Letter to Shareholders
December 14, 2009
One Financial Place
440 South LaSalle Street, Suite 3900
Chicago, Illinois 60605-1028
Dear Shareholders and Friends,
We are delighted to welcome everyone, including our many new shareholders. The Thomas White Fund Family is celebrating its 15th anniversary, and the Funds’ advisor, Thomas White International, Ltd. is enjoying its 17th year in business. We invite all of our shareholders to visit our expanding Thomas White Global Investing website at www.thomaswhite.com and to subscribe to our reports, designed to keep you abreast of the many interesting events occurring in the 45 countries covered by our research analysts. The site, which allows people to become more familiar with investing beyond their borders, attracts an increasing number of visitors from around the world.
Knowing your Advisor
We feel it is important that you are kept informed about our progress as a business. First, I want to remind you that our firm’s professionals are also shareholders, and many like myself, have 100% of their equity investments in the two Thomas White Funds. Second, we are an independent firm, having no association with other organizations. Third, the Thomas White Funds are no-load funds. This may explain why the great majority of you have been introduced to the Thomas White Funds by professional advisors who focus on performance and select funds with minimal marketing fees.
Our performance goal as the advisor to the Thomas White Funds is straightforward: to outperform each Fund’s benchmark in the long-term and especially during market declines. We feel the surest path to accomplish these goals is to become an exceptional research organization. To meet these objectives, our professionals need to understand corporations, investor behavior and portfolio design better than our peers.
How are we working toward this goal? We start by attracting the smartest, most mature and best educated students from the finest universities in the world. We do not re-train experienced analysts; all of our analysts begin their careers with us and are incented to stay with us until retirement. We value longevity, knowing insight and judgment grow with experience. We stress intensive training by our most senior professionals.
Responsibilities are widely distributed in a team-oriented collegial environment. Our veterans feel the primary reason for our success has been the pride we derive from having our research produce excellent performance. While our analysts have developed an extensive body of stock valuation knowledge since 1992, we feel this effort is still in its infancy. Despite this difficult interim economic environment, the issuance of additional shares to raise capital continues to be the primary way companies around the world can rebuild their balance sheets.
Thousands of private and government-owned companies will be listing their shares over the coming years. This means the number of stocks and the countries they trade in will continue to multiply over time. Moreover, just as 401(k) plans and other similar programs have dramatically increased share ownership in the U.S. and Europe, the future introduction of similar programs in developing countries with large populations could sharply increase the demand for equities.
This positive outlook explains why we continue to expand our global research capabilities. In addition to increasing the number of our security analysts, we are also adding more IT professionals to program the firm’s proprietary valuation methods and maintain our extensive databases of industry, company and market information.
Our 2010 Outlook
The economies of the U.S. and most other countries bottomed in the first quarter of 2009 and then recovered over the next three quarters. In 2010, growth will benefit from: 1) continued monetary and fiscal policy stimulus; 2) recovering equity and fixed income markets; and 3) pent-up demand.
Factors still restraining growth include: 1) rising unemployment; 2) liquid but unwilling lenders; 3) continuing financial problems in housing and banking; and 4) the probable winding down of fiscal stimulus.
We estimate that global GDP growth should be a disappointing 2.8% in 2010, up from a 2.0% decline in 2009.
America’s mild recovery will lead other developed nations.
In 2010, we believe that the U.S. economic recovery will begin with a slow first quarter, averaging a 2.3% pace. Housing and capital spending on equipment will likely have decent recoveries, but with weak consumer spending at just 1.8%, GDP growth will likely be disappointing. It is our feeling that the major impediment to household spending will be unemployment’s projected rise to 10.5% in the first quarter of 2010.
This Shareholder Message focuses on major trend changes that we feel will shape investment returns in the coming decades.
Europe and Japan fell harder and will be slower to recover.
Europe and Japan experienced deeper recessions than the U.S. and we believe that they are likely to recover at a slower pace than the U.S. In 2010, we estimate that the Euro zone and the U.K. economies will grow at rates of 0.9% and 0.8%, respectively. As they were at the epicenter of the European housing bubble, we feel the recessions in Ireland, Spain and Greece will likely continue next year. We also believe that Japan, with a new stimulus program meant to curb deflation, will experience only 1.4% growth in 2010.
Emerging market countries will continue to lead developed economies.
Supported by secular growth trends, we project that the emerging market country economies will likely expand faster than the industrialized nations in 2010. With weak financial institutions, Eastern Europe struggled in 2009, but we estimate that its 1.7% growth should outpace Western Europe this coming year. We also believe that emerging Asian economies will likely advance 7.1%, led by China’s 9.0% and India’s 6.4% growth. It is also our feeling that Brazil, still hampered by sluggish exports, will likely rise 2.2%; while Russia’s sharp 7.5% decline in 2009 will likely recover to advance 1.5% next year.
