The 2008 financial crisis was a major wakeup call for many investors. While the subprime mortgage crisis and regulatory negligence was a huge reminder that investors need to play an active role monitoring their portfolios, the crisis also revealed, that the global financial markets were more intertwined than most had realized.
Most investors, both institutional and in the retail space, have primarily focused on domestic opportunities in the United States, and for good reason. But now, more than ever, awareness of the opportunities and macro trends around the world is absolutely critical.
For over four decades, Guild Investment Management and its founder Monty Guild have been advising clients on allocating their assets on a global scale. With a disciplined set of fundamental criteria, Guild scours the globe in developed and emerging markets for opportunities that fit the firm’s profile. Equities.com had the chance to speak with Mr. Guild to learn more about his firm, and the compelling markets that he’s watching both for the near and long term.
EQ: Can you talk about Guild Investment Management’s history and the firm’s approach to the market?
Guild: I founded the company in 1971. Prior to that, I was an analyst at a bank and at a hedge fund. I felt there was a need to offer global investment management services to individuals and for corporate customers, such as pensions and so forth. So we take a global macro approach, looking at social, political, and economic events around the world, and then winnowing out those sectors and countries in the world that have headwinds, and focusing on those that have tailwinds.
We then begin to do bottom-up research by talking to analysts from those countries, as well as sending analysts there ourselves to determine which industries are going to be most attractive in those countries. We visit companies, customers, suppliers, and so on, and then compare notes with other companies similar to them.
So for instance, when we go out and visit a steel company, we ask them who their competitors are, which ones are the most effective, who has new products coming out, etc. Often, they’ll give you very good information, but sometimes they won’t. We found that in every country, the culture is different and the willingness to be forthcoming and share information with foreigners is different. So it’s been a long learning curve over the past decades.
We do stocks in the U.S., Canadian, European, as well as Asian markets. We don’t do Latin America so much, though we do some of the bigger countries there. We try to stick to the bigger emerging markets and the developed markets. So we don’t do Botswana or markets things like that.
EQ: What is your set of criteria when determining the kinds of opportunities that you find?
Guild: We look for a three-to-one or four-to-one reward/risk ratio with the potential to increase 30 to 50 percent over 12 months. So that means that if we buy a stock at $10, we think it can go to $15 over a year or two. So if we think it can go up 50 percent, then we might be willing to tolerate 17 percent risk. If we think it can go up 30 percent, then we may only be willing to tolerate 10 percent risk.
We have an automatic loss-cutting mechanism and we cut off our losses or take profits anytime a stock falls by the predetermined percentage from the high that it has reached. So in the case of the stock we bought at $10, if it went from $10 to $8, we would exit the position because it reached our risk tolerance. If it went to $14, and then fell 17 percent to under $12, then we would sell it because it violated our loss-cutting parameter. We often will buy back a stock we sold if we like it, even if it is at a price higher than where we sold it as long as we think it still has a reward/risk ratio of three-to-one or four-to-one.
This requires a lot of in-depth work and constant monitoring, but it makes us work hard and helps us to create a lot of short-term gains. We don’t try to create a lot of long-term gains, and the reason is that the market very seldom trends in any direction without having a loss-cutting experience in the middle of the one-year holding period. If it did, then we would hold on for a longer period of time. We would hold for as long as we think the stock can still move up another 30 percent over the next 12 months.
EQ: In terms of global investing, I don’t suspect there was a lot of that going on in 1971. What attracted you to the opportunities there?
Guild: In 1971, President Nixon closed the gold window. At that point in time, as a student of economics, it became obvious to me that this change was going to create inflation. It was going to create a higher price for gold, because it used to be that you could go to the gold window at the Federal Reserve and get back gold for dollars. When the dollar was convertible to gold with foreign currencies, more people wanted the dollar.
Once foreign currencies and central banks saw that the dollar was no longer convertible to gold, the dollar began a rapid decline. Nixon had some Keynesian economists advising him, and they said we needed more liquidity in the system to pump it up. So they devalued the dollar. One way you create growth is to create inflation, which is the impression of growth. That’s what Nixon did.
So we had a gradually weakening dollar, and a gradually strengthening gold price worldwide. The only way Americans could play that in 1971 was by owning gold stocks. There were very few American gold stocks at the time, and Americans couldn’t own gold after President Roosevelt took all the gold out of circulation during the Great Depression. As a result of this whole process, we thought gold stocks in South Africa, Britain, and Asia would rise in value. So we started buying shares of South African gold miners trading in London. That was the beginning of our development of an international approach.
EQ: How has your international scope expanded since?
