“Price matters!” Pay too much for the stock of even the greatest company and you can lose money. That’s what Great Investor Bruce Berkowitz, portfolio manager of The Fairholme Fund told WEALTHTRACK recently. This week’s guests couldn’t agree more. They are searching far and wide for the best bargains. They are finding them, not in the U.S. but overseas. Andrew Foster is the Founder and Chief Investment Officer of Seafarer Capital Partners which focuses on companies in emerging markets. David Nadel is the Director of International Research for Royce & Associates where he concentrates on smaller companies.

WEALTHTRACK Episode 918; Originally Broadcast on October 27, 2012

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One of the eternal truths of investing is that price matters. As recent Great Investor guest, The Fairholme Fund’s Bruce Berkowitz told us, the best investment advice he ever got was that “the price you pay for a security determines most of your success… maybe 75% of your success.” Pay too much for even the greatest company, you can lose money; pay nothing for a mediocre company, you can make a lot of money.

It turns out the same rules apply to markets. With more investors putting money into market-based exchange traded funds, or ETFs, price matters more than ever. According to the Financial Times, net new global inflows into ETFs have soared $182.6 billion so far in 2012, up 42% over the same period last year, already surpassing 2011’s full year total. So what kind of prices are investors paying for these funds? It depends on which markets they are buying. And according to a recent report, there is a huge gap among global markets right now. Some are historically quite expensive, others quite cheap.

According to a research report put out by California-based Cambria Investment Management and recommended to us by WEALTHTRACK guest David Nadel, the U.S. is one of the expensive markets right now. Cambria used a valuation measure developed by Yale economist and frequentWEALTHTRACK guest Robert Shiller. It’s called CAPE, which stands for Cyclically Adjusted Price-to- Earnings ratio and it is figured over trailing ten year periods, instead of the commonly used price- to-earnings ratios, or P/E’s, figured on current or estimated earnings for a year. According to Cambria, going all the way back to the late 1800s, the best ten-year periods to invest in the U.S. were when the cyclically adjusted price-to-earnings ratio began the period at an average of under 11. With that low starting point, average annualized 10-year returns came in at 16.1% for the market. The worst ten-year periods were when the market started at a CAPE of around 23. The average ten-year market return after starting at that P/E was negative 3.3%.

What is the U.S. market’s CAPE level now? It’s above 20. As Cambria says “it very much matters what price one pays for an investment!” Future returns are lower when valuations are high, and future returns are higher when valuations are low. And the same rules apply to overseas markets.

This week’s WEALTHTRACK guests pay close attention to valuations all over the globe. Andrew Foster is the founder and Chief Investment Officer of Seafarer Capital Partners, where he manages the newly launched Seafarer Overseas Growth and Income fund which focuses on foreign markets, especially in the developing world. Before going out on his own, Foster was a portfolio manager at Matthews International Capital Management, where he managed several funds including the Matthews Asian Growth and Income Fund. David Nadel is Director of International Research for Royce & Associates, the firm founded and still run by legendary small company stock pioneer Chuck Royce. Nadel is co-portfolio manager of Royce Global Value Fund, as well as involved in managing six other funds focusing on smaller company stocks around the world. I’ll begin the interview by asking Nadel about his current strategy in the Royce Global Value Fund and why he is de-emphasizing the U.S.

On WEALTHTRACK Extra this weekend, we’ll also hear about David Nadel’s unusual first job and how Andrew Foster’s wife became involved in founding Seafarer Capital Partners.

For those of you who would like to see any of our future programs 48-hours in advance of the broadcast, you can subscribe to our WEALTHTRACK Premium subscription service on our website.

Have a great weekend and make the week ahead a profitable and a productive one!

Best regards,

Consuelo

Action Point

One Investment

NADEL: EMERGING MARKETS INCOME

“I’m going to pick Ashmore Group. Ashmore Group is an emerging markets fixed-income specialist. They also are an emerging markets equity management, based in the U.K. It’s about almost a four billion dollar company. Pays about a four percent dividend. Not expensive, again, for us, six or seven times operating income… they’re actually the largest company in the world to do this, as a pure play. But the allocations to emerging market fixed-income, and keep in mind this is one of the few reliable sources of yield today. The allocations are less than four percent in the U.S. and in Europe. Japan in the last decade has gone from a four percent allocation to a 24% allocation. Because of course, the Japanese are totally yield-starved. And I think that if Americans aren’t yield-starved yet, I don’t know what they’re waiting for. And the same thing with the Europeans. So my bet is that America and Europe will catch up with Japan, and Ashmore will be a big beneficiary of that.” – David Nadel

FOSTER: U.S. EQUITY EXPOSURE

“My investment is the Vanguard Total Stock Market Fund. Its ticker is VTSMX. And I know that’s a little bit off-base, given that we’re both active managers. I believe in active management. I’m very much an international investor as well, and I think there’s probably more value overseas than in the U.S., as David, I think, rightly pointed out. The reason I’m choosing that is it’s aimed at the part of your audience that probably has little exposure to equity markets at all right now. I’ve been traveling around the country a lot lately, setting up my new business, and I just hear a constant refrain about just the amount of fear that’s out there. That there’s any growth left at all. China’s not growing, the U.S. is tepid, Europe is in a dark, dark place. And the exposure that people have to growth assets and equities in particular, I think is very low. And I’m not trying to dismiss the major concerns that are out there in markets at present. They are serious. But I think it is not really a satisfactory response, in my mind, to retreat from markets altogether. So I’m recommending a very basic fund with low expenses, and I believe mightily in low expenses, that gives people a broad exposure to markets. It’s a way to get back in. If you haven’t been in, I think you do need to be in markets. Maybe you don’t jump in, but you at least put more than a toe in. Maybe a foot at this stage.” – Andrew Foster

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Archive

August 19, 2011
Two money managers finding value in two different stock classes. Both have beaten the markets, with less than market risk over the long term. Noted value investor Tom Russo focuses on strong global brand name companies, while Royce and Associates David Nadel specializes in international small company stocks including gold mining shares.