No Drama, Just Consistent Gains

The New York Times called it a “moment of reckoning.” Widely followed commodities trader Dennis Gartman in a note to his clients wrote that he’s “never…ever…EVER” seen anything quite like it.

The references, of course, are to March 15’s collapse in the price of gold, the largest single-day percentage drop in 30 years, capping a two-day decline of 13%.

The selling was triggered in part by worries that Cyprus and possibly other European nations might have to dump their gold holdings to raise funds or satisfy bailout requirements. Also, after acting as a commodities tailwind for much of the past two years, the Fed‘s quantitative easing program looks to be winding down, which would relax inflationary pressure.

Suddenly, the “safest” investment no longer seemed so safe. In fact, there’s a good chance that gold’s 12-year streak of uninterrupted gains will come to an end this year.

That’s why I felt it fitting to tell you about a timely investment idea that could give comfort — not to mention capital appreciation — to “safe haven” investors of all stripes.

Like gold, this investment has been a steady gainer, but without the drama.

The recommendation comes courtesy of Stock of the Month’s Amy Calistri, herself a champion of investments that help her and her followers sleep better at night. In each issue of Stock of the Month, Amy provides a single investment idea, backed by in-depth analysis in plain English. (To listen to Amy talk about her strategy, follow this link to her new presentation, “How to Beat the Stock Market…In just 12 Minutes per Month.”)

If you’ve read recent issues of Insider, then you know that Amy is feeling even more cautious than usual these days.

The culprit? A market that’s underestimating the risks of the global slowdown, according to Amy.

The antidote? Going forward, in Amy’s view, the advantage will go to those portfolios that are largely U.S.-focused. Holdings that don’t rely on revenues from weak foreign currencies. Holdings that have a defensive element.

Amy went one better this month when she reiterated a recommendation on a holding that, by design, is “a steady performer in almost every circumstance.”

In fact, Amy’s “stock of the month” for April isn’t even a stock — it’s a mutual fund of the merger-and-acquisition variety.

“This is an asset that all investors should know about,” Amy told her readers. “It is one of the rare investments you can turn to when the odds are stacked against you.”

The Merger Fund (MERFX) is an equity mutual fund that invests primarily in companies that are being acquired.

Compare the steady performance of The Merger Fund with the erratic performance of the SPDR Gold ETF (NYSE: GLD)

As Amy explains:

“When a bid for a company is first announced, the company’s stock rises, approaching the premium bid price. It approaches it — but usually doesn’t reach the bid price. After all, there is still a small, but finite, possibility that the deal will fail to close.

“Merger-arbitrage funds like MERFX buy the shares of acquisition targets below the bid price and ride the rest of the way up until the deal is finalized — making a small percentage off each deal. The more M&A deals that are done, the more money those funds make.”

MERFX has returned an average 6.9% annually to investors since its launch in January 1989. The holdings in Amy’s Stock of the Month portfolio have returned an average of 11.1% as of today’s close, outperforming the S&P 500 by 3.1 percentage points.

In the following interview, Amy talks about The Merger Fund and her portfolio…

Bob: What do you like about MERFX?

Amy: First let me say that no investment is without risk. That said, The Merger Fund is specifically designed to minimize market risk. In a volatile or declining market, MERFX usually provides investors with a smooth ride and steady returns. You won’t get rich with MERFX, but when the market is tanking, you’re probably going to get a good night’s sleep.

The fund has had only two losing years since its 1989 inception. In 2008, it lost 2.3% while the S&P 500 dropped 37%. In 2002, the fund lost 5.7% compared with the 22.1% loss in the S&P 500.

If you’re looking for a less volatile holding when market conditions are challenging, MERFX is a good place to start. Unfortunately, it isn’t the solution for everyone. The fund accepts only U.S. residents, and it requires an initial $2,000 minimum investment.

Bob: You alerted your readers of the new risks you saw in the market on April 9. The market has dropped more than 2% since then. What data convinced you that there were problems ahead?

Amy: During the course of each month, I track dozens of economic and corporate indicators across the world. I’m always looking for a trend or a clue that the market hasn’t recognized yet in search of a single best investment idea.#-ad_banner-#

For instance, in the spring of 2010, I noticed retail profits were finally starting to rise. Also in early 2010, the Supreme Court removed most limits to corporate spending on elections. With a healthier retail sector and a contentious national midterm election ahead, I thought advertising spending would be on the rise. In late May 2010, I started a position in the media giant Discovery Communications (Nasdaq: DISCA). Ad spending did rise, and DISCA was a beneficiary. By the time I closed my position, I had a total return of 29.1%, about 4.9 percentage points better than the S&P 500.

In the month prior to my April Stock of the Month issue, I was struck by the deteriorating economic conditions in Europe. In March, eurozone unemployment hit a record high of 12%. Manufacturing activity was contracting, even in more resilient countries such as Germany.

Japan’s economy was barely able to ease out of recession in the fourth quarter of 2012 with GDP growth of 0.2%. And on April 4, the Bank of Japan announced an aggressive new monetary policy to help stimulate the country’s economy. This dramatically weakened the yen and, in turn, weakened the revenue stream of foreign companies selling goods and services to Japan.

Europe and Japan account for roughly a third of the world’s economic activity. These are important markets for multinational corporations. Yet the U.S. stock market didn’t seem to take that into account. I suspected there would be a reckoning once large multinational companies started reporting their first-quarter results. And I think that’s what we’re starting to see now.

Bob: Most of your current Stock of the Month portfolio is concentrated in U.S.-focused securities. Many of them are in defensive sectors. Will they be as resilient as your latest holding in MERFX?

Amy: Not initially. MERFX is market-neutral by design. The rest of my holdings have an element of market risk. They should still do better than the overall market. But in my 30 years of investing, I’ve come to learn that even the babies go out with the bathwater during market corrections. However, if I’ve picked wisely, the babies will be rescued once the market sorts itself out.

Action to Take –> I built up a larger cash position in my portfolio over the past two months. This will enable me to take advantage of the market’s confusion over the next few months. I’m hoping to add to some of my current holdings at good prices. And I’m already keeping my eye open for the next baby to add to my portfolio.

P.S. — Follow this link to learn how you can take advantage of a special offer to follow Amy in “real time.” (For the text version of Amy’s presentation, click here.) Among the bonuses: Amy’s latest in-depth research report, “Amy Calistri’s Top Three Stocks to Buy Now.”

By becoming a member of the Stock of the Month community, you’ll be the first to know Amy’s next move. Plus, you’ll sleep better tonight.

Further Reading…
Our Experts Reveal Their “Pullback Wish List”, StreetAuthority Insider, April 12, 2013. I asked the StreetAuthority stock market strategists to name the first one of their portfolio holdings they would buy more of if prices suddenly “corrected” by 10%.

How to Beat the Stock Market… In just 12 Minutes per Month