Guild: Over time, we became knowledgeable about Hong Kong and became knowledgeable about Europe. We had already known about Europe, and for many years, most of our international investing outside of the U.S. was in Canada, Europe, and Hong Kong. Then, as the four tigers of Taiwan, Hong Kong, Korea, and Singapore started to come to prominence, we started to do more there and got involved in India, China, and so forth. So it’s been about gradually adding to our repertoire over the last 42 years.
EQ: Finding opportunities with the potential to increase 30 percent to 50 percent within 12 months with acceptable risks seems like a pretty tall order. How do you do that on a consistent basis?
Guild: We have to do a lot of digging and throw away a lot of fool’s gold to find the gold nuggets in the bunch. So it’s just constant work, and we have a network of experts all around the world in our business. We communicate with them and we tell them what we like in the U.S., and they share some of their ideas with us. So in addition to doing our own research, we have a network of professionals all over the world that we work with. Often, they’re money managers and are successful people who we’ve known for decades.
EQ: Who are the investors that you typically work with and what value do you provide them?
Guild: We’re a full-service investment management firm. By that, I mean we manage money in equities, income, aggressive growth, conservative growth, or a hybrid effect of income and growth. So we have four general styles of clients that we manage money for. Mainly, it’s small and mid-sized corporations of wealthy individuals. We like to provide any service a client wants in terms of providing information, and charge fees for it. The idea is to give a very hands-on, total service package to a client.
If they have questions about their business--how to finance their business, how to grow their business, what investment bankers they might need for mergers or acquisitions or to sell their companies, or to go public--we’re happy to introduce them to those people for no fee.
We provide advice on how to allocate their assets around the world. So what we do often is give our investment management clients a lot of free advice in areas that we don’t collect fees because we believe it’s a full-service relationship.
EQ: What are some intriguing investment opportunities that you’re watching closely right now?
Guild: One area we like a whole lot is mortgage insurance companies and insurance companies that are doing turnarounds. One stock we like and own a lot of is Genworth Financial, Inc. (GNW) , which trades at a little more than half of book value.
It operates primarily in three businesses: mortgage insurance, long-term care insurance, and international mortgage insurance.
Mortgage insurance is a great business these days because the government is getting out of it and the bad mortgage insurances have already been paid out. So new mortgage insurance being written today is very high quality because down payments and underwriting standards for loans are better. So that’s one area that’s doing well.
For long-term care insurance, they had way underpriced their products in the past. They were losing money on that business, but have reinstituted pricing increases and reorganized it. So they’re better positioned there now.
Their international mortgage insurance sells to countries abroad, such as in Europe, Canada and Australia.
They were also in the asset management business but they’re selling off their weaker businesses and concentrating on their stronger businesses. So they’re trading at a little more than 50 percent of their book value, turning things around, and we see about a 30-percent upside.
EQ: You recently discussed how commodities may be building a bottom. What do you see there?
Guild: That’s more of a long-term view. It’s not something that will happen in the next month or so. We’re talking about maybe over the next year or two.
One of our jobs at Guild Investment Management is to look out ahead to see what’s happening in the future. Right now, we’ve seen commodities prices bottom around $500 on the Thomson Reuters Continuous Commodity Index (CCI). It’s hovering around $504 and $524, back and forth, back and forth. Everybody’s bearish on commodities right now. We’re having big crops this year for farmers, so that’s pushing the price of grains down. Everyone’s thinking they’re going to go down forever. My experience, however, is that grains go down until the planting season starts, and then there’s always concern whether there will be enough.
We’re also having a good winter crop for soybeans and corn down in Brazil. It’s summer for them right now. We’re also seeing some weakening in demand from China, although demand for minerals, oil, metals, and things like that remain good.
You’re also seeing crop prices and other food prices come down. Cotton prices are also coming down. So for all of these reasons, people are saying commodities are over.
Our experience with commodities is that when it looks darkest, that’s the time to start doing your research and picking out when they’re going to turn. You don’t know if they’re going to turn now or six months from now, but we think this current range trading is providing a base-building period. After it goes on for six to 12 months, it will provide a good buying opportunity. It started in June or July of this year, so in six months or so—it could expand to maybe 12 or 18 months—we think commodities start up again.
EQ: Do you incorporate a short strategy?
Guild: We do short, but it’s not one of our primary skillsets. We try to find fundamental shorts instead of market shorts. When the market is bad, we try to generally just get out. We try to avoid the bad markets, which we do with our loss-cutting mechanism.
EQ: That approach seems to have proven pretty successful for you.
Guild: Yes, if you just avoid the declines and can limit your losses to a small degree during down markets, and even if you generate average performance in the uptrends, you end up doing quite well.
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