Jeff Nuttall's eye for global investing was sharpened on the terrain of Houston during childhood.
With his father a career geologist, Nuttall became interested in rock collecting. As a kid, he collected specimens and accompanied his father as he performed seismic tests for oil and gas companies.
He carried his interest in geology with him into his college years, studying petroleum engineering for three years at the University of Texas.
Still today, as a senior financial advisor with Wells Fargo in Denver, he maintains an interest and expertise in natural resources, although his focus has broadened well beyond the borders of the Lone Star state.
"We definitely believe we're in a global economy. What happens in Asia, the Middle East and Europe has an effect on us," says Nuttall, who manages the accounts of 55 ultra-high-net-worth households, many of which also come from the oil and gas sector.
Of course what's happening in Asia, the Middle East and Europe is well-documented close to home in the business pages and at the gas pump, as well as in the tumultuous European markets.
Countries across the eurozone are suffering from credit crises, which have not shown much respect for national borders. Even the economic-growth machine of Asia has experienced a slowdown.
All of which creates shaky confidence in the global economy. Pimco Investment Management Co., the manager of the world's largest bond fund, said in a recent report: "While we do not expect recessions across all developed countries in 2013, we certainly would caution that the probability of more widespread recessions has increased, given the coordinated slowdown in global aggregate demand we are witnessing across the world."
And late last month, the IMF said even more directly that it probably will cut its official estimates of global growth for 2013.
Investments and the City
It takes a strong stomach to dive into investments across the globe - particularly when the outlook is cautionary. And for those looking for an immediate pickup, global investing is a tricky game. This isn't Apple, after all, about to launch a new gadget with a practically guaranteed stock price jump.
Instead, advisors who are looking to move their clients into more global options need to have a longer eye, looking at areas that may not pay off until five, 10, or even 15 years down the road rather than tomorrow.
For many advisors, natural resources are offering some interesting investment prospects. After all, what could be more of a basic need than water and food? But investors must be willing to put some skin in the game.
"It's definitely not for the faint of heart," says Doug Leonzi, an advisor at National Penn Bank in Allentown, Pa. "It's for someone who has a longer-term perspective of the markets. But you have to be careful that we're not in a 10-year global recession when assets don't have time to recover."
One factor that seems to lend favor to the natural resources category, say experts, is the expected explosion of the world's population - which is forecast to balloon to 8.92 billion people by 2050, according to the United Nations Department of Economic and Social Affairs.
While the world is expected to get more crowded, a deeper look at the numbers suggests that it will be felt mostly in the cities. In 1990, less than 40% of the global population lived in cities - by 2050, this will grow to seven out of every 10 people, according to the World Health Organization.
More people on Earth - with more migrating to urban spaces - means more people needing food, places to live and work, roads to get there and steel to build it all. But the most important need will be water. And for investors, that means all the pipes, roads and other infrastructure support to bring it to their homes (see sidebar).
Today, even advisors with clients in retirement believe that natural resources are a crucial bet. With clients today facing 30 years of supporting themselves after they retire, they need to consider growth in their portfolios.
Former safe havens like Treasuries and CDs are no longer enough when interest rates today hover at just around 1%. So advisors are focused more than ever to add at least a modicum of higher-return options into retirees' portfolios, depending on their risk tolerance.
Russ Cesari, whose clients are mostly near or in retirement, says investors who work with him tend to be conservative. Yet he believes it's a mistake for them to ignore the need for growth. "They want reasonable growth, yet perhaps not near the volatility of the market," says Cesari, senior wealth advisor with Northwest Financial in Herndon, Va. "I use ETFs in volatile areas, like precious metals, because I can put stop orders in when things go south and I have some protection on the down side."
Precious metals are high on Nuttall's list as well with about 5% to 10% of his clients' portfolios invested in them. Betting on silver, gold, platinum and palladium makes sense to Nuttall as central banks have shifted from net sellers to net buyers today.
He believes that a renewed interest in gold hinges on trust in a currency that's been used for thousands of years. While gold has fallen from its all-time high of $1,920 a troy ounce in September 2011, it's still trading comfortably above $1,700 - nearly double its average price of $872 in 2008.
"There's also a supply-and-demand issue that goes with any metal," he says. "Metals are getting more and more expensive to get out of the ground, as labor and taxes are more expensive." He cites the Chilean copper mines as one example. With miners working miles under the earth, the high cost to bring that metal above ground, not to mention the dangerous conditions that can be caused by cave-ins or earthquakes, drives up costs.
"The cost of getting any metal out of the ground is going up on an annual basis," he says. "Yet emerging economies need more of these metals to grow, and there's demand from central banks. As long as they have demand, and supply is getting tougher and more expensive, that's going to drive prices up."
More of Everything, Please
Matthew Peterson, director and portfolio manager of the Greenwich, Conn.-based investment advisor Newgate Capital Management, credits his firm's expansion into natural resources to two managing directors at the company: James Trainor, the firm's chief strategist and Avy Hirshman, the chief investment officer. They traveled through Asia from Shanghai to Kuala Lumpur in October 2003 and watched those emerging markets' demand for commodities grow.
Since then, Newgate adopted a took a two-pronged approach on natural resources that are based on two basic principles of economics; namely, supply and scarcity.
For the first prong, the firm invests in "companies that actually get the stuff," says Peterson. The definition of "stuff" can be broad within the company, meaning anything that is on the ground or under the ground, says Peterson.
