Using a 2003 Goldman Sacks research article “Dreaming of the BRICs: The Road to 2050” as a primary source, on July 3 I wrote an article “Investing: How to Make Money from the Industrialization of Brazil, Russia, India, and China “. He stated why Brazil, Russia, India, and China (aka BRIC) will be among the world’s most dominant economies by mid-century. As these countries industrialize, a huge demand for the necessities of industrial life such as homes with indoor plumbing, electricity, utilities, appliances, and automobiles will be created.
To capitalize on this trend, I suggested a direct and indirect investment approach. How did these approaches come about? If you’ve been following the “Week in Review” articles, you know that both methods had phenomenal years. If you bought both portfolios at the morning open after I published the article, you have been rewarded with gains of 21.83% (direct) and 8.35% (indirect) vs. 10.93% for the S&P 500. For the year, the direct and the indirect methods yielded 49.2% and 41.2% respectively.
To review the approaches: The direct approach is made up of a basket of equally weighted exchange-traded funds (ETFs) representing each of four countries: Brazil (EWZ), Russia (TRF), India (IFN), and China (FXI).
The indirect method (also known as the Big-Build Out portfolio) consists of companies that provide essential products for industrialization, such as copper, aluminum and zinc. Contains proven mining industry leaders such as: diversified producers: BHP Billiton (BHP), Falconbridge (FAL), Rio Tinto (RTP); aluminum producer Alcan (AL); copper producers: Freeport-McMoran (FCX), Southern Copper (PCU), Phelps Dodge (PD); nickel producer Inco(N); iron ore producer – Companhia Vale Do Rio Doce (RIO).
During the California Gold Rush, these companies’ equipment, parts, and service providers also benefited. Therefore, two heavy equipment manufacturers are included, Caterpillar (CAT) and Bucyrus International (BUCY). Although the final company is not a producer or supplier of base metals, countless tons of cement and concrete will be needed for construction. Therefore, the cement and concrete producer – Cemex (CX) completes the portfolio.
An added benefit of having 12 shares in the indirect portfolio is that at least one company is sure to be a takeover target. In 2006, FAL was acquired by Xstrata and N by Companhia Vale do Rio Doce (RIO). Freeport McMoran (FCX) has made an offer to acquire Phelps Dodge (PD) and there are rumors that FCX is a target. Fusion activity will continue as it is cheaper to acquire resources than to explore, develop and mine. This improves the portfolio’s performance as the target company’s share price rises to match the withdrawal premium.
The industrialization was not completed in 2006 and will not be for many years, so I will ride this horse again in 2007. Obviously the direct approach is still the same, but I am making some adjustments to the indirect method. Two changes arise out of necessity as FAL and N have been acquired. Those two will be replaced by Teck Cominco (TCK), the world’s largest zinc miner, and Lundin Mining (LMC), a base metals mining company in Canada. Although CX had an outstanding year, I am replacing it with another heavy equipment operator, Terex Corp (TEX). Terex has just been added to the S&P 500 index.
So the 2007 Big-Build Out list is as follows:
AL, BHP, BUCY, CAT, FCX, LMC, PCU, PD, RIO, RTP, TCK, TEX
Will we see returns of 40% again? I don’t know, but whatever it is, I plan on doing it. Don’t let this train leave without you.
