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Money Talks
May 13, 2011, 12:01 a.m. EDT
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” What's in your wallet? Less buying power, for starters.
Inflation is taking a bigger bite out of household budgets, and as an investor who broods about worst-case scenarios mutual fund manager Charles de Vaulx is worried.
"There's so much debt in the system, you have to be out of your mind to pay no attention to the big picture," de Vaulx said. "When there's a credit boom, you never know when the party will end. All you know is that the longer it lasts, the harder the fall."
So de Vaulx is avoiding what he sees as the market's potential land mines: momentum stocks, debt-riddled businesses, pumped-up emerging markets and companies and bonds that are likely to wither when both inflation and interest rates climb. Read more: Strategist Jeremy Grantham says to sell riskiest investments.
Instead, the co-manager of the IVA Worldwide /quotes/comstock/10r!ivwax IVWAX -0.17% and IVA International /quotes/comstock/10r!iviox IVIOX -0.53% funds with Chuck de Lardemelle, is making investments that can withstand the challenging investment climate he expects "” and even take advantage of it.
At such a time, capital preservation is paramount: "To finish first, you must first finish," de Vaulx likes to say, quoting American race car driver Rick Mears.
Accordingly, De Vaulx has made five crucial investment moves into areas he believes can go right when things go wrong.
First, the fund manager is buying inflation protection through shares of companies with the ability to pass higher prices to consumers.
Essential services providers, consumer-staples companies and fee-generating businesses are particularly attractive, de Vaulx noted. Three of his favorites: credit-card processor Mastercard Inc. /quotes/comstock/13*!ma/quotes/nls/ma MA -0.69% , retailer Wal-Mart Stores Inc. /quotes/comstock/13*!wmt/quotes/nls/wmt WMT -0.15% and Sodexo /quotes/comstock/24s!e:sw FR:SW +0.17% /quotes/comstock/11i!sdxof SDXOF +0.39% , the French catering and services group.
Mastercard receives a percentage of every transaction, and the more inflation, the more money it makes, de Vaulx pointed out. "Owning Mastercard is owning a stream of free cash flow that can creep up through inflation," he said. Similarly, Wal-Mart and Sodexo are two enterprises that should be able to maintain profit margins against rising food costs.
Each of de Vaulx's funds had about 5% to 6% of assets in gold bullion at the end of March. The stake reflects a longstanding allocation for the fund manager.
"We control risk by owning gold," de Vaulx said. "As long as the policymakers are being irresponsible, it's good to own some gold, especially if the [U.S.] dollar keeps falling."
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