Almost a third of the way into the year, one thing is becoming clear: 2014 is not shaping up to be another monster year for the U.S. stock market.
For more years than Wall Street’s best and brightest care to admit, the script for investment success has been startlingly straightforward.
Throw out all of the textbooks touting the benefits of diversification across asset classes and sectors. Just bet on a U.S. stock index and your investment problems are solved.
It turns out that the simplest strategy of being “dumb and long” in the U.S. stock market trounces the most sophisticated hedge funds in the world. This year, there are signs that this script is changing.
For the first time in recent memory, the U.S. stock market is far down the global league tables of the best-performing stock markets in the world, ranking a middling 29th out of 45 so far in 2014.
As subscribers to my investment and trading services know, I recommend stocks, bonds, currencies, commodities and basically anything that I believe will make my subscribers money.
That’s because if you’re a “one-trick pony” in the investment world — betting only on China, technology or even master limited partnerships (MLPs) — you’ve got a pretty short shelf life.
I’ve always believed that there is more than one way to skin the investment cat.
And looking at three of the top-performing asset classes from my investment programs at my firm Global Guru Capital is a good example of this philosophy put into action.
1. Pimco Municipal Income Fund II (PML) — up 12.52%
Say the words “invest in municipal bonds,” and most investors can barely stifle a yawn.
After all, municipal bonds are the very opposite of exciting, high-risk and high-return investments like biotechnology.
Yet here’s something I bet you haven’t heard elsewhere: returns on municipal bonds have trounced biotech in 2014, generating double-digit percentage total returns even as the U.S. stock market has been churning in place.
It wasn’t supposed to be that way. Meredith Whitney grabbed headlines a few years back with her prediction that there would be between 50 and 100 “significant” municipal bond defaults in 2011, totaling “hundreds of billions” of dollars.
And just last year, major cities in the United States such as Detroit and San Bernardino, Calif., went bankrupt.
No wonder that in 2013, about the only asset class that performed worse than municipal bonds was the much-hated emerging markets.
In 2014, Pimco Municipal Income Fund II (PML) exchange-traded fund (ETF) is the single best-performing asset class in Global Guru Capital’s “Double Your Dividends” Investment Program. Throw in an annual yield of 5.9%, tax free and paid out monthly, and municipal bonds aren’t quite as boring as you might think.
2. Vanguard REIT Index ETF (VNQ) — up 12.53%
The Vanguard REIT Index ETF (VNQ) exchange-traded fund tracks the performance of the MSCI US REIT (real estate investment trust) Index. Its largest holdings include the well-known Simon Property Group.
Like municipal bonds, U.S. REITs were another asset class that substantially underperformed the broader market in 2013. This year has been much different, and the rally in U.S. REITs is one of the most underreported developments around.
The rally in U.S. REITs is particularly surprising. After all, the U.S. housing market is hardly on fire and the recovery in the sector has softened in the first quarter of 2014. Housing starts were lower in both January and February, with housing permits showing a definite declining trend.
Nevertheless, Vanguard REIT Index ETF (VNQ) is far and away the single best-performing asset class in Global Guru Capital’s “Ivy Plus” Investment Program — a program that tracks the asset allocation strategy of the Harvard endowment. With an expense ratio is only 0.10% and yielding 2.77%, this ETF is a true and surprising performance dark horse.
3. iShares MSCI Frontier 100 (FM) — up 13.81%
The iShares MSCI Frontier 100 (FM) exchange-traded fund tracks the MSCI Frontier Markets 100 Index. Frontier markets are emerging markets that are themselves still “emerging” — that is, countries with the smallest, least mature and least liquid stock markets.
With all of the bad press emerging markets have been getting, it’s surprising that frontier markets have been on fire. While the iShares MSCI Emerging Markets ETF (EEM) has been essentially flat over the last 12 months, iShares MSCI Frontier 100 (FM) has surged 29.73%.
Here’s the secret…
A large part of FM’s gains are due to gains in Qatar and the United Arab Emirates. These stock markets have soared 47% and 188%, respectively, since the beginning of 2013. And these two markets alone represent about 36% of the underlying index.
That’s all changing soon, as both of these countries will graduate from the MSCI Frontier Markets Index for the MSCI Emerging Markets Index. Unless the likes of Nigeria and Kuwait — the two new largest holdings — pick up the slack, the performance of this ETF may suffer.
But for now, the iShares MSCI Frontier 100 (FM) is the single best-performing asset class in Global Guru Capital’s “Global Gains” Investment Program.
The bottom line?
While most of the financial press is focused on exciting and sexy momentum stocks, there are always a group of low-profile performers that offer surprisingly good returns.
You just need to know where to look.
In case you missed it, I encourage you to read my Global Guru article from last week about why emerging markets are the next hot pick. I also invite you to comment in the space provided below.
NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Products.
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