×

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

Peter Schiff
Rick Wilking | Reuters
Peter Schiff

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.

Thai Beverage Public Company (SGX: Y92)

This Bangkok-based small-cap company mostly sells spirits and beer throughout Asia, but also in other parts of the world. It's up 40.5 percent since the start of the year, mainly because it's been able to increase its market share this year — it now owns about 40 percent of Thailand's alcoholic beverage market.

Its gains have been helped by a rebrand of its flagship Chang beer, which is now appealing to a younger consumer. Sales of beer revenue climbed by 71.3 percent year-over-year in the first quarter, to about $518 million, according to the company. Nelson likes the 13-year-old business because it's a stable operation, management has been able to control costs, and volume sales have seen substantial increases. "Their improvement in the beer business has started to occur," he said.

Samsung Electronics (KRX: 005930)

This Suwon, South Korea-based electronics company has been a favorite of Nelson and Schiff's for a while. The stock is up about 30 percent in local currency terms, driven in part by better-than-expected gains in its global smartphone business. The company generated $45 billion in revenue in the second quarter of this year, up 5 percent year-over-year. Its mobile business accounted for more than half of those revenues. As well, according to research firm Gartner, the company sold 32 million more smartphones than Apple did in the second quarter.

It recently announced a recall of its Galaxy Note 7 — a battery issue has caused the phone to catch fire — which could cost the companies millions of dollars, if not more. But the company's quick response should prevent any long-lasting impact to the brand, said Nelson.

He continues to like the business, partly because it's cheap: It's trading at about 4.8 times, trailing 12 months' enterprise value to EBIT, while it's attractive on a return on capital employed metric, too. He also likes the management team and its focus on improving shareholder returns via dividends and stock buybacks. While it only pays a 1.28 percent yield, it has increased its dividend per share by about 281 percent since 2011. "Hopefully this trend will continue and increase as we go along," he said.

Yamana Gold (NYSE: AUY)

Every gold miner that EuroPac owns has helped the fund immensely, said Nelson, but this Toronto-based producer has been one of the best performers, climbing 144 percent year-to-date. One of the main reasons why this company, and others he owns, have done so well is that these businesses have finally cut expenses and have improved operations. Looking at the NYSE ARCA Gold Miners Index, capital expenditure levels for the group overall have been cut by 54 percent on a per-share basis since 2012, while net debt is down 28 percent per share from its high in 2013. Free cash flow has also turned positive for the index, he said.

As for Yamana, one reason why it's done so well is that it fell so much over the last few years — it plummeted about 90 percent between November 2012 and the end of 2015 — that it's just coming back from those low levels. It made a number of operational improvements, including cutting general and administrative expenses by $5.5 million in the first quarter of this year, which has helped, and it's focusing more on shareholder returns. "I knew these stocks were way oversold and were due for a bounce," said Schiff.

While Schiff is first to admit when his fund has a bad year, as it did in 2015, he's optimistic the gains he's made in 2016 will continue. Gold will stay strong, he said, and his other quality investment should keep paying off, too, especially if the United States struggles. For Nelson, it's about sticking to the plan through good times and bad. "We consistently employed our investment process, even though we expected headwinds in 2014 and 2015," he said. "We didn't expect the fed to be able to hike its interest rate as much as they were communicating, and it's turning out that we were correct. We stayed consistent, and we're now seeing an improvement."

— By Bryan Borzykowski, special to CNBC.com