Emerging Markets Boost Monsanto, Dow

BOSTON ( TheStreet) -- Tobias Welo, manager of the Fidelity Select Materials Fund ( FSDPX), says agriculture stocks, such as Monsanto ( MON), Dow Chemical ( DOW) and DuPont ( DD) will benefit from growth in developing nations.

The $661 million fund, which garners four stars from Morningstar ( MORN) has returned 98% during the past year, better than 96% of its rivals. The fund has gained 6% annually, on average, during the past three years, outpacing 86% of competing portfolios. Monsanto, Dow Chemical and DuPont were the fund's top three holdings as of January 31, according to Morningstar.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers share their investment views in five fast and furious questions.

Are you a bull or bear?

Welo: I am relatively bullish. Looking at some economic factors in the U.S., we've seen industrial production and capacity utilization data trending up since the middle of 2009. It appears that housing has hit a bottom and the auto sector is seeing some gradual improvements as well. The financial sector has improved its balance sheets and is starting to lend again. As a result, companies' access to credit and willingness to invest to expand their business has also improved. If we continue on this path to recovery, materials would be in a position to perform well.

Longer term, demand for growth for materials is likely to be driven by the emerging markets like China and India. Over 20 million Chinese migrate from the farm to the city every year. This evolution of their economy, this industrialization, creates a huge demand for materials that supply will be challenged to meet.

What is your top industry pick?

Welo: One of my top picks is the agriculture space, including the seed and fertilizer companies. The economic growth of developing nations with large populations is leading to increased global demand for food, particularly protein. It takes 2 to 7 pounds of grain to make one pound of animal protein. With a limited amount of arable land in the world, increased agricultural efficiency is a critical part of the solution.

Three of the four largest players in the seed space have historically been Monsanto, DuPont and Dow Chemical. These companies have benefitted from their use of biotechnology to develop new, highly advanced seeds with specific traits that might help control insects or bacteria that can harm crops. These seeds give farmers improved crop yields and ultimately are the No. 1 way a farmer can make more money.

The other big part of the agriculture space is fertilizers. There are three main ingredients for fertilizer: nitrogen, phosphate and potash. These materials are processed and blended to create fertilizer. The demand for these products has been growing as developing nations, such as China, are only now starting to invest in fertilizers to improve their crop efficiency. Fertilizers should benefit from increased penetration for several years.

What is your least favorite industry pick?

Welo: One industry I'm less positive on is the aluminum industry. I am concerned by the low barriers to entry, which have led to an oversupply. Unlike a mineral like copper which is in tight supply, bauxite, the main component to the production of aluminum is readily available. I am concerned that aluminum will suffer from ongoing oversupply, at least in the short term.

What is your outlook on inflation and its effect on the materials sector?

Welo: Some of the key inflation indicators have turned positive for the materials sector. Companies are starting to see pricing power and I've positioned the portfolio to benefit from an inflationary environment.

Clearly global governments have been fighting deflationary pressures, and trying to get their economies going through fiscal and reflationary monetary policies. The question is whether governments will be able to remove stimulus from the system at the right time. If not, we could see more inflation.

Materials stocks that have significant exposure to commodities that have done well during inflationary periods, including gold, copper and other metals. In the high inflation environment of the 1970s, materials stocks performed well, outperforming inflation and the broader market. As a result, many investors look to the sector as a potential hedge against future inflation.

What approach do you take when choosing investments?

Welo: The materials sector is complex in that it is dependent on the strength of the global economy, but each subgroup has its own separate cycle, depending on supply and demand and the health of their end markets. What drives demand for chemicals differs from what drives demand for gold. The cyclicality of the sector presents a lot of opportunities that we, as active managers, feel we can take advantage of.

-- Reported by Gregg Greenberg in New York.
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.

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