Richard Hirayama, the subadvisor to ROI Global Supercycle Fund who works out of San Fran-cisco, believes the world is undergoing a dramatic shift as capitalism becomes a universal way of life and a single world economy is created.
(ROI Global Supercycle was launched more than a year ago by Toronto-based ROI Capital Ltd. <\/b>)
Investing under such circumstances is best done by taking a bird\u2019s-eye view, seeking out opportunities created by the big picture and long-term trends \u2014 or \u201csupercycles,\u201d as Hirayama likes to call them.
During such supercycles, demand for specific products greatly exceeds supply for many years. Hirayama\u2019s investment philosophy is based on the conviction that superior investment performance depends on first identifying the most attractive global sectors, then drilling down to the best companies.
\u201cThe world is undergoing a tectonic structural evolution,\u201d says Hirayama, who at 62 years of age has 40 years of money-management experience under his belt. \u201cIt\u2019s a shift no human has ever seen. The key is to spot the major macro trends. The traditional bottom-up approach is antiquated and archaic. It\u2019s nearsighted and myopic.\u201d
Hirayama speaks with some credibility. He is a managing member of Hirayama Investments LLC, <\/b> an affiliate of Wentworth Hauser and Violich Investment Counsel<\/b>, a money-management firm he joined in 1990.
Last year WHV, which manages almost US$8 billion in assets, was ranked first among international equity managers by New York-based Informa Investment Solutions Inc. Hirayama has been a key contributor to WHV\u2019s winning average annual return of 12.4% on its international portfolio during the past 10 years.
Through ROI Global Supercycle, ROI Capital is the only firm to offer Canadian retail investors access to WHV\u2019s portfolios. ROI Global Supercycle\u2019s return for the tumultuous year ended Aug. 31 was 18.3%, a far cry from the loss of 14% registered by the MSCI world index (in Canadian dollars). Assets under management in various versions of the fund total about $12 million.
\u201cCapitalism is the greatest economic system ever devised,\u201d Hira-yama says. \u201cIt generates more wealth than other systems. Socialism and communism generate misery.\u201d
He says the disintegration of the Berlin Wall and the collapse of the Soviet Union set in motion a chain of events in which the world is no longer fragmented and polarized by opposing political and economic regimes.
Instead, the world is open for cross-border trade, and that presents juicy opportunities for global giants that can dominate their industries.
Hirayama cites Toyota Motor Corp. of Japan as an example of a company riding the global wave, reaching for dominance in the car industry.
\u201cPreviously, the world was only half-open, and it was a less efficient, slower-growing world,\u201d he says. \u201cThe world is now dominated by capitalism, and huge corporations are crossing country boundaries [and] trying to dominate their competitors. When you can trade with formerly Communist countries, it becomes a bigger, faster-growing world.\u201d
Hirayama points to the huge populations of India and China, and the voracious appetite that will be created for goods as their middle classes expand, as a major stimulus of world demand.
China and India have 2.4 billion people between them, he says, and when combined with other emerging markets, there are 5.5 billion people contributing to the new economy.
The size of this population, he adds, dwarfs the mere one billion people in the traditional developed world who have driven the global economic engine until recently.
\u201cIt is the emerging economies that will be making the world tick as we move into the future,\u201d Hirayama says. \u201cIt\u2019s a brave new world. China is industrializing, urbanizing and building infrastructure, such as a transcontinental highway and railroad. That requires a lot of steel and energy. You must widen your focus [as an investor], rather than confining your view to the developed world.\u201d
As a result of globalization and the growth of emerging markets, Hirayama has weighted the ROI Global Supercycle portfolio to 37% in energy, 29% in other materials and 10% in industrials. By contrast, materials and resources make up about 18% of the MSCI world index, he says, which is less than the 21.5% represented by the banks.
Hirayama sees no \u201cred flags\u201d that the supercycle has peaked, and he foresees being overweighted in the same three sectors for many years.
@page_break@However, some analysts say, there can be risks to lack of diver-sification in an unpredictable world.
