Selling Schering Plough, Looking to India, Brazil and South Africa

In line with yesterday’s post on some pending changes to the Secular Trends Model Portfolio, I am blowing out the remaining 1850 shares of Schering-Plough (SGP) in the model. SGP has really just been a floater since the announcement of Merck’s (MRK) buyout in early March, which initially valued Schering shares at $23.60 in cash and stock.

Since I have no particular desire to hold MRK shares (or deal with the record-keeping of this corporate event), I’m getting out now, happy with the 90% gain but a little frustrated that I didn’t exit on March 10th. At the time I was still quite skittish on the broader markets, and my thinking was that I was happy to ride along with a stable Big Pharma (MRK as the tracker) through the Spring. If I had known the S&P would shoot up 40% those three months, well - you get the picture.

Selling 1850 shares SGP at $23.70, and making a note to look at buying into a future IPO of Schering’s animal health business if it is to be divested to appease regulators.

CASH NO GOOD

With the SGP proceeds along with my FCX profits and general dividend collections, I’ve now got quite a bit more cash than any capital allocator should be comfortable with. No investment manager should be getting paid a dime to hold cash assets at 1-2% interest; retail investors that want cash should buy money markets and avoid paying a stock fund manager to sheepishly hedge their fear.

I’m using my research time to decide between several strong international investments, with a focus on India, Brazil, and South Africa.

Brazil and South Africa are both rich in natural resources, which is one of my favorite secular trends. Brazil gets extra points for locking up long-term capital from the Chinese towards developing their oil resources, and for finally getting religion on maximizing their potential for agricultural supremacy.

South Africa’s platinum leadership is also quite enticing (more on this theme to come), as is the prospect for the country to take a big wheelhouse kick forward as they host the World Cup in 2010.

And while India has little in the way of natural resources, it is quite rich in intellectual and human capital, two resources that will be put to great use over the next decade. All 3 nations can expect to see organic GDP growth this year to the tune of 3-5%, far above the best hopes of the “developed” world.

Disclosure: Author does not hold positions in the companies mentioned

Comments

[Larry House:]

It makes sense to look outside the U.S. for growth. However, the China story is showing some cracks. Fact is, no place in the world is going to catch fire as long as U.S., Europe, and China are questions marks. If I were buying equities, which I am not at this time, I would go outside the U.S. Agree also that there is nothing attractive about MRK at this time.

Jun 25 10:46 AM

[Danny Furman:]

Asia and South America are the world's best hopes for growth. Right now India is overpriced, China is mostly fairly priced and Brazil is cheap.

Jun 25 01:37 PM

[Old Trader:]

"No investment manager should be getting paid a dime to hold cash assets at 1-2% interest; retail investors that want cash should buy money markets and avoid paying a stock fund manager to sheepishly hedge their fear."

I'm afraid I have to take exception with the above remark taken from this article. The whole point of paying any sort of money manager is because the investor hasn't the knowledge, time, and/or inclination to manage their own money. It strikes me the author is saying there's no value in having the knowledge, or foresight to hold a heavy cash stake, or the discipline to not get sucked in by various head fakes, bubbles, etc. I'll bet there's no shortage of investors who would have paid CONSIDERABLY more than "a dime" to any managers who had a heavy overweight in cash last year, especially in the latter half.

Actually, I think its a mistake that many, if not most mutual funds "mandate" an essentially fully invested portflio, even if the management can't find compelling value, and are, as a result, forced to settle for buying the "best of the worst", so to speak.

Jun 25 07:04 PM

[Ryan Barnes:]

To Old Trader - I see where you're coming from with your comments, and I might have written that part of my piece a little opaquely. My frequent suggestion to investors that outsource their investment mgt (by far the best choice for most of them) is to, on their own, choose how much they should allocate to cash, stocks, and fixed income investments. Even the most basic investor can use simple charts based on age and tolerance to risk to make these allocations.

From there, they should take the part they want to hold in cash and literally invest in MM's. Give the stock allocation to an "all-stock" fund manager (understanding of course, that any manager will need to hold a few % in cash just to handle redemptions and rotations), give the bond portion to a bond manger, etc.

This way, the investor has made 1 broad, overriding choice that they know will remain fixed. I think the problem many investors ran into during 2008 is that they sent off the majority of their assets to managers without thinking about their own tolerance for risk. Its foolish to assume your stock fund manager should be managing your asset allocation risk for you. Keep in mind I'm speaking only about mutual funds and the like, not separately managed accounts which are often a one-stop-shop but custom suited to each investor with the help of CFAs, CPAs, and RIAs.

I realize this may seem like a lot of steps for individual investors, but they are steps EVERY investor should take. Heck, if they really refuse to have but one single investment, they can pick up one of those unsightly but possibly useful "lifecycle funds" from Vanguard, Fidelity, and others.

Thanks for the comments, and best of luck in your investing efforts.

Jun 26 01:30 PM