In today's interview, Craig Hillegas of Hillegas
Advisory Services tells Kate Stalter how, over the longer term,
emerging nations are the place to be. He also shares some of his top picks for
mutual funds and ETFs to capture infrastructure and agricultural
Kate Stalter: We're joined today by Craig Hillegas of
Hillegas Advisory Services in San Diego. Thank you so much for joining us today,
Craig Hillegas: My pleasure.
Kate Stalter: Give us your take on the current market. What
do you think individual investors really need to be aware of these days?
Craig Hillegas: If individual investors just look to what's
happening both here at home and abroad, whether it's Greece or Washington, DC,
one disturbing fact is that our shorter-term futures are in the hands of
politicians. I don't know about you, but that makes me a little nervous, because
they're prone to kick the can down the road.
So, I think it's prudent at present to be a bit more cautious, and also
opportunistic with investment themes. It's good to have some dry powder to be
able to pick up positions on sale, and to favor some investments that provide
some downside protection.
An investment that uses a covered call or put strategy, like the
Gateway Fund ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=GATEX"
target=_blank>GATEX), would be one example. There's also a unique PIMCO
investment, their Global Multi-Asset Class Fund ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=PGAIX"
target=_blank>PGAIX) that actually buys a type of insurance-like or put
protection that can come into play should the market decline in a significant
PGAIX is intended to be an all-weather investment vehicle that protects
against the risk of a big market decline. It includes global diversification of
stocks, bonds, emerging market, real estate, and commodities, and it's run by
PIMCO's chief investment officer, Mohamed El-Erian.
Kate Stalter: Are there any sectors right now, Craig, or
global regions that you see as showing particular strengths that investors
should be looking at?
Craig Hillegas: A couple of my favorite sectors, at least
longer term, are going to be listed as the tailwind sectors, those that benefit
from our global population moving from seven billion to nine billion.
They benefit from growing urbanization in the emerging-market countries such
as Brazil, India, China, the rest of Asia, and infrastructure. About $40
trillion will be spent on infrastructure over the next 20 years, so that's a
huge tailwind if you have $2 trillion going a year into various infrastructure
There are some specialty managers and even closed-end funds that work in that
area. T. Rowe Price has the Global Infrastructure Fund ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=TRGFX"
target=_blank>TRGFX), as does Cohen & Steers.
The Cohen & Steers Infrastructure ETF ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=UTF"
target=_blank>UTF) has the added benefit of going on sale, being a
closed-end fund. So it sells at a price lower than the actual component
securities. It's common to be able to purchase UTF for a 10% discount.
Kate Stalter: Anything right now you think investors should
really shy away from because it's showing weakness?
Craig Hillegas: Well, emerging markets are pricey,
expensive, and scary right now, in large part because of what could happen to
China, and China's debt. They've made a lot of bank loans to local governments,
and that could end up posing a threat to their banking system, and they're
trying to slow down their economy.
So, based on current valuations, I'd shy away from a big exposure to emerging
markets-the equities-at present. When they correct, that would be an excellent
time to make some substantial purchases.
I think now is not the time. When you do want to invest in emerging markets,
it's best to do it incrementally with multiple purchases over a period of
Kate Stalter: Let's turn to some of the investment vehicles
that you are using with your clients right now, that you believe individual
investors should be taking a look at.
Craig Hillegas: Okay, absolutely. In keeping with that
global energy-commodity theme: MLPs, or Master Limited Partnerships that invest
in pipelines, can be very generous income-producing investments.
You can get 5% to 8%-plus cashflow yields, and the hope of capital
appreciation over time.
For instance, the SteelPath MLP funds enable investors to avoid the nasty
K-1s that they receive for tax reporting. They issue simple 1099s, so you can
get about a 6.2% yield with the SteelPath MLPs compared to about a 3.2% yield
with a ten-year Treasury.
One example, in keeping with that natural resource theme, is an agricultural
ETF, the Market Trust Agribusiness ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=MOO"
target=_blank>MOO). I'd recommend that on a pullback.
I wouldn't buy it now, but with the world population growing, the people in
China and India-one of the first things they look to do is have more protein in
their diet and spend more money on food, so that should be an excellent
long-term play, along with water-type resources to fuel the agribusiness. So,
another symbol there is PowerShares Water Resources Portfolio
Kate Stalter: Okay, any other funds or ETFs or any other
instruments that you'd care to mention here?
Craig Hillegas: Well, closed-end funds, because they can be
purchased on sale, can provide a real compelling opportunity.
Closed-end funds issue a fixed number of shares, and then they're traded on
the stock exchange and so the price is determined by the market environment and
the attractiveness to a buyer and seller. So it's possible to get a margin of
safety by buying these investments at a 5% or 10% discount, or more, that can
provide quite an added cushion and also generous income.
It's common to be able to get a 7% or 8% income yield and capital
appreciation over time, so one of the best ways to access this space is just to
outsource it to a specialized manager.
Cohen & Steers happens to have one called the Cohen & Steers
Closed-End Opportunity Fund ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=FOF"
target=_blank>FOF), managed by Doug Bond, who has offered over $50 billion
during his career of new closed-end fund offerings.
Presently, that investment has a generous 7.7% distribution yield and sells
at a 7% discount below the publicly traded net asset value.
Once again, same caveat: Buy it incrementally. And should investors in the
market panic, I wouldn't be surprised if you'd be able to pick that up at a 10%
or more discount.
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