Monetary and fiscal policy will keep interest rates low.
The stronger economies, including Australia and Norway, have already raised short-term interest rates. Korea, China and India may follow by next spring, but most central bankers, fearing renewed weakness, will likely keep rates low until late 2010. Close global coordination saved the world from a financial meltdown in late 2008, and then aggressive fiscal stimulus by the U.S. and China softened GDP declines in the first quarter. Japan has just announced a second stimulus plan and there are indications that the Obama administration is now considering one. With weakened finances, new stimulus packages may collapse a country’s credit ratings, which could drive up their interest costs.
Energy and metals prices have run ahead of the recovery.
Like oil prices in early 2008, energy and industrial metal prices have been driven up above their economic value by speculators. We believe that prices may pull back, and then advance when the global recovery gains speed in late 2010. We feel today’s supply and demand picture for oil suggests it is worth roughly $67 a barrel.
Rising inflation could cause some Asian countries problems in 2010.
Rising unemployment and excess capacity will likely continue to tame inflation next year. Conditions are so difficult in Japan that prices of certain goods and services are deflating. We feel it is important that businesses and investors adopt strategies that can handle either inflation or deflation.
Trade imbalances have narrowed, but they will become a major problem when the economy recovers.
In our view, when the European and American economies recover and oil prices rise again, probably in late 2010, the serious problem of trade imbalances will likely rear its ugly head again. Post WWII country growth models are no longer sustainable. Both sides— the consumer-driven debtor countries and the export-driven Asian countries— understand this, but neither have the political capital to correct this challenge.
Massive trade imbalances have caused excess debt in the West and liquidity has created asset bubbles in Asia. We believe that the situation would not have occurred had currencies been free to float. Eventually, it is our feeling that the domestic problems caused by these imbalances will become so large, that no country will be able to avoid floating their currency. We can only hope that devaluations will occur gradually.
The 2009 pattern of the dollar rising sharply in the first half of the year and then falling the second half may reoccur in 2010.
Although our best guess is that the dollar will strengthen versus the Euro and the Yen in the intermediate term, we continue to feel the dollar will decline versus most other currencies in the long-term. We have long concluded that having a diversified exposure to all major currencies is the only practical way to deal with uncertainly and high volatility in this area.
There is a low but distinct risk that things will go wrong again in 2010.
Judging by the strong stock and bond market rally since March 2009, investors seem to be convinced that the government’s response calm the global financial panic was effective. But risks still exist that could threaten the recovery and even cause a possible relapse. Our analysts believe the chance of a relapse that is a W-shaped recovery is low, but possible.
They see the potential threats to continued growth as: 1) the voluntary ending of stimulus policies prematurely; 2) a political backlash forcing the involuntary ending of stimulus policies prematurely; 3) the inability of a major country to sell enough debt to continue its stimulus program; 4) consumer spending not recovering due to ever rising unemployment; 5) a trade war developing due to a single country acting unilaterally in response to domestic political pressures; 6) energy prices surging again due to an event-caused supply disruption or investor hedging; 7) the surprise failure of another large creditor, be it a financial institution or even a country; and 8) the disruption caused by a dramatic currency move, for example the Chinese Yuan being allowed to float to deal with a new asset bubble.
Our Portfolio Strategy
We remain convinced that, given the many future economic and market scenarios now possible, investors will be best served by holding adequate cash reserves to encourage clear thinking and, with the remainder of one’s investments, by owning, as the Thomas White Funds do, diversified portfolios of sound companies with positions broadly diversified across the world’s regions and industries. While equities will likely continue to be the most volatile asset class, history shows they have produced superior, inflation- adjusted returns over the long term.
Well-run companies with prudent balance sheets have demonstrated the ability to survive a wide range of economic and market storms with most recovering and eventually becoming more valuable than before the decline. By having the wherewithal to adapt to challenging conditions better than their weaker competitors, these companies should be able to use their advantages in scale, lower costs and greater access to capital to increase market share in their industries, and acquire valuable companies or divisions at fire sale prices. Like us, company managers with long-term horizons recognize that difficult environments can offer exceptional buying opportunities.
During this period of rapid change in the world’s markets, I urge you stay abreast of the important events occurring in the forty five countries covered by our analysts. Their observations are available at www.thomaswhite.com. You may subscribe on the site to get this content sent to you by email. We also invite you to visit our offices in Chicago to meet the professionals in our organization.
Sincerely yours,
Thomas S. White, Jr.
President
FORWARD LOOKING STATEMENTS
Certain statements made above may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. and the Thomas White Funds undertake no responsibility to update publicly or revise any forward looking statements.
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