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Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., a boutique investment advisory firm based in San Antonio that manages domestic and offshore funds specializing in the natural resources and emerging markets sectors. The company’s no-load mutual funds include the... More
My company:
U.S. Global Investors
My blog:
Frank Talk: Insights for Investors
My book:
Goldwatcher: Demystifying Gold Investing
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  • Where A Resources Manager Is Uncovering A Sweet Find

    After traveling nearly 6,000 miles by plane, helicopter and jeep, Evan Smith, portfolio manager at U.S. Global, is walking along a dirt path in Kenema past dilapidated shops covered with rusted, corrugated metal. He can hardly believe he has arrived at his destination. Surrounded by hundreds of miles of forest and savannah, it's tough to imagine an agricultural diamond-in-the-rough nearby.

    Kenema is in Sierra Leone, a country in the Western part of sub-Saharan Africa with 5.6 million people recovering from a decade-long civil war that ended 11 years ago. Today, the rural people, mostly farmers and fishermen, are peaceful and friendly, says Evan, who explored the opportunity for the Global Resources Fund (PSPFX).

    To get here, Evan flew from San Antonio, Texas to the largest city in Sierra Leone, Freetown, making stops in New York City, Ghana and Liberia. Then he boarded a four-person helicopter to fly east 150 miles, enduring heart-pounding drops and lifts between clouds and mountains before safely arriving at a cocoa plantation development.

    (click to enlarge)

    The heart of Africa has been beating strong in recent years due to elevated commodity prices and resilient domestic demand, despite the global economic slowdown. Among the sub-Saharan African countries, Sierra Leone was the fastest growing country last year, according to the World Bank. Its economy experienced growth that is as rare today as Fancy Red diamonds. GDP increased a whopping 18 percent.

    Non-profit organizations are taking note of the country's progress. The Freedom House recently categorized Sierra Leone as a free country, which is unusual in sub-Saharan Africa. Among 50 countries and 900 million people, only 13 percent of people are considered free under the organization's definition.

    Sierra Leone is also becoming more attractive for business. In the World Bank's Doing Business 2013 report, the country ranked 140, up from 148. One of its main findings this year is that "among the 50 economies with the biggest improvements since 2005, the largest share-a third-are in sub-Saharan Africa."

    Looking ahead, these countries are expected to be among the fastest growing economies in the world. The International Monetary Fund estimates that out of the top 20 countries with the highest projected compound annual growth rate from 2013 through 2017, 10 are in this area of the world.

    This is the growth Agriterra (OTC:AGTAF) is looking to capture in its development of a cocoa plantation that Evan traveled across the Atlantic Ocean to check out. Agriterra is a London-based company that invests in African agricultural businesses to serve the fast-growing economies of frontier markets, such as Mozambique and Sierra Leone.

    When Evan toured the grounds, he snapped pictures of the initial stages of development, as the company nurtures 250,000 seedlings in a technically advanced and irrigated nursery. Each cocoa sprout is planted in its own bag, under a canopy of screens which provides just the right amount of light. An irrigation system nourishes the plants, delivering the perfect amount of water and fertilizer.

    Agriterras Cocoa Nursery
    Cocoa Bean Plants Kenema

    After a few months, the seedlings will be mature enough to be transplanted to an area that provides the right amount of shade. You can see a three-meter grid of stakes designating where each plant will go in this photo below.

    You may not think about where your Godiva chocolate originates, but the areas are limited. Cocoa grows best along the equator belt between the Tropic of Cancer and Tropic of Capricorn. Tropical conditions of plentiful rain and high humidity are ideal and "shading is indispensable in a cocoa tree's early years," says the International Cocoa Organization (Pending:ICC).

    While Sierra Leone is geographically situated along this band, it isn't among the largest cocoa-producing countries. Most of the world's chocolate originates from beans grown in Côte d'Ivoire, Ghana and Indonesia. Cocoa has traditionally been raised on small, individually owned farms, many of which have aging plants and therefore, lower yields. But with Agriterra's advanced applications and solid operations, the development seems to be off to a sweet start.

    So why is an oil and materials manager getting his boots dirty in Sierra Leone? The cocoa plantation is only one example of a company producing a commodity that we believe will be sought by the world's growing middle class population. As more and more people reach this status, consumption of discretionary items, including chocolate, should increase.

    Rather than limit commodity holdings to energy and materials stocks, take a multi-faceted approach across 10 industries. By including companies such as grain processors, plantations and ranch lands, and agriculture companies, such as chemical and fertilizer stocks, we believe investors can enhance returns with less volatility.

    That's why we keep our eyes open and boots on the ground because you never know where in the world you'll find a sweet or savory opportunity.

    Thanks to Evan Smith, who contributed to this commentary.

    Interested in more articles about resources, gold and emerging markets? Get updates to Frank Holmes' blog by joining here. Or you can follow U.S. Global on Twitter or Facebook.

    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.

    All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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

    Holdings in the Global Resources Fund as a percentage of net assets as of 3/31/13: Agriterra Ltd 0.57%

    Disclosure: I am long OTC:AGTAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Jun 19 4:09 PM | Link | Comment!
  • Finding Opportunity Far And Near

    Samuel Johnson once said, "The use of traveling is to regulate imagination by reality, and instead of thinking how things may be, to see them as they are." Although penned by an 18th century English writer, the idea holds true in today's highly connected world of search bars, tweets and breaking news. Our portfolio managers' research trips to foreign countries authenticates the data from a Bloomberg terminal or an earnings report. Treks add tacit knowledge to our wealth of explicit facts.

