Five Attractive Emerging Market Closed-End Funds

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Closed-end funds are considered to be cheap when the market prices of their shares trade at a discount to their NAVs. Hence investors looking to add some of this asset type to their portfolio may want to pick them up when they trade at a discount as opposed to a premium.

From a recent Journal article on closed-end funds:

“The “closed end” label reflects the fact that these funds don’t continually issue new shares, as conventional open-end funds do. Among the key complexities to understand: Share prices often vary from the value of the underlying holdings, and many funds use leverage, which can affect both prices and income payments.

There are about 650 closed-end funds on the stock market today, with about $200 billion in assets. They range from multibillion-dollar leviathans to $30 million minnows.

More than 400 specialize in bonds. The rest cover the waterfront of investment opportunities. Do you want to invest in post-Castro Cuba? Herzfeld Caribbean Basin is set up to do just that (and generally gets a pop when the health of the Castro brothers leads the news in Miami). Fancy betting that the luck of the Irish will turn? Try the New Ireland Fund. Are you interested in Australian bonds? Try Aberdeen Asia-Pacific Income. (Don’t laugh: In the past 10 years that fund has quadrupled investors’ money. How has your portfolio done?)”

In this post lets take a quick look at five country-specific closed-end emerging market funds.

1. Thai Fund (TTF): This fund aims to achieve long-term capital appreciation by investing inequities of companies in Thailand. The fund has an asset base of $244 M. Financials make up about 30% of the portfolio. Currently the fund is trading at a 15% discount to the NAV. YTD the fund is about 44% based on market returns. The 5-year market return is about 12%.  The expense ratio is on the high side at 1.77%. From an investment perspective Thailand has high political risks. However many Thai firms pay high dividends and the private consumption of goods and services is growing. Hence among emerging markets, Thailand can be a destination for high-risk seeking investors.

 2. Turkish Investment Fund (TKF):  Financials account for about 40%  the fund with Turkiye Garanti Bank alone having a 19% allocation.  The total net assets of the fund is $150M and the expense ratio is 1.4%. YTD the fund’s share price is up 33%. Turkey’s financial system remained relatively unscathed during the financial crisis and the country’s economy will gain a big boost when Turkey gains entry into the European Union.

 3. Malaysia Fund (MAY): Similar to the Turkish fund above, Financials are the major holding in this fund. YTD the fund is up 43%. With this fund, investors can gain exposure to the some of the very conservative and strong Malaysian banks, rubber plantation companies and Genting, one of the top Malaysian companies with interests in casino operations among others. Currently the fund is trading at a 12% discount.

 4. Mexico Fund (MXF): The top three sectors in the fund are Telecom, Consumer Services and Basic Materials. Financials make up just 7% of the holdings. America Movil and Wal-Mart de Mexico are the top two holdings in the fund. YTD the share price has grown by 30% and the expense ratio is 1.70%.  The fund has an asset base of $395M. Despite the ongoing violence due to drug lords, Mexico remains an attractive market for investment. However the Mexican economy is heavily dependent on the U.S. economy.

5. Taiwan Fund (TWN):  This fund has $345 in assets and the expense ratio is 1.60%. Since Taiwan is heavily focused on hi-tech exports, technology accounts for more than one-fourth of the holdings. YTD the fund is up about 20% and the fund is now trading at a discount of 8%.

Constituents of the STOXX Americas Select Dividend 40 Index

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The STOXX Americas Select Dividend 40 Index measures the performance of the highest dividend-paying stocks relative to their home markets.

This index is created based on the following conditions:

  • Stocks are screened by defined historical non-negative dividend-per-share growth rates and dividend to earnings-per-share ratios.
  • Index components are weighted by their indicated annual net dividend yield, i.e. the largest dividend-yielding companies have the highest weight in the index.
  • Fixed component numbers and cap factors guarantee index diversification.
  • All components have a dividend to earnings-per-share ratio of less than or equal to 60%.

The components of the STOXX Americas Select Dividend 40 Index are:

[TABLE=679]

Relative to the  S&P 500’s current yield of about 2%, all the U.S. stocks mentioned have higher yields. The only US banks in the list are New York Community Bancorp (NYB) and M&T Bank Corp (MTB). M&T recently agreed to buy Wilmington Trust(WL) for about $351 million. As per the deal, Wilmington Trust shareholders would receive about 0.05 shares of M&T stock for each share of Wilmington Trust and M&T would add $8.3 billion in deposits and $8.1 billion in loans. The majority of the U.S. constituents in the index come from the utility and telecom sectors which have traditionally paid out higher dividends. Cigarette makers Reynolds American (RAI), Altria Group (MO) and Lorillard (LO) have also consistently paid excellent dividends.

