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International Portfolio: The Solid Fourth-Quarter Results Continue

By Roger S. Conrad on Mar. 12, 2014

In local currency terms, the 20 names in our International Portfolio have returned an average of 11 percent since the strategy’s inception on Nov. 15, 2013–double the gains posted by the S&P/TSX Composite Index and five times the return eked out by the S&P/ASX 200.

Eight of the 10 holdings in the International Portfolio’s conservative sleeve and half our aggressive holdings have delivered double-digit returns.

This impressive performance reflects the strength of the companies’ underlying businesses. Our basket of 20 Australian and Canadian energy names announced strong year-end results and issued guidance that suggests this momentum will continue into 2014.

The chief headwind for the International Portfolio: currency weakness. Although the Australian and Canadian dollars have stabilized in recent weeks, the Aussie has given up about 4 percent of its value in US dollar terms since we launched this strategy. Over this period, the Canadian dollar has fared even worse, tumbling by 6 percent.

These declines have taken a bite out of the returns earned by US-based investors. But almost all of our International Portfolio holdings trade below our buy targets in US dollar terms.

Even as these names continue to outperform as businesses and sow the seeds for long-term growth, US investors can still buy them on the cheap.

Australia and Canada are not Argentina. Both countries are investor-friendly and historically have embraced fiscal responsibility and steady monetary policies. Regulation of the energy industry is generally favorable in both countries. And despite some recent softness, their economies are still growing and inflation is generally well-behaved.

Much of the past year’s currency declines reflect ongoing questions about China’s economic growth and emerging markets’ appetite for Canada and Australia’s natural resources.

However, this pullback has started to attract investors to bonds denominated in Canadian and Australian dollars, a trend that could portend stable exchange rates for both currencies.

The previous issue of Energy & Income AdvisorThe International Scene, highlighted the nine International Portfolio companies that had reported 2013 results.

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