Portfolio Review: Commodities Dip Seen As Good Time To Buy

March 25, 2008


At times, ILF has shown more volatility than the S&P 500. "But it has been a pretty straight upward trend in ILF for a good three or four years," Naismith said. "Its chief positions are in Brazil, Mexico and to a lesser degree, Chile. Those are pretty strong markets among developing countries."

He also continues to favor SPDR S&P Emerging Markets (AMEX: GMM). Most of its holdings are in BRICS - Brazil, Russia, India and China. "But another 50% of the fund is spread across 14 or 15 different smaller emerging markets," Naismith said. "It has a very different flavor than other emerging markets ETFs. And it's still highly diversified."

But he's watching closely to see how a slowdown in the U.S. could impact emerging markets. "We're seeing a real transition across developing nations. People are becoming better educated and there's a real thirst to live more successfully than past generations," Naismith said.

That's bringing about a cultural change that might put developing economies on steadier footing if developed markets collapse more in coming months, he added.

"We're still bullish on emerging markets," Naismith said. "It could be very volatile. But we see this as a long-term core holding."

Sarasota Capital currently has about 12-15% of its total assets in emerging stock markets, he estimates.

Sideways-Moving Market 

Naismith hasn't been investing in bonds since late 2005. "The commodities help a lot because they're inversely correlated to the stock markets," he said. "And we're holding about 20% in cash now. That's not a bad place to be in this sort of sideways-moving market."

If the S&P 500 rallies past 1380, Naismith plans to start putting more cash to work. "But it also has to hold past 1380 for three-to-five business days," he added. "If it does that and shows the broader market is forming a solid base, then we'll start getting back into the domestic markets."

In the U.S., Sarasota does own PowerShares Dynamic Consumer Staples (AMEX: PSL). Another largely domestic holding is PowerShares WilderHill Clean Energy Index (AMEX: PBW). "These are ones we've held through this rough patch," Naismith said.

PBW is a call he's making on the long-term prospects for alternative energy. Naismith is also planning to keep a small position in PowerShares Water Resources (AMEX: PHO). Each position represents about 5% of the firm's total assets.

"Whenever these things get beat up, we tend to gather more shares. It's inevitable that water and clean energy is going to face rising demand going forward," Naismith said. "We've got a crisis taking place in clean water. And moving from fossil fuels to cleaner fuels is inevitable."

In addition, Sarasota has owned PowerShares DB G10 Currency Harvest (AMEX: DBV) since its late 2006 inception. The fund rotates between G-10 country currencies. The three currencies with the highest yields are given 200% exposure and the three lowest yielding are shorted by the fund.

"In backtesting, this particular strategy has only had two negative years in the past 20 years," Naismith said. "Over the last 15 years, its returns are about even with the S&P 500 but with significantly less volatility. So we like it going forward in a jittery economy."

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