Among the Canadian stocks, except Royal Bank of Canada(RY) all other major banks are in the index. The tickers and dividend yields noted for IGM Financial, National Bank of Canada, Great-West Lifeco, Power Financial Corp and Power Corp. of Canada are based on their listing in the Toronto Exchange.

Top 10 European Companies by Market Cap

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The table below lists the Top 10 European companies by market capitalization as of November 15, 2010:

[TABLE=678]

Source: FT Markets Data

The above list excludes firms from Eastern Europe and Russia and the market cap is based on the stock price on the domestic exchanges. Among the many European banking giants, only HSBC (HBC) of UK made it to this list with market cap of about $194 billion. In the pharmaceutical sector, it is interesting to note that Swiss drug companies Novartis (NVS) and  Roche (RHHBY) have market caps exceeding $125 billion. Nestle (NSRGY) owns many popular brands and has a strong presence in emerging countries.

A Review of the Global Tobacco Industry

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“I’ll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty.” – Warren Buffet

Page Updated: 4/7/19

The tobacco industry sells about six trillion cigarettes each year. The industry is highly concentrated with a handful of firms controlling the majority of the global tobacco market. The tobacco market was worth about $614 billion in 2009.China is the biggest market based on total cigarettes consumed. There are some 350 million smokers in China who consume around 2,200 billion cigarettes a year, or about 41% of the global total. However the industry in China is state-owned by the monopolistic China National Tobacco Company.

Outside of China, the four largest publicly-listed international tobacco companies account for about 46% of the global market according to British American Tobacco (BTI).

Philip Morris International is US-based and BAT and Imperial Tobacco are based in the UK.Companies that operate mainly in the domestic markets include Egypt’s Eastern Tobacco, Thailand’s Tobacco Monopoly, Bulgaria’s Bulgartabak, Taiwan’s Tobacco & Liquor Corp and Vietnam’s National Tobacco Corporation. The major American players in the U.S. market are Altria(MO), Vector Group Ltd (VGR) and Turning Point Brands, Inc.(TPB).

1-market-share-tobacco-cos.jpg

Based on the total number of cigarettes sold, the top five global brands are Marlboro, Winston, Mild Seven, L &M and Kent.

After China, the ten countries that consume the largest number of cigarettes are Russia, the U.S., Japan, Indonesia, India, Brazil, Ukraine, Turkey, Korea and Italy. The relationship between volume of cigarettes sold and volume of profits shipped are not consistent across markets. For example, Phillip Morris International’s sales in OECD countries accounts for one-third of total sales but accounts for 46% of total profits. And the tow-third of sales in non-OECD nations account for only 54% of its profits.

Due to their scope and scale of profits, tobacco companies  transfer huge amounts of wealth from one region of the world to another. In 2008, around $20 billion was earned by tobacco companies from outside their home territories.

The Top tobacco growing countries are shown in the graphic below:

top-10-tobacco-growing-countries.jpg

  • Phillip Morris International (PMI), which was spun off from Altria in 2008 is the world’s largest private tobacco company. Altria sells its products in the US market while PHI sells them overseas. With 75,000 employees Philip Morris owns seven of the leading 15 global brands. In 2008, the company reported revenues of over $64 billion. PM repatriates about $10 billion in profits to the US from global sales.
  • British American Tobacco(BTI) is the second largest tobacco company in the world based on unit volume.The company’s 2008 revenue totaled about $50 billion. Some of the top brands owned by BAT include Dunhill, Pall Mall, Lucky Strike, Viceroy and Vogue. BAT also holds substantial stakes in Reynolds American and Indian Tobacco Company (ITC) of India. In terms of ownership, more than two-fifth of the shares are held by just 400 shareholders including the Canada Pension Plan Investment board. BAT repatriates about $6 billion from overseas earnings to UK. More than three-fourths of the company’s sales are in the fast growing emerging markets.
  • UK-based Imperial Tobacco(ITYBY) also sells the majority of cigarettes outside of UK. The company repatriates about $4 billion in earnings to UK from abroad.
  • Altria (MO), formerly known as Philip Morris, is the largest cigarette maker in the US. Reynolds America (RAI) ranks the second followed by Lorriard.
  • Stockholm, Sweden-based Swedish Match(SMWAY) is involved in the production and sales of snuff and snus, chewing tobacco, cigars and pipe tobacco.The company does not make cigarettes and the “match” component makes up only 10% of its revenues.

