Pedal to the Metals

If there’s any one word to describe local investment star Steve Leuthold and his 25-person firm, it’s "eclectic."

Founded in 1981 and known over the years primarily for its qualitative research for large institutional clients such as mutual and pension funds, the Minneapolis-based Leuthold Group has distinguished itself with its wide-ranging approach to the investment markets.

This is amply illustrated in the firm’s three mutual funds. The largest is the $1.3 billion Leuthold Core Investment Fund, which is driven by the same quantitative screens that inform Leuthold’s research. ("Screens" are computer-driven models that analyze thousands of stocks by comparing them to other stocks in their industry, the market as a whole, and other measures.) The Core Investment Fund finds its opportunities in domestic and international stocks (including the stocks of emerging countries) and investment-grade and high-yield bonds. There’s also the Grizzly Short Fund, which is made up entirely of short sales—bets that a security’s price is going to fall. Then there’s the Select Industries offering, which focuses on specific sectors.

Leuthold’s Grizzly fund has suffered over the past three years thanks to the improving equities market. But his Core and Select Industries products have both earned five stars from Chicago-based fund-rater Morningstar.


{Q} Where do you see some of the best opportunities now, in terms of all your various funds?

{A} I think there’s a lot of opportunity in what I’d call global companies that aren’t necessarily headquartered overseas. IBM [NYSE: IBM] is 50 percent foreign; so is Dell [Nasdaq: DELL]. One of the problems is that people identify investments by their point of origin, but if you take a Sony [NYSE: SNE], Toyota [NYSE: TM], or any big Japanese company—those are global companies. We’re very group focused, and one of the areas where we’re devoting a lot of time is in developing global industry groups. So if you look at the steel companies, there we’re looking at steel companies all over the world—whether they’re in Korea or in Brazil—and combining them into one global industry group. The same is true for industrial metals.

{Q} Tell me about industrial metals.

{A} Industrial metals exclude gold, because that’s not an industrial application, or steel, because that’s a process. It would include iron ore, copper, lead, zinc, tin, and silver—silver because more than half of the use of silver is in industrial applications; in fact, it’s about 70 percent.

{Q} Commodities have had a pretty good run in terms of price. Is all of the appreciation reflected in the current price, or do you see more upside there?

{A} Industrial metals went through a 15-year period where nobody was making any money in that business and because of that, they didn’t invest in expanding capacity. So up through 1999, you had consumption growing at 2.5 percent per year, and you had the amount of investment in the whole area at about 1.5 percent a year. That’s why we have this huge shortage in things like copper and zinc.

Then the global demand started exploding. If we had a shortage in, say, corn, farmers would just grow more corn. But to bring on a new copper mine, it’s an eight-year process because of all the environmental issues. Even in a place like New Guinea, it’s a seven-year process. You have new supply coming on in the next year or so, but the demand is still coming on much faster than the supply.

{Q} How much of that is China?

{A} China is significant. India is significant. Also Eastern Europe is significant in terms of demand. It’s not just a China play. This is happening all over the world—in places like Vietnam, where they’re getting more into manufacturing because of their labor-cost advantage.