This can entail copper and iron ore, but it can also refer to water and fertilizer. "We have a pretty broad mandate," he says.
The second kind of company that the firm looks at are those "that actually increase production," he says. "So we hold Joy Global, which makes mining equipment, and also Transocean, which operates drilling fields."
It's this second group that piques Peterson's interest the most - as he believes that's where long-term investors are going to make the most over time.
They fit in with what Peterson says is the firm's philosophy - and what he calls a basic law of economics: that people always want more.
"People believe there's never enough," he says. "Longer term, companies that make more, have ultimately a higher return for investors. But they also tend to be a little more volatile, because they're more sensitive to slowdowns or softening in business. So we hold both ends, these and [producing companies] to balance it."
Feast or Famine?
Volatility is clearly affecting global agricultural markets too - very visibly on the domestic side, as well as in Russia, as this summer's drought took a toll on corn, wheat and soybean crops. Water and agricultural products, of course, go hand-in-hand as natural resources. And demand for both is expected to swell as global population numbers continue to increase.
In the past 50 years, global water draws have increased sixfold, and per- personal consumption has doubled, according to Edward Kerschner, senior strategy consultant for Morgan Stanley, who co-authored a paper on the subject, "Peak Water: The Preeminent 21st Century Commodity Story," in November 2011.
"And why is that happening?" asks Kerschner. "It's not that people are drinking twice as much. The principle reason is urbanization. The shift from rural to urban is a fivefold increase in water use."
Still, 70% of all water today is tied to agriculture, with 20% used by urban centers and 10% by industries, according to Kerschner. By 2050, agriculture is still expected to consume 60% of water, with urban areas pulling 30% of water use, and industry still at 10%. Finding ways to use water more efficiently for urban areas as well as farmlands is going to be a growth area. Indeed, it already is, notes Kerschner, who says that the ISE Water Index Fund beat the market by a couple of hundred basis points this year.
Where he's watching more closely is the research and technology work going on in this sector, from reverse osmosis to desalination of sea water, to using ultraviolet light instead of chemicals to treat water.
This last area is one embraced by New York City, which is scheduled to open the largest UV drinking-water treatment center in the world this fall. "UV water is supposed to be more pure than bottled water," says Kerschner.
While Nuttall says he's not strongly versed in water issues, he nevertheless has been watching agriculture for the last few years as well, noting that one billion people still go to bed feeling hungry each night. He points to the Arab Spring protests starting in late 2010, and stemming in part from high consumer prices for items including food, as a sign of a growing need for not just more agricultural products - but more cost-effective and efficient ways of growing these resources.
"If food represents 70% of your expenses on an annual basis, and it doubles in price, you're going to be upset," he explains. "So if there's a water issue, then that leads to food inflation. We're supposed to add 1.6 billion people in Asia. How much are they going to eat, and what is that going to cost them?"
Don't Forget the Farmers
While citizens of the world gravitate toward cities, investors should be looking "down home" for possible buys in their portfolios.
One of Nuttall's solutions, for investors, is to buy ETFs or funds that focus directly on areas that affect food, rather than crops themselves - chemicals, fertilizers and seeds. That also applies to genetically modified products (GMOs) that are the new promise for easier growing seasons.
"We've found that if you have a bad crop year, like 2012, we find farmers tend to spend a little bit more on fertilizer or different seed types, which cost more money," he says. "Obviously these companies move up nicely, as they are now, as people expect sales to be better next year."
Investor Jim Rogers also believes that agriculture is poised to enter a positive investment period in the next decade or two. The author of A Gift to My Children and founding partner of the Quantum Fund with George Soros, Rogers believes that after a 30-year bear period, agriculture, as a sector, frankly has to grow.
"After a 30-year dismal period, one result is we have inventories of agricultural products at near historic lows," says Rogers. "There's been very little investing in agriculture because it's been a terrible business, and worse than that, we now have a huge shortage of farmers in the developing world."
Dan Finch, a senior financial advisor with American National Bank of Texas in Greenville, is also keeping his eye on the transition from farming to urban living - particularly in China - but has yet to pull the trigger on any investments because of his concern of exposing his investors to the volatility of commodities like food. Still, growing up on a 40-acre farm in Mississippi, Finch believes agriculture is an area he will want to move some client assets into within the next few years, most probably through ETFs.
"You have a lot of people moving from farming communities to cities in China," he says. "Obviously something is going to have to happen where people who were once feeding themselves are now going to rely on others for their food. Right now I'm trying to get my arms around how we can use this to get my clients as much as possible."
The globe continues to face hard times today with countries from Greece to Spain and Italy limping from debt.
Yet the world's population is only set to increase, requiring more of almost everything - more food, more water to grow food, more infrastructure, more metals to build more homes and more precious metals.
The key is to locate hidden gems today - or what Aaron Visse, portfolio manager for the San Francisco-based Forward Funds, sees as companies trading at a discount.
Then, when the world digs itself out of its economic malaise, there's opportunity to gain. To hardy advisors and investors - there's little question that day will come.
"There are a lot of non-believers who don't see global growth," says Visse, who oversees the Forward Global Infrastructure Fund. "But it pays to be contrarian ultimately long term, and invest in companies that can grow earnings and grow dividends, and have grown out of favor."
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