In addition to shareholders, one of the biggest beneficiaries of sales of tobacco are the governments of various countries. Governments worldwide generated over $160 billion in the form of excise taxes, duties, income taxes, etc. from just nine companies in 2008.

Current and Future State of the industry:

Cigarette smoking is declining in the developed world due to unprecedented bans on cigarette usage in public places, restrictions on advertising, extremely high taxes, health warnings, limitations on retail display and other factors. In addition, the percentage of population who are smokers is reducing. As a result consumers in developed countries are switching to lower-priced offerings and alternatives to cigarettes such as smokeless tobacco, snus, etc.

While sales is declining in developed countries it is booming in emerging markets. Tobacco makers are aggressively marketing in those markets in order to compensate for the declining sales in rich countries. However even in emerging markets governments are proposing tougher regulations governing the sales and marketing of tobacco products.

From an article in the New York Times:

This year, Philip Morris International sued the government of Uruguay, saying its tobacco regulations were excessive. World Health Organization officials say the suit represents an effort by the industry to intimidate the country, as well as other nations attending the conference, that are considering strict marketing requirements for tobacco.

Uruguay’s groundbreaking law mandates that health warnings cover 80 percent of cigarette packages. It also limits each brand, like Marlboro, to one package design, so that alternate designs don’t mislead smokers into believing the products inside are less harmful.

The lawsuit against Uruguay, filed at a World Bank affiliate in Washington, seeks unspecified damages for lost profits.

They are using litigation to threaten low- and middle-income countries, says Dr. Douglas Bettcher, head of the W.H.O.’s Tobacco Free Initiative. Uruguay’s gross domestic profit is half the size of the company’s $66 billion in annual sales.

Peter Nixon, a vice president and spokesman for Philip Morris International, said the company was complying with every nation’s marketing laws while selling a lawful product for adult consumers.

He said the company’s lawsuits were intended to combat what it felt were excessive regulations, and to protect its trademark and commercial property rights.

Cigarette companies are aggressively recruiting new customers in developing nations, Dr. Bettcher said, to replace those who are quitting or dying in the United States and Europe, where smoking rates have fallen precipitously. Worldwide cigarette sales are rising 2 percent a year.

But the number of countries adopting tougher rules, as well as the global treaty, underscore the breadth of the battleground between tobacco and public health interests in legal and political arenas from Latin America to Africa to Asia.

The cigarette companies work together to fight some strict policies and go their separate ways on others. For instance, Philip Morris USA, a division of Altria Group, helped negotiate and supported the anti-smoking legislation passed by Congress last year and did not join a lawsuit filed by R. J. Reynolds, Lorillard and other tobacco companies against the Food and Drug Administration. So far, it is not protesting the agency’s new rules, proposed last week, requiring graphic images with health warnings on cigarette packs.

But Philip Morris International, the separate company spun out of Altria in 2008 to expand the company’s presence in foreign markets, has been especially aggressive in fighting new restrictions overseas.

It has not only sued Uruguay, but also Brazil, arguing that images the government wants to put on cigarette packages do not accurately depict the health effects of smoking and vilify tobacco companies. The pictures depict more grotesque health effects than the smaller labels recommended in the United States, including one showing a fetus with the warning that smoking can cause spontaneous abortion.

In Ireland and Norway, Philip Morris subsidiaries are suing over prohibitions on store displays.

In Australia, where the government announced a plan that would require cigarettes to be in plain brown or white packaging to make them less attractive to buyers, a Philip Morris official directed an opposition media campaign during the federal elections last summer, according to documents obtained by an Australian television program, and later obtained by The New York Times.

tobacco-ads-ban-tracking.jpg

Hence similar to other sectors tobacco multinationals are increasingly dependent on emerging markets to maintain earnings. As income levels and standard of living increases in EM countries, sales of tobacco products may increase further. In some ways a bet on tobacco stocks can be considered as a bet on emerging markets.

