Frank Holmes'  Instablog

Four decades ago, the "Dogs of the Dow" strategy was born. It's a simple concept where investors hold the ten highest dividend-yielding companies of the Dow Jones Industrial Average and rebalance annually. This strategy has paid off for the devoted "Dogs" investor: Since 1972, it has beaten the overall index by 3 percent, says UBS Investment Research.

At U.S. Global, we apply a similar approach to find growth and income in the faster growing emerging markets. We believe choosing the highest dividend-paying companies located in developing countries helps investors capture the significantly higher growth potential, while earning income in the form of historically outsized dividends.

We call these top dogs our "Show Dogs of the World," and they make up many of the holdings in our Global Emerging Markets Fund (GEMFX), the China Region Fund (USCOX) and the Eastern European Fund (EUROX).

This approach looks promising, especially after reviewing research done by UBS. Its new "Dogs of GEM" investment strategy picks 20 of the highest yielding companies among the 800 stocks of the MSCI Emerging Markets Index (MXEF) and refreshes the list annually.

Looking back five years, UBS finds the success rate is "striking," with its portfolio of high yielding emerging markets stocks "comfortably outperforming the MXEF index in almost all years on a total return basis." Since 2008, the "Dogs of GEM" had a compound annual growth rate of 24.1 percent compared to the emerging markets index rate of -0.6 percent.

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UBS's "Dogs of GEM" contains companies in several different developing areas, including Brazil, Korea, Poland and Taiwan, with dividend yields ranging from 10 to 22 percent. And, many of these companies are also owned in U.S. Global funds.

One overlapping holding that is in the EUROX portfolio is KGHM Polska Miedz (KGH:PW), a copper and silver producer located in Poland with a market capitalization of $8 billion. In 2012, the emerging markets best-of-breed company had a dividend yield of 14.9 percent and a total return of nearly 140 percent. It significantly outperformed U.S.-based Freeport-McMoRan (FCX), the largest publicly traded copper producer in the world, which fell 7 percent on a total return basis.

Expect an extra bite of volatility, but KGH is only one example of the outstanding growth opportunity in these emerging best of breeds.

See additional EUROX, GEMFX and USCOX holdings here.

Follow the Money
According to Morgan Stanley, $45 billion has been flowing into emerging markets funds since the beginning of September, when the third round of quantitative easing began. For those investors who want to "follow the smart money," investing in the "Show Dogs" in emerging markets appears to be a smart strategy for growth and income.

Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund's returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund's performance more volatile.

The MSCI Emerging Markets Total Net Return Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in emerging market countries on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax.)

in the China Region, Eastern European and Global Emerging Markets Funds as a percentage of net assets as of 12/31/2012: KGHM Polska Miedz: Eastern European Fund, 4.74%; Freeport McMoRan: 0.00%

Disclosure: I am long KGHPF.PK.

It's getting a little more difficult to be green in the Evergreen State these days. Beginning in February 2013, electric car owners will be receiving conflicting messages: Drivers are getting tax incentives from Washington D.C. for plugging in instead of fueling up, but those savings will be offset by Washington state's new annual tax on fuel efficient cars.

The U.S. has made it a national priority to increase fuel efficiency, with plans to inject $7.5 billion into the electric vehicle industry over the next seven years, according to The Washington Post. The amount includes tax credits for as much as $7,500 toward the purchase of plug-in hybrids and all-electric cars such as the Chevy Volt, the Nissan Leaf or the Toyota Prius. The government also provides grants to electric battery manufacturers and loans to automotive companies for the production of electric vehicles.

Drivers of fuel efficient vehicles have additionally benefited from paying less in gasoline taxes. In some states, this can add up. After Americans factor in 18.4 cents per gallon of gas in federal tax, the state's tax on gas can be as high as 39.15 cents per gallon in North Carolina or as little as 7.5 cents per gallon in Georgia.

The state of Washington has one of the highest state gas taxes in the nation, with drivers paying a tax of 37.5 cents per gallon.

(You can find out how much your state taxes are by checking out bankrate.com's interactive map.)

Now, to make up for lost revenue, Washington state will be charging residents who own fuel-efficient vehicles an annual tax of $100. The state has decided that electric car owners need to "contribute their fair share to the upkeep of our roads," says Washington State Senator Mary Margaret Haugen who sponsored the bill.

It's not only the Evergreen State sending inconsistent signals to fuel conscious drivers: Oregon, Kansas, Arizona and Utah have also toyed around with a similar tax, says The New York Times.

For consumers and global resources investors alike, I believe government policies are precursors to change. It's interesting to see that the state has chosen to garner more money from its residents to pay for its roads instead of employing fiscal discipline or finding cost effective ways to maintain its infrastructure.

