RDM Financial CEO Ron Weiner explains why he advises individuals to use ETFs and mutual funds for emerging-world exposure. He also discusses why he likes sovereign debt in several emerging nations.

Kate Stalter: Today, I am on the phone with Ron Weiner. He is the CEO and founder of RDM Financial Group. Ron, I understand that your investment philosophy involves quite a bit of exposure to emerging markets in some way. Can you tell us about that?

Ron Weiner: Sure, Kate. I think the bottom line to global growth is that these emerging economies are growing at a slow rate of 5%, at a higher rate of 7% or 8% currently, and the rest of the world is growing—if growing at all—Europe is probably flat; US probably a 2%, maybe a high of 3%. But the actual growth is coming from elsewhere.

So from a long-term perspective, you want to be in the places that are obviously growing the most.

Kate Stalter: So what’s the best way for investors to take advantage of some of his growth?

Ron Weiner: Well, there are a lot of different ways. Currently, we are much more focused on US companies that benefit from the growth of the emerging markets. Five years ago, we were more directly invested in the emerging markets, but that has become more of a dicey affair lately.

So you can invest in Caterpillar (CAT), McDonald’s (MCD)…Apple (AAPL), for one, has four stores in China, and I can’t imagine how many they could have, but a whole lot more than the almost 400 they have worldwide.

China Mobile (CHL) does not have the iPhone yet, so there are lots of places that Apple is going to see growth from the growth in the emerging markets. So you can play US companies that are levered to increase sales to emerging markets as an emerging-markets play.

Also, there’s an innumerable number, certainly, of mutual funds, but of ETFs now. We are much more interested today than we were three or five years ago, because they have gotten more specific.

One that we own a fairly large position in, about a 4% position, is an ETF called Market Vectors Agribusiness (MOO). That is, as you might suspect, an agricultural ETF. Those kinds of holdings would be Monsanto (MON), Potash (POT), Archer Daniels Midland (ADM), John Deere (DE)—anything that has to do with feeding the globe.

One of the aspects of the emerging market is that they spend 40% of their discretionary income on food. There are 7 billion people on the planet today. Some reports, United Nations and such, say that by 2050, there will be 9 billion people on the planet.

People are eating more; caloric intake per capita on the planet is growing very quickly. Plus the fact that the number of people are growing, it in themselves means that over the long term, agriculture is going to be an increasingly important part of the world economy.

So here is a way of owning about 72 stocks, both US and foreign, that are all geared towards the same feeding of the planet. There’s a lot of ways to play the emerging markets.

We own a mutual fund that is Asia only, and it has a 3.2% dividend. A lot of people are saying you should invest in high dividend-paying stocks. Well, here is a way you can own Asian stocks in a higher growth area that has a very decent dividend. So there are numbers of ways to play the emerging markets.

That is the Matthews Growth and Income Fund (MACSX).

Kate Stalter: You were talking about some equities. When I talk to advisors, some of them mention benefits of emerging-market debt exposure. What is your opinion of that?

Ron Weiner: Good point. We do own that as well, on the debt side, but it trades more like an equity.

For emerging-market debt, particularly, our focus would be in the sovereign debt, that being of governments of emerging markets. The balance sheets of countries like Indonesia, Malaysia, and Singapore. Korea, to some extent, is considered an emerging market.

Their balance sheets are a whole lot stronger than certainly European and even US government balance sheets. The yields are higher as well. You are talking anywhere from 3.5% to 6% yields on ten-year government debt of emerging markets.

But the play there is not the yields. The play there should also be a gradual and sometimes not-so-gradual appreciation in the currencies of countries that have stronger balance sheets than that of the US.

So the two ways of playing emerging-market debt: I think most people buy the mutual funds in this either in local currency or hedged in terms of US dollars. Right now, I would say for the past three months or so, you were better off being in the local currency, because those currencies have appreciated against the dollar.

But last year—certainly in the fourth quarter—you saw the opposite: when the rest of the world was worried about economic collapse, they went to Treasuries as an investment, as a secure place to invest, and thus we saw those funds that invested in local currencies not do as well.

But the choice would be yours. Longer term, you probably would do very well investing in local currencies. But expect volatility over and above the yields.

Kate Stalter: And again, any particular funds that stand out to you right now in these areas?

Ron Weiner: Well in that case, we kind of looked at PIMCO for that. They’re smart people; there are a lot of people; they’ve been around this business for a long time, so we go with the experience, not the newer names.

Kate Stalter: Last question for you today, Ron: Just coming back to the equity side, a few minutes ago, you alluded to the phenomenon where some of these emerging-market names were just some of the high flyers a few years back, and then went through a particularly rough patch, even failed to rebound as much as the general market did.

Anything in there that you would advise investors to be particularly cautious about if they are looking to go into individual stocks? Any names that could be available to them at this juncture?

Ron Weiner: The only emerging-market play in our portfolios right now of individual stocks is Baidu (BIDU). That, in essence, they call it the Google (GOOG) of China.

In some of our aggressive growth, we have Youku (YOKU). I would say that mostly, you have to be very cautious. No. 1, suspect accounting. Certainly government regulation can change individual positions overnight.

My suggestion is really to stay away for the most part from individual names overseas in the emerging markets and stick more with ETFs or managed funds. Too scary for us.

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