Part of the research that Frank Holmes does in his role as Chairman, CEO and CIO of San Antonio-based U.S. Global Investors, Inc. is an assessment of the political risks in countries where commodities are mined or produced. That’s because, he says, the real cost of getting copper, oil or gold out of the ground varies with the country, and one of the most important variables in assessing that cost is political risk. So far this year, his travels through South America and Africa have left him upbeat.
Holmes caught up with Staff Editor Kate McBride when he was in New York March 21st to accept Lipper Fund Awards 2006 for three U.S. Global Investors Funds: the China Region Opportunity Fund won both three- and five-year awards; the World Precious Metals Fund won a three-year award; and the Global Resources Fund won a five- year award.
Last week, Holmes was in Colombia with President Alvaro Uribe. “What a delightful guy, he’s 52, looks like he’s 42, athletic, speaks beautiful English; he is high-energy, never uses the word me or I … he has a vision for this country.” Over the past couple of weeks, Holmes says, $3 billion in investment has been committed to Colombia for the development and production of high-quality coal for export to the U.S. “We participated in the financing of two companies in this country, one for oil and gas, the other one is coal; so far the investments have done very well, they have doubled. They are listed in Canada, but 100% of the assets are in Colombia.” Holmes asserts that Uribe’s vision for Colombia includes “job creation, infrastructure, and getting his deficit down as a percentage of GDP; he’s taken it from 53% down to 43%, his goal is to take it down to 33% but still maintain the strong GPD growth.” He cites the inclusion last year in the Investor’s Business Daily’s CANSLIM 100 Best Stocks the BanColombia ADR (symbol CIB on the NYSE), as a “reflection of the growth and success of that economy.”
Holmes makes a stark contrast between what is happening politically in Colombia versus the situation in Venezuela, “which has the oil, and there are bridges falling down, no infrastructure, Chavez is running around trying to embarrass America,” says Holmes, “whereas Uribe is pro-America. You get caught with drugs there, you’re shipped to America–you’re processed in the U.S. If you want to build a port to ship coal to America it is Homeland Security-certified–costs about $3 million. All the processes and procedures are in place to make sure there are no drugs, etc., being shipped.”
“We like to go into countries where everyone [outside] has a negative, cognitive dissonance, a real anchoring to something that was history–and it’s evolving. Those who adapt first, see those opportunities–that things are evolving–do well, and I think that that’s part of the process, and helping our performance,” Holmes explains.
Now, as a money manager, what are my risks? Should I be getting out early or should I be getting in early? That’s my reason for globetrotting.” He says that one shocker for him was, while traveling in Africa, in Cape Town, the Congo, Mozambique, and southern Sudan, seeing the Chinese everywhere, looking for resources. “They’ll come in and sell you a mining plant, come in and assemble it all, for one-third the price of the Germans.”
But how does he deal with commodities’ somewhat notorious volatility issues? Some of it is rather simple, he says: “Whatever China needs, get long; whatever China has extra of get out of the way.” His team monitors government policies of what they call the “E7″ emerging countries with the largest populations–and that drives “longer-term understanding of these commodities. Shorter term, we will raise cash, recently we were up to 20% cash,” and Holmes added that they have had as much as 30% cash in some of the portfolios.
So how would Holmes allocate commodities in clients’ portfolios? He looks to the allocation model of Roger Gibson, president of Gibson Capital Management, and author of Asset Allocation: Balancing Financial Risk, McGraw-Hill, 2000). Holmes points out that Gibson’s model allocates 25% each to international, resources, income (including bonds, dividends, and REITs), and domestic equities, and Holmes says to be sure to regularly rebalance.