\u201cThe [ROI] fund\u2019s concentrated portfolio will likely add to increased volatility, since there will be times when resources are in or out of favour for periods of time,\u201d says David O\u2019Leary, manager of fund analysis with Morningstar Canada<\/b> in Toronto. \u201cInterestingly, the fund does have significant exposure to consumer staples at present. Consumer-staples firms operate in industries that are not as sensitive to economic cycles and typically hold up well during periods of economic uncertainty. This provides some diversification to the fund\u2019s resources exposure.\u201d
Hirayama says emerging markets are generally not self-sufficient in natural resources; as these countries grow, they will have to import more raw materials. Currently, China consumes more energy relative to gross domestic product growth than developed societies, he says, and resources-rich countries such as Canada and Australia stand to benefit.
\u201cNew resources supply takes years to come onstream,\u201d he says. \u201cWhen the global economy turns up again and is robust, you can\u2019t just turn on the oilwell and have the oil come out. Emerging markets will have to import more oil.\u201d
Because Hirayama views the global economy in terms of supercycles, most stocks in the ROI fund are held for the long term, with a low turnover rate of 5%-15% a year. \u201cWe look to generate returns over an extended period of time,\u201d he says, \u201cfive, 10 or 20 years.
\u201cLong-term is the purest way to invest in equities,\u201d he continues. \u201cMany of our competitors are traders with high turnover rates. It\u2019s ridiculous They generate tremendous transaction costs trying to trade. When they sell, if the stock goes higher, it\u2019s difficult to buy it back at a higher price.\u201d
Hirayama\u2019s process of identifying good companies starts with an analysis of the top economic sectors in 52 countries around the world, including consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials\/natural resources, telecommunications and utilities.
He then breaks those sectors down into 67 industries. Out of 2,500 potential global equity securities, he constructs his portfolio of 30 to 60 stocks.
\u201cWe feel that natural resources, including energy and materials, are the dominant leaders of the current supercycle,\u201d Hirayama says, \u201cand have felt that way since 2000. Those sectors have dominated this decade. Supercycles tend to last a long time, from seven to 25 years.\u201d
In the first phase of a supercycle, he says, stocks tend to outperform in a controlled way, as there are still many skeptics who believe the trend is a short-term one and the situation will revert to the mean. During the second leg of the trend, the skeptics capitulate and pile in, while the early believers buy more of their successful stocks at higher prices.
\u201cIn the later stages of a supercycle, the sector themes take a sharp upward turn,\u201d Hirayama explains. \u201cThis hasn\u2019t happened yet. But, based on history, it\u2019s likely coming.\u201d
Prior to the current trend favouring energy and materials, the previous supercycle was in technology and telecommunications, he says, and these sectors made up 50% of the ROI fund\u2019s portfolio at the sectors\u2019 performance peaks in 1999 and early 2000. Hirayama then sold in the first quarter of 2000 as holdings became dangerously overvalued relative to their profit-earning potential, and rotated into \u201cold economy\u201d resources stocks.
On a country basis, the ROI fund\u2019s biggest holdings are in Switzerland, with 22.3%; the U.S., 16.8%; Canada, 14.9%; and Britain, 14.8%.
Among the top holdings are two Canadian companies: Canadian National Railway Co. and Potash Corp. The fund also holds a variety of oil and gas field-servicing companies, including U.S.-based Diamond Offshore Drilling Inc. and Schlumberger Ltd., as well as Cayman Islands-based Noble Corp.
Hirayama expects that the rampant printing of money by governments \u2014 particularly in the U.S. \u2014 will increase demand for gold and other hard assets, but he is not keen on the troubled U.S. real estate market. Investors are beginning to fear the resurgence of inflation down the road and the devaluation of the U.S. dollar.
\u201cThe government is printing a lot of treasury bills, notes and bonds, and a lot of foreign investors own them,\u201d Hirayama says. \u201cThe Chinese, Brazilians and Russians are getting a little tired of acquiring these securities and watching the US$ go down. There could be a demand squeeze on assets that benefit [from] inflation.\u201d \tIE<\/b>
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