Monday, October 10, 2016

Why Peter Schiff’s international fund is up over 35% year-to-date

If there's one piece of advice that Peter Schiff has for investors, it's stick to your plan.

After a terrible year in 2015, the president and CEO of Westport, Connecticut-based Euro Pacific Capital is now having a banner year. His EuroPac International Value Fund (EPIVX) is up just above 35 percent year-to-date, the second best performance out of any diversified international equity fund, according to Morningstar.

The gains have largely been driven by Schiff's bet on gold, which only started to pan out in 2016. The fund has about 28 percent of its assets in the yellow metal, up from 15 percent at the start of the year, while a number of his gold stocks — Yamana Gold, Barrick Gold and Newmont Mining — have seen 100 percent-plus returns. He expects even bigger gains in gold going forward, because he thinks people will soon realize that the Federal Reserve policy over the last few years hasn't worked.

While Schiff has owned gold stocks for decades, the yellow metal has only seen big gains over the last year. Since January, it's up 27 percent, in large part due to worries over world growth, overvalued stock markets, the possibility of rising U.S. interest rates and concerns that global monetary policy isn't working.

"The foundation has been built on stimulus, and the economy will eventually collapse under its own weight," he said. "There's more evidence saying that the economy isn't as strong as the Fed has been saying and that they can't deliver all of their rate hikes. I do believe it will be as every bit of a disaster as critics like me have been warning."

Gold may have been a big driver of returns, but it's not the only reason why the fund has done well. While Schiff and Jim Nelson, co-manager of the EuroPac International Value Fund, can invest anywhere in the world, they've been finding good opportunities in resource, telecom and infrastructure companies in places like New Zealand, Switzerland, Singapore and Australia.

A big reason why he's investing in these countries is that they have companies with little exposure to the United States. The U.S. consumer, he said, "is living on credit, has no savings, and the whole economy is headed for collapse, and I want protection against that. I'm trying to invest in markets and companies that are best positioned to do well in an environment where the U.S. economy is not doing well."

These countries also have overnight rates that are higher than the Fed Funds rate, which is now 0.5 percent. That makes them more attractive from a yield perspective, added Nelson.

When it comes to actually buying companies, Schiff and Nelson look at return on capital employed versus earnings yield, which they feel is the best way to measure the quality and value of the company. There isn't a specific number they look for — some companies may have a lower return on capital employed, but that is at times compensated by a higher earnings yield, said Nelson. This method allows them to eliminate any gains due to financial engineering, such as with share buybacks, as that can cloud returns, said Nelson. He tries to strip all of that away to see what kind of return a company can generate with the assets it owns.

With that in mind, here are three stocks that have driven the fund's performance since the beginning of the year.