Global currency devaluation could be a driver of inflation, cautions James Dailey, manager of the TEAM Asset Strategy Fund (TEAMX). To address that risk, his fund holds top-quality blue chips, gold miners, and money-market treasuries, which he uses as a cash proxy.
Kate Stalter: Today on the daily guru, we are talking with James Dailey. He is with TEAM Asset Strategy Fund.
James, start out today by telling us a little bit about your fund’s objective and your investment philosophy.
James Dailey: Our fund is what is traditionally known as a global macro absolute return strategy. Basically, that is a type of strategy that has been far more prevalent in the hedge-fund space throughout the decades, and prominent fund managers like Paul Tudor Jones and Bruce Kovner of Caxton Associates, and is really a proxy for what we do.
What that means is, we are looking at long-term global macro trends in the global economy, global financial markets, currency markets…and we are trying to navigate those long-term trends using a fusion of that analysis with basic fundamentals that we look at on the security level, as well as technicals and quantitative research that we conduct.
Kate Stalter: So are you an equity fund? Let’s break that down a little more for our listeners and talk about what kind of asset classes.
James Dailey: Sure. I guess the best way to think about global macro strategy is that it is the broadest mandate that someone can provide in an investment manager, so we are active in stocks, bonds, commodities, and currencies on a global basis.
We are also active long and short, so at any time, depending on what we see is the underlying market trends and what our view is on the market, we can be net long stocks, we could be net long certain currencies or certain commodities, or we could be net short any and all of those at any given time.
I know our exposure does change, depending on what our views of the markets are.
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Kate Stalter: Let’s talk a little bit about some of the specific holdings in the fund at this time. What are some of the top holdings, at this moment?
James Dailey: Well we go back to our process in looking at major trends. I think that one of the big things that we are trying to reconcile, and we think the markets are trying to reconcile, is how do people view and react to what is going on in Europe relative to the legacy of 2008.
The crisis in 2008 posed such a long shadow and disrupted so many people and created almost like a trauma victim. We have all been traumatized by that experience, based on the volatility and the great recession.
I think people are responding to this crisis in Europe and the potential for a global recession as if we are going to have another 2008. We feel like that creates a lot of opportunities, because we don’t think it is another 2008. We think that policymakers are being proactive this time rather than reactive—you can see that in major governments printing money in significant quantities.
So a lot of our portfolio positioning, at this point, is geared toward what we call money-printing beneficiaries, meaning that ideas and positions that we believe will not only weather an environment where governments are printing a lot of money, but even benefit and provide an insurance policy for our investors.
So most prominent in that are precious metals mining companies. For instance, we own Kinross Gold(KGC), which is a major gold miner. As a group, the gold miners are trading at a historic extreme discount relative to the metals, meaning if you look at the stocks vs. gold or the stocks vs. silver, they are at an historic discount to those metals.
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We think that as governments now, like the Swiss National Bank, which has historically been viewed as a hard currency, they are now printing money. It is almost a race to debase, some have said, our global currency devaluation.
So we own a little over a quarter of our fund, at this point, in precious metals, mining stocks. Kinross being a prominent one and Yamana Gold (AUY) being another one. Those that we think are very cheap not only within the group, but are growing their production profile.
So if, as we believe, gold prices will continue to go higher, you not only get the benefit of operating leverage because of higher gold prices, but also they are producing more gold incrementally over the next several years. So we think there is some explosive opportunity there.
Kate Stalter: I was looking earlier at some of the Morningstar data about your fund, James, and at the time anyway, it seemed to be the case you had quite a bit of exposure to Treasuries. Is that still true?
James Dailey: Well that’s Treasuries in the form of a money market; that is part of our process. If we are looking to get defensive in the short or the intermediate term, we can hold significant amounts in money markets or cash.
Early in 2011, we actually made the shift out of traditional money markets into Treasury-only money markets, due to our expectation that the issues in Europe would continue to get worse.
And now, it hasn’t filtered to the point where money markets are in jeopardy, but that was a risk we didn’t want to have in the portfolio, because the incremental yield pickup that we were getting on a regular money market was basically nothing…I mean peanuts relative to taking the added credit risk. So that is basically a cash proxy in the portfolio.
James Dailey: Two out of the three are. That is, again, one of the challenges in monitoring, and you see this: Yesterday, we had a lot of news coverage and today again, reports about the 13Fs, which the large hedge funds file with the SEC. So you hear people talking about which changes Warren Buffett has made, or George Soros, or John Paulson.
When you are running a global macro strategy, Buffett is a little different, obviously, but if you are running a global macro strategy like George Soros and you are active, when you are looking back a month or two or three, positioning can change quite extensively depending on market conditions.
At this point, we no longer own Disney. We sold that a couple of weeks ago. We still own Pepsi and AT&T; that is really part of our barbell approach to what we are doing in the portfolio with our equity exposure, where we have part of the barbell that is leveraged to what we expect to be money-printing beneficiaries.
I already mentioned the precious metals area; there is also some energy exposure. We recently addedHalliburton (HAL), for example, which we think is very well positioned.
Then on the other side of the barbell are some of these more conservative, blue-chip stocks, which we think are very fairly valued or even very cheap, that provide some dividend support. So we are creating some income through dividend yield. That is certainly the case with AT&T, where they yield close to 6%, and Pepsi with a yield well over the ten-year Treasury.
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So, more conservative anchors for the portfolio, and that is because we are respectful of volatility. Our funds are a fairly volatile fund, as most global macro absolute return strategies are over time, but we are respectful of that and we do try to include some portfolio positions that we think are well positioned that are not as volatile.
Kate Stalter: What would be your advice at this point for an individual investor who is managing his or her own portfolio, and really is just kind of frustrated with all the volatility that we have seen? What should that person be doing right now?
James Dailey: Well, I think the first step is to be honest with oneself. I think that that is a real challenge for people, because I think a lot of people try to talk them into something that creates a really damaging outcome. If they try to convince themselves that they can handle it, and then eventually they reach their breaking point and panic out at the wrong time.
So I think people need to have an honest assessment of the level of volatility that they can withstand realistically over time.
Having said that, I think that most people should have a realistic view that the financial markets are in dire straits, relative to this macro environment with what is going on with currencies, what is going on with the global economy and significant government intervention in the west, in Japan, in those markets and in those economies.
I think the best way to do that and address those risks are owning risk assets, because of this concern about inflation over time and not 70s-style inflation, but currency-devaluation-driven inflation, which is very different…It is not about wage pressures or capacity utilization being too high; it is about currencies going down.
Those that are flocking into low-yielding fixed-income instruments, because they are nervous about volatility, I think are setting themselves up for the worst of both worlds, which is little or negative returns. Actually seeing the pricing of their portfolio go down; they might have some short-term volatility that is not as high, but they actually lose quite a bit of money over time through inflation, and eventually, when the yields go back up.
I would say that for those that are nervous, blue-chip stocks—something like AT&T or like a Pepsi—there are all kinds of funds and ETFs that focus on those areas specifically.
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Outside of that, looking at strategies and managers that are geared into this inflationary currency devaluation environment and have a game plan to not only survive it, but potentially thrive in it.