    Last week, I was in Peru and Colombia with former president Bill Clinton and Frank Giustra in conjunction with the Clinton Giustra Enterprise Partnership. I've been involved with this impressive organization since its inception. I love how it brings together private companies, government and communities in developing regions of the world to eradicate poverty by growing jobs and training local workers.

    As part of the trip, Clinton signed an agreement between the foundation and Peru's Ministry of Foreign Trade and Tourism to promote and reward hotels and restaurants that buy from local producers.

    Each group will give $450,000 over the next three years to train local producers to become suppliers for Cusco's hospitality and restaurant sector. All told, suppliers should bring in more than $5 million in income over the next five years and benefit more than 1,800 people, according to the Clinton Foundation.

    In Cartagena, Colombia, Clinton and Giustra celebrated the opening of a warehouse that will provide a local supply chain for the area's hospitality, restaurant, catering, and supermarket sectors, as well as the Acceso Training Center, which will train about 20,000 local residents over the next 10 years to work in the hospitality sector.

    (click to enlarge)

    Moving beyond Latin America, other U.S. Global portfolio managers are finding exciting opportunities on their travels. When Michael Ding recently traveled to Thailand, he immediately identified a potential investment as soon as the plane touched down in Bangkok.

    And with emerging Europe growing faster than its western counterparts, Director of Research John Derrick, and Portfolio Manager Tim Steinle are headed to Warsaw and Prague to visit with local companies and management. We are optimistic about many expanding opportunities in this area of the world.

    Back in the U.S., no one needs to travel far to see the tremendous growth in domestic stock prices. Over the last four years, the S&P 500 Index climbed 21 percent annually.

    But how much further should you expect them to go? The Federal Reserve Bank of New York had the same thought and delved deep into data to find out.

    Would it surprise you to learn that a vast majority of equity valuation models state that stocks should head much higher over the next five years?

    This is research based on 29 different equity valuation models and surveys that use varying economic and market-related data such as dividends or inflation to calculate potential future returns. Using a weighted average, the New York Fed estimated the equity risk premium over the following month.

    Simply stated, the equity risk premium is the expected future return of stocks minus the risk-free rate, such as a Treasury bill. For example, if the estimated future return of stocks is 5 percent and a Treasury bond yields 4 percent, the premium is the difference between the two figures, or 1 percent.

    Looking back over five decades of annualized results, there's always some premium for stocks. This intuitively makes sense, because in exchange for taking higher risk, investors expect to receive higher returns.

    (click to enlarge)

    During these 50 years, the premium nearly fell to zero two times. One time was in 1987, when investors' exuberance toward the equity market caused stocks to rise quite sharply.

    The most recent dip in the equity risk premium was at the height of the great tech boom in 2000. Many investors remember triple-digit price-to-earnings multiples. And some companies saw terrific price appreciation even though there were no reported earnings to be had at all. You'll remember Fed Chairman Alan Greenspan coining the phrase, "Irrational Exuberance."

    Looking at the chart above, today we see an opposite picture. In fact, today's equity premium is at 5.4 percent, as high as it was in November 1974 and January 2009.

    And what happened in these two time frames? Well, we saw the dramatic increase in equity prices from 2009 to today.

    Back in the 1970s, investors experienced the collapse of the Bretton Woods system and "a terrible case of stagflation," says the Fed of New York. However, that didn't stop the stock market, as gains were incredible, increasing nearly 15 percent on an annualized basis from 1974 to 1979.

    The chart illustrates a tremendous case for U.S. stocks over the next five years. Make sure your portfolio is poised to participate.

    Want to receive more insights? Sign up to receive free email updates from Frank Holmes and the rest of the U.S. Global Investors team, follow us on Twitter or like us on Facebook.

    All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: long-ideas
    May 21 4:20 PM | Link | Comment!
  • Making Investment Grade Is Only The Beginning For Turkey

    It's been a few months since I was in Istanbul and wrote about Turkey's exciting cultural and economic transformation, and the country is still making headlines. The Emerging Europe Fund's (EUROX) portfolio manager, Tim Steinle, has been very bullish on Turkey for multiple reasons, including its young growing demographic, its fiscal and monetary policies geared toward growth, and its entrepreneurial mindset and pro-business policies, to name just a few.

    Most recently, Moody's Investors Service validates our opinion of Turkey as the rating agency upgraded the country's credit rating from Baa3 to Ba1 with a stable outlook.

    The move brings about the long-awaited second investment grade rating, following Fitch's upgrade in November 2012. The agency highlighted the recent and expected improvements in finance metrics, as well as noticeable progress on structural and institutional reforms.

    In addition, Turkey's central bank cut rates by 50 basis points, exceeding analyst expectations as it seeks to contain currency appreciation. The lira has been strengthening as capital inflows seeking to benefit from the country's promising economic growth remain strong.

    Local stocks historically received a boost in the months following an upgrade. The table below shows HSBC Global Research's chart of the performance of the Philippines' equity market following its credit upgrades. One month after the rating upgrade, stocks rose an average of 2 percent. In the three months after its upgrade, stocks climbed 10.3 percent, on average.

    (click to enlarge)The Philippines Market After Rating Increase

    Turkey stands among the strongest countries to benefit from current global easing. Internally, inflation is well under control, and domestic consumption is unabated. Furthermore, the country's stock market continues to trade on a cheaper price to earnings valuation when compared to countries like Mexico, Malaysia, and Thailand, says HSBC. Hence, there is ample reason to believe the Turkish equity market should continue to outperform.

    Samuel Pelaez, analyst at U.S. Global Investors, contributed to this commentary.

    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 Emerging Europe Fund invests more than 25 percent 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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 21 3:31 PM | Link | Comment!
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