Nicholas Kaiser, manager of
, has one of the best track records in the business. But he
didn't achieve this success by taking on high levels of risk;
Kaiser is a value investor who no qualms about increasing the
fund's cash position when the market is overbought. The fund ranks
in the top 2 percent of its category on a trailing three-year basis
and is at the top of the pack for the past five years. We spoke to
him about his investment outlook for 2011, parts of which may
What's your outlook for the US economy in 2011?
I have an optimistic outlook for the US economy in 2011. Our
forecast calls for 10 to 15 percent growth in the broader
We expect US corporations to continue to post high earnings as
the US economy shakes off the after effects of the recession.
Unemployment should fall to about 8 percent by the end of the year,
leading to generally more positive sentiment in most regions of the
That being said, don't expect widespread euphoria in the markets
or valuations to rise to the levels we saw in 2006 and 2007. Much
of the US economy is based around the construction and real estate
sectors, both of which we suspect will recover slowly.
But export-focused companies will continue to grow at a decent
Overall, we're optimistic that this will be a good year for the
The global economy has bolstered the performance of the US
economy, and that trend will continue. This is a different
situation than what we've experienced in the past; we're accustomed
to the US being the world's leader.
Today we have stronger economies overseas, especially in
emerging markets, which have benefited dramatically from lower debt
and faster growth. This means their consumer markets are strong and
their citizens are making purchases and investing. That has helped
US and European exports, which are quite strong.
International investing is largely a currency game, so the main
question is how the currencies of our major trading partners will
perform. The risk is that the dollar will depreciate. But given the
favorable outlook for the US economy, we think the dollar will
perform reasonably well in 2011 so the risk incurred by holding
cash is relatively low.
The dollar has some strength, and we're pretty optimistic about
domestic political events over the last few months. We see the
government working together a little better than before, and that
should boost confidence that our leadership has what it takes to
solve the problems facing the country.
We just might have the right people in place to come up with
interesting solutions to the host of issues that threaten the
health of our country and its economy.
A number of Republicans were elected to Congress in November,
and without even taking office, they appear on course to pass their
tax bill. It's amazing that they have already pretty much won their
agenda. Of course it required some compromise, but they did it.
Regarding the bigger problems, such as what to do with Fannie
Mae and Freddie Mac, I look forward to a vigorous debate. But
there's a better opportunity to solve these problems now that
there's a balance of power in Washington. Both sides will be heard,
and reasonable compromise is possible.
Many have predicted that the midterm elections would result in
political gridlock in Washington. That won't be the case because
President Obama has demonstrated a willingness to make deals, even
if he hasn't been particularly happy about them. He's recently
brought in a new team of business advisors and his original team
has shuffled out with their tails between their legs.
President Obama is a smart guy who seems to understand that it's
better to get along and listen to both sides. In this respect, he's
taken a lot of lessons from the Clinton presidency. President
Clinton was reelected because he changed course after his party's
shellacking in the 1994 midterm elections. President Obama realizes
that he also needs to change.
What steps could the government take to help turn around
We have a huge problem with Fannie and Freddie. At the heart of
the issue is whether the government will continue to subsidize
mortgages and housing the way it has for over 50 years. I think we
can all agree that we don't need to continue this practice. If we
can reach that consensus, we can then start to resolve a bevy of
We can put Fannie and Freddie out of their misery and put all
the debt on the government's balance sheet. After all, who really
cares if the final debt is $13 trillion or $20 trillion? But once
this clearly flawed practice has come to an end we could see things
turn around. Then after six months or so passes, people will start
looking for places in which to invest their cash and turn to this
pool of mortgages that's suddenly worth something.
But before any of this can happen there has to be an initial
consensus that subsidizing mortgages isn't such a great idea--after
all, no other country has ever done it to the extent that we have.
We could then adopt five-year mortgages accompanied by a 20 percent
down payment, as is the case in Canada and much of the rest of the
world. If we solve this problem, everything else can fall into
place over the next 12 to 24 months.
What will be the most attractive markets this
Because we're value investors, we stay away from higher-risk
markets. That limits our exposure to high-growth markets such as
China and increases our exposure to countries such as Japan.
The same holds true for some parts of Europe where countries
such as Germany and some of its neighbors are going to perform
reasonably well. We're also looking into Eastern Europe.
Even though inflation has risen in India we see opportunities
there. Brazil will continue to be strong, though the market is
getting overpriced. We like Latin American countries such as Peru
and Chile and we're seeing some good opportunities in the rest of
A number of smaller European economies such as Denmark and
Norway are doing fine; there's nothing like oil prices at $90 per
barrel to help out a country like Norway.
Japan's export business is strong. Take a company like Canon (
). The firm produces high-quality products and has the ability to
meet its customers' demands for increasingly advanced technology.
Meanwhile, the yen has been quite strong, making the country's
exports more expensive. But the quality of Canon's products has
meant that the stronger yen hasn't slowed the company's sales.
Besides, we want to buy into stronger currencies through bets Canon
and other companies that can sell to emerging markets such as China
When choosing companies in which to invest, we look for strong
balance sheets and transparent businesses. There are still issues
in the developing world with transparency, corruption and weak
accounting standards. This makes investing in these countries too
risky in many cases. We view the markets of major Organization for
Economic Cooperation and Development (OECD) member states and
second- and first-world countries as solid and safe.
We'd rather buy shares of a resource company in Canada or
Australia that's selling to China than purchase stock of an
importing business in China. It's a lower-risk strategy.
What are your thoughts on the best and worst sector bets
for this year?
We've been overweight resources. That will continue to be a good
place to invest internationally. We will continue to invest in
energy-related sectors because the price of oil is attractive at
$90 per barrel.
There are good profits to be found in many transportation
companies, particularly foreign airlines that run themselves in a
conservative manner. There will be some decent financials in the
strong economies; several international banks and insurance
companies are very attractive right now. But by and large we'll try
to avoid highly leveraged companies. That being said, there's a lot
of cash on corporate balance sheets and I suspect there will be a
wave of mergers and acquisitions activity.
I would avoid companies that rely on government subsidies to
sustain operations, particularly clean-energy firms. The fact is
that many clean-energy sources such as wind power simply aren't
economical at this stage. This means that the world, particularly
the US, will continue to rely on coal for most of its power
generation needs for some time to come.
What's your best piece of advice for investors this
Be conservative but stay fully invested. Risks still lurk in the
markets, but you'll find good protection in strong companies with
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