Currently Altria Group (MO),Philip Morris International (PMI) and Imperial Tobacco Group (ITYBY) pay have dividend yields between 4% to 6% while Swedish Match (SWMAY) and British American Tobacco (BTI) pay between 2% to 3%.

Sources: Euromonitor International, The New York Times, The Wall Street Journal, Company sites, WHO, The Global Tobacco Economy by Physicians for a Smoke-Free Canada.

Tobacco Stocks List:

Related Articles:

  1. Economic Facts About U.S. Tobacco Production and Use, CDC
  2. The Tobacco Atlas, World Lung Foundation & American Cancer Society
  3. Tobacco industry, Wikipedia
  4. New Tobacco Atlas Estimates U.S. $35 Billion Tobacco Industry Profits and  Almost 6 Million Annual Deaths
  5. Tobacco industry dying? Not so fast, says Stanford expert, Stanford University News
  6. Tobacco Industry, Guardian, UK
  7. Tobacco atlas: country by country, Guardian, UK
  8. Tobacco in Australia, The Cancer Council
  9. The Tobacco Atlas, WHO
  10. Tobacco Economics, Allan Gray Asset Managemen
  11. Philip Morris International Inc, Euromonitor
  12. Top tobacco producing U.S. states in 2011, Statista
  13. The Legacy Tobacco Digital Library – Contains more than 14 million documents created by the industry (University of California, San Francisco)
  14. Top Global Tobacco Companies:

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 Source:  Tobacco Industry Set to Grow In Emerging Markets, Credit Suisse

From TobaccoFreeKids.org site:

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Source: Kremlin Cracks Down on Big Tobacco, WSJ

Biggest Global Tobacco Makers:

Source: The Global Tobacco Industry (Click to download the pdf report), Mazars

American Smokers

Source: America’s Smokers: Still 40 Million Strong, The Wall Street Journal, July 16, 2014

World’s Top Tobacco Companies 2014 (Bloomberg Industry Market Leaders)

Where people smoke the most (and least) cigarettes per person:

Cig Map

Source: 40 maps that explain the world, The Washington Post, Aug 12, 2013

Click to enlarge


Source: Statista

Comparison of Healthcare Performance Among Seven Countries – U.S. Ranks Last

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New York city-based The Commonwealth Fund published a report few months ago comparing the the U.S. to six other developed countries on measures of healthcare performance in five areas: quality, efficiency, access to care, equity and the ability to lead long, healthy, productive lives. The countries compared were Australia, Canada, Germany, the Netherlands, New Zealand, and the United Kingdom. Despite having the most expensive healthcare system in the world, the U.S. ranked last in this comparison.

Click to enlarge

Compares-US-Healthcae-to-other-countries

Source: via The Global and Mail

The U.S. ranked last in terms of efficiency such as use of information technology, spending on administrative costs, duplicate medical testing, etc. Another key point noted by the report is that Americans have the hardest time affording the health care they need. Lack of affordability of healthcare adversely affects factors such as leading healthy and productive lives, infant mortality and deaths before the age of 75.

From a news release:

“Provisions in the Affordable Care Act that could extend health insurance coverage to 32 million uninsured Americans have the potential to promote improvements to the United States’ standing when it comes to access to care and equity according to Mirror Mirror On The Wall: How the Performance of the U.S. Health Care System Compares Internationally 2010 Update, by Commonwealth Fund researchers Karen Davis, Cathy Schoen, and Kristof Stremikis. The United States’ low marks in the quality and efficiency dimensions demonstrate the need to quickly implement provisions in the new health reform law and stimulus legislation that focus on realigning incentives to reward higher quality and greater value, investment in preventive care, and expanding the use of health information technology.

“It is disappointing, but not surprising that, despite our significant investment in health care, the U.S. continues to lag behind other countries,” said Commonwealth Fund President and lead author Karen Davis. “With enactment of the Affordable Care Act, however, we have entered a new era in American health care. We will begin strengthening primary care and investing in health information technology and quality improvement, ensuring that all Americans can obtain access to high quality, efficient health care.”

Earlier editions of the report, produced in 2004, 2006, and 2007, showed similar results. This year’s version incorporates data from patient and physician surveys conducted in seven countries in 2007, 2008, and 2009.”

You can download the full report in pdf format by clicking here.