Fat Prophets take profits

As US dollar bears, our strategy has been to avoid over exposure to the greenback. And with the dollar languishing, non-US denominated assets have performed strongly. This trend has been confirmed by the outperformance of the NFJ International Fund (AFJAX), which is effectively a play on non-US companies. The Fund has surged around 50 percent since our initial recommendation in June 2006. Given these strong gains, and considering the Fund's recent sector allocation decisions, we believe it is now an opportune time to take profits.

"The development that raises some concerns for us is the shift of the Fund's weightings towards the financial sector."

Looking at the charts, we see firm gains of almost 20 percent over the past month alone, which has seen the fund recover fully from the July/August correction. This week, the stock achieved an all-time high of $28.79.

The Fund is open ended, not listed on any exchange and currently holds $638 million of assets. The aim of the Fund is to invest at least 65 percent of assets in common stocks of non-US companies with a market capitalization of over $1 billion.

The primary objective of the Fund in terms of stock selection is to identify those stocks on low price to earnings multiples. The fund manager's overweight bias to resources and energy over the last few years reflect a successful sector allocation track record and this has been a key contributor to the Fund's recent strong outperformance.

Our key conviction for the Fund was based primarily on its investments in companies listed outside the US. We argued that this offers US investors a way to allocate capital out of dollar investments, which is a sensible way to diversify as the greenback continues to weaken.

The development that raises some concern for us is the shift of the Fund's weightings towards the financial sector. Since our last review two months ago, the Fund has increased its weighting in financial stocks from 14 to 19 percent and this now represents the biggest weighting of the portfolio.

[Top Five Industries]

[Financials] [19%]

[Materials] [17%]

[Energy] [15%]

[Utilities] [10%]

[Consumer Staples] [9%]

This reflects the fact that many financial stocks are now beginning to show value characteristics, such as low PE multiples. However, we believe this may also represent lower future earnings from the sector rather than a buying opportunity. Our concerns stem from the probability that the US subprime asset backed market could have further repercussions on global financial institutions.

A mitigating factor lies in the stock selection behind the sector weighting. Some of the Fund's financial institution investments are targeted towards those with emerging market exposure, such as HSBC for example.

The Fund has also reduced its overall geographical exposure to emerging countries. Given our view that there is a long term shift of wealth to these countries, this has also contributed to our caution.

[[Top Ten Countries]]

[United Kingdom] [12%]

[Canada] [12%]

[Brazil] [11%]

[South Korea] [10%]

[Germany] [6%]

[Mexico] [6%]

[United States] [5%]

[Taiwan] [4%]

[Japan] [4%]

[Netherlands] [4%]

Since inception (31 Jan 2003), the Fund has outperformed domestic and international stock markets, returning an average annualized 31.4 percent against the benchmark (MSCI AC World ex USA) return of 25.9 percent. This has been a very impressive performance, but looking forward, we believe the upward trend could pause for consolidation given the firm gains achieved over the past month.

Accordingly, the NFJ Value Fund will be removed from the Fat Prophets portfolio.