7.05. Most recently there has been pressure on the stock price because Sterlite is in the process of a complicated merger with Sesa Goa (see Q1 2012 portfolio review for more details).

A court ruling has forced Sesa Goa to close 90 iron ore mines in Goa and Karnataka, and whether they can be reopened remains unclear. Since Sesa Goa’s fortunes affect the future value to Sterlite investors of their share in the merged company (to be called Sesa Sterlite) this has depressed the Sterlite share price.

But it is worth noting that iron ore was expected to be only 17% of the merged company’s earnings. So even in a worst case scenario, where mining cannot recommence in Goa and Karnataka, the stock looks oversold. The nine analysts covering this stock have an average six-month price target of $11.50, ranging from $8 to $14. Sterlite remains a “hold” for now.

Hess Corp. (NYSE:HES), our integrated energy company, has announced it will sell or close all activities that don’t relate to oil and gas exploration and production. Hess has come under pressure from activist investors recently. And management is reacting.

Hess will exit downstream activities such as fuel retailing and energy trading. It will also sell reserve assets in Indonesia and Thailand to become more focused.

The dividend will increase from 40 cents a year to $1 – an increase of 150%. But the dividend yield remains a low 1.5% at the end of February price.

Also, management has been authorized to buy back up to $4 billion of the company’s stock when funds become available from asset sales. At the current market capitalization of $23.8 billion, this is equivalent to returning 17% of the company’s value to shareholders. But the timing of this will be uncertain. Also the company will shrink from the asset sales, so it is unclear whether this buyback program in itself is supportive of the stock price.

This is likely to occur only if some of the buybacks are funded by retained profits instead of asset sales. Buybacks from retained profits are similar to dividend payments, since they are a way of returning cash profits to shareholders. Asset sales mean that assets are converted to cash. If that cash is then used for buybacks, there are fewer shares but also lower assets in the company.

Overall, the investors have received the news well. And the share price rose to $66.50 by the end of February. Including dividends, our profit since our recommendation in August 2011 is 17.5%.

At time of writing, the stock price has risen to $69.82 – an extra gain of 5.8% on the original purchase price of $57.04. Hess remains a “hold” for now. But we may take profits if the price continues to rise. It is already marginally above my earlier estimate of fair value, although that was conservative.

Our two big energy investments, Gazprom OAO (PINK:OGZPY) and Petrobras preferred stock (NYSE:PBR-A), continue to take it on the chin.  But on March 6, Petrobras announced a 5% increase in diesel prices. This should reduce the losses it takes from importing more expensive foreign fuel.

At writing, the preferred stock trades at $18.36 – 9.7% above the $16.73 price at the end of February. This still leaves us 40% down since our initial recommendation, including dividends. But I estimate fair value at $36.19, which is nearly double the current level.

Gazprom and Petrobras remain the two most undervalued stocks in the Family Wealth Portfolio. But I fully expect them to reward patient, long-term investors.

Gold fell 3.7% during February to $1,608/oz. This has weighed further on the price of the Tocqueville Gold Fund (NASDAQ:TGLDX), our medium-term play on a resurgence in the stock prices of gold miners.

Gold has been weak lately. But we expect long term demand for physical gold to continue, especially in emerging markets. And we expect supply to remain tight. We recommend that you stay invested in gold and gold miners for the long run.

I have reviewed ways to invest in gold bullion in the past. And I have recommended the London-based BullionVault – by far my favorite physical storage service due to its low costs of trading and storage.

BullionVault has just introduced a feature which may interest you, especially if you are still building your allocation to gold. It’s called the Automatic Gold Investment Plan. And it allows you to send a fixed amount of cash to your BullionVault account each month.

BullionVault will then invest this monthly contribution the following day at the “London p.m. fix” – a widely-recognized rate used as a benchmark for pricing gold products and derivatives around the world. If you want a hassle-free way of building your gold position… and you don’t want to worry about timing market ups and downs… this “drip feed” approach is worth looking into. You can find out more about this service here.

Our two Russian hedge fund recommendations have performed well since we recommended them at the end of last October. Because they are not listed investments the end-of-month prices are available later than other investments in the Family Wealth Portfolio. (Prices are only available when the fund manager, Prosperity Capital Management, sends out its fund reports – usually a week or two after month end.)

But at the end of January the Russian Prosperity Fund was up 11.7% and the Prosperity Quest Fund was up 9.1%. Russian stocks fell in February, along with emerging markets in general, so I expect these funds to have fallen a few percentage points during February as well.

Until next time.

[ilsig rmarstrand]Rob[/ilsig]

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