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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
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Goldwatcher: Demystifying Gold Investing
  • How To Discover The Top Dogs In Emerging Markets 0 comments
    Jan 18, 2013 1:51 PM

    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.

    (click to enlarge)

    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 OTC:KGHPF.

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