By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The following security mentioned was held by one or more of U.S. Global Investors Funds as of 12/31/12: Toyota Motor Co.

Disclosure: I am long TM.

Exchange-traded funds continued to attract assets in 2012 while money has been exiting equity mutual funds. Still a majority of assets continue to be invested in actively managed products: As of the end of 2011, of the nearly $13 trillion invested in funds, index and exchange-traded funds comprise only about 8 percent, according to the Investment Company Institute.

As active investment managers who have experienced bull and bear markets, the financial industry's deregulation and re-regulation, and the shifting needs of baby boomers, we are pleased that actively managed mutual funds continue to be the choice for a significant portion of portfolios.

The ETF industry has matured from its adolescent days, yet it continues to morph in puzzling ways that produce mediocre results. In my blog, I've discussed some eye-openers to help investors understand the risks of ETFs before putting their money in a product that might end up with unexpected outcomes.

Take the relatively new iShares MSCI Global Metals & Miners ETF (PICK), which began trading at the beginning of February 2012. The ETF is based on the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index, which is a non-diversified basket of companies located in developed and emerging markets that are involved in producing or extracting metals or minerals. Its 10 largest holdings make up 50 percent of the index, which makes it a more concentrated, potentially more volatile, portfolio.

By comparison, as of November 30, 2012, the top 20 holdings in the Global Resources Fund (PSPFX) make up 43 percent of the overall portfolio.

In theory, one chooses a natural resources investment to gain access to the companies that stand to benefit from the world's growing needs of natural resources. In addition, commodities offer portfolio diversification, as they have historically had a lower correlation to the overall market.

However, in a face-off, PSPFX would steal the puck from PICK, as the Global Resources Fund has outperformed the ETF by nearly 13 percentage points since PICK's inception in January 2012.

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PSPFX also added significantly more return with less risk compared to the ETF over the same timeframe. The Global Resources Fund experienced an annualized standard deviation of 15.95 percent compared to the PICK ETF, which had an annualized standard deviation of 24.34 percent, according to Morningstar Direct.

You can also compare two gold equity investment vehicles. Although gold miners have had a challenging year, the Gold and Precious Metals Fund outperformed the Market Vectors Gold Miners ETF (GDX) by 400 basis points.

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As I often remind investors during presentations, there is no free lunch on the commodities table-every investment comes at a cost or a risk. When it comes to emerging markets and commodities, there are inefficiencies that we believe give active managers an edge. In emerging markets, the capital markets are not as sophisticated as in developed markets and the information can be less uniform and straightforward. Managers who have an explicit and tacit knowledge of the country and its way of doing businesses are likely able to flush out the best opportunities. We believe it is worth paying a bit more in management fees to get the expertise needed for these specialized markets.

The Eastern European area is a good example of a nuanced market. While the presidential reelection of Vladimir Putin in Russia caused markets to stress over how he would lead the country, Turkish stocks have experienced substantial growth. U.S. Global Investors' Eastern European Fund (EUROX) benefited from its ability to invest in the entire area: Russian stocks make up only about 37 percent of the fund while Turkey comprises 17 percent of the fund. See the fund's regional breakdown here.

We believe this is why we have significantly outperformed the Market Vectors Russia ETF year-to-date as of December 13, 2012:

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Indexers often argue that active managers have periods of underperformance. Fellow Canadian Wayne Gretzky has been called the greatest hockey player ever, holding or sharing more than 60 records that he collected during his 20 seasons of playing in the National Hockey League. He holds the NHL record for the most hat tricks-achieving three goals in a single game more than 50 times-and when he retired, Gretzky was inducted into the Hockey Hall of Fame.

However, under asset management's rigid standards for active managers, the "Great One" might be considered a loser, as his team won the Stanley Cup "only" four times.

From time to time, active managers underperform; yet, they have the opportunity to add alpha. ETFs, on the other hand, are built to only match the benchmark and are never expected to beat it.

While ETFs offer instant execution, liquidity and lower fees, certain passive investments may not get you where you want to go over the long-term. The "hat trick" equivalent that Global Resources, Gold and Precious Metals, and Eastern European Funds has been able to achieve this year against their respective ETF peers is more diversification, better historical performance and less volatility.

Outlook on Natural Resources
Learn what our investment team believes will drive gold and natural resources in the new year by joining our Outlook 2013 webcast. Sign up today and email us with your questions, so we make sure we cover what's on your mind.

Click here for more information about the performance, investment objectives, and expenses of the funds and ETFs discussed in this commentary.

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.

By investing in a specific geographic region, a regional fund's returns and share price may be more volatile than those of a less concentrated portfolio.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund's performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Disclosure: I am long GDX.