How a Mutual Fund Can Average 35% a Year
By Graham Summers
July 25, 2007
I'm sure my last essay piqued some interest.
After all, it's not often that you find mutual funds that average 35% a year for seven years... at least not if you're focusing strictly on domestic markets. As much as the S&P 500's 11% rally last year seems impressive, it's nothing compared to other, international markets.
In fact, looking at the best performing mutual funds of 2006, you'll notice a distinct lack of U.S. equities. According to Morningstar, the top 10 performing funds of 2006 were:
Fund |
Symbol |
2006 Return |
Dreyfus Premier Greater China |
DPCAX |
85% |
Oberweis China Opportunities |
OBCHX |
81% |
Old Mutual Clay Finlay China Inst |
OMINX |
79% |
JHancock Greater China Opp |
JCOAX |
70% |
Columbia Greater China |
NGCAX |
69% |
ING Russia |
LETRX |
67% |
Gartmore China Opportunities |
GOPAX |
67% |
AllianceBernstein Great China '97 |
GCHYX |
65% |
Matthews China |
MCHFX |
64% |
E.I.I. International Property |
EIIPX |
64% |
|
As you can see, some of the best investments in the world are outside of the U.S. When an entire market soars 30%, nearly everything on that market is going to rise. If you can find a fund that focuses particularly on the larger, more profitable firms in such a market, you'll do very nicely indeed.
Regarding the particular mutual fund I mentioned last week – the Global 10 Large Cap Index Fund – it produces such ridiculously high profits by focusing specifically on the largest, most profitable companies on the Kuwait Stock Exchange... companies like Mobile Telecommunications (MTC).
MTC has a virtual monopoly on the telecom industry in the Middle East. The company has more than 13 million square miles under license – 30% more land than the entire U.S. The company has 29 million customers making 210 million calls daily.
MTC currently operates in 20 countries (six in the Middle East and an additional 14 in Sub-Saharan Africa). It's the No. 1 operator in 14 of these. MTC owns 59% of the telecom market share in Kuwait, 53% in Jordan, 30% in Bahrain, 50% in Lebanon, 59% in Sudan, and so on.
These telecom markets are still very much in the early stages. So the growth potential is enormous: MTC increased its number of Middle Eastern customers by 49% in 2006. The number of African customers more than doubled for the same time period. MTC has 33% of the market share in Tanzania, 28% in Kenya, 79% in Zambia, 61% in Malawi.
Altogether, MTC's customers have risen nearly ninefold in the last two years. Revenues have quadrupled, while net income has nearly tripled for the same time period.
With this kind of profitability and growth, it's no surprise to see that the Global 10 Large Cap Index has 29% of its assets in MTC's stock. However, Global's fund spreads the remainder of its assets across an additional nine large-cap equities, all of comparable attractiveness.
For example, consider the fund's second-largest holding, the National Bank of Kuwait (NBK).
NBK is the largest private institution in Kuwait. It's also the highest-rated bank in the Middle East, with an A rating from Standard & Poor's and an Aa3 rating from Moody's.
The bank has branches in Kuwait, Bahrain, Iraq, Singapore, France, the U.K., the U.S., Saudi Arabia, Lebanon, etc. Islamic banking is the fastest-growing banking industry in the world. And NBK is at the top of the heap. It generates 57% of the consumer loans in Kuwait. New loans have more than doubled from $5.1 billion to $12.2 billion in June 2006. Similarly, assets under management have nearly doubled from $3.8 billion to $7.1 billion in June 2006. The returns have been tremendous.
Revenues and income have more than doubled from 2003 to 2006. Between 2001 and 2006, NBK showed investors an average annual return on equity of 24%.
By investing outside of the U.S., you get access to monopolies, unfair deals, and political advantages you'd never find at home. After all, many of these countries are in the early innings of building a modern economy. And when you put your money in a basket of these kind of companies – a basket like the Global 10 Large Cap Index – making 35% doesn't seem quite so outlandish anymore.
More to come...
Good trading,
Graham
