DBGR: Industrial Engine Of The EU
Germany is the cornerstone of EU industrial output. The majority of German products and services are considered top-of-the-line, globally. The weak Euro will make Germany’s best exports price competitive in every advanced economy market. Export economies are currency sensitive. In fact, export economies are almost always under the suspicion of purposely taking actions to weaken their currencies in order to be more ‘price competitive’. This is particularly true when the global economy slows. In the case of commodities, the competitive pressures are now even more intense. When demand for, say, iron ore or copper declines, the mining industry must clear inventory. Sometimes the problem is more complex; crude oil, for instance. Presently, not only has demand slowed, but production has continued on full tilt. ‘Semi-manufacturing’ trade is also complicated by currency imbalances. The trade of semi-completed products may be more expensive in one direction, but less expensive at the point of sale. So the middle manufacturer pays more for the parts and then receives less for the sale. That’s a nutshell description; the semi-manufacturing trade is far more complex. Having a common regional currency mitigates the problem and an entire region has a little more of a ‘currency hedge’. This is particularly so for an economy which manufactures discretionary durable goods and then exports globally. Take Germany for instance. Germany engages in the semi-manufacturing trade, markets and then distributes its products around the world. Hence, the German economy, a Eurozone member, benefits from a weak Euro. Germany’s economy had recovered strongly from the global credit collapse in 2008. Through innovative renegotiations with trade unions, and increasing production efficiency the economy has ‘motored ahead’ of its fellow EU members. Is the right time to take a share in the German economy? Deutsche Asset & Wealth Management , a German-based financial services company, offers an opportunity through its X-trackers portfolio of funds : the MSCI German Hedged Equity ETF (NYSEARCA: DBGR ) . (click to enlarge) According to X-trackers: The fund “… seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Germany U.S. Dollar Hedged Index …” Further, by hedging the tracking index mitigates “… exposure to fluctuations between the value of the U.S. dollar and the euro. ..” A word about hedging: in this case, it doesn’t hurt to hedge, but over the long term it may not be all that helpful. The European Union has its very strong economies as well as its very weak economies. Every leading global economy will have its ‘ups and downs’: the U.S., China, Japan as well as the European Union. The EU has a strong core including Northern Italy, the Nordic members, France, Germany and the U.K. Even Spain seems to be well on track towards better economic times. The point is that having a hedge is a little extra insurance. So then, does the fund itself have a good foundation? First off, it’s well concentrated with 56 holdings, totaling about $149,344,364.00 in assets. The fund first listed on the NYSE on June 9, 2011, and has semi-annual distributions; management fees are in line with the industry average, at 0.45%. The table below makes an interesting comparison of annualized returns since listing. Average Annualized Returns 1 Year 3 Years Since 6/9/2011 listing Market Share Price 1.74% 6.43% 2.83% Net Asset Value 1.51% 6.10% 2.86% MSCI Germany U.S. Doller Hedged Index 1.77% 6.38% 3.22% MSCI Germany Index -9.26% -0.21% -1.42% The next important observation is the way the fund allocates its capital. This is summarized in the pie chart below and does not differ much from the MSCI Germany Index allocations as demonstrated in the table below the pie chart. MSCI Germany Index Allocations Discretionary 20.54% Financials 18.23% Health Care 15.30% Materials 13.44% Industrials 12.18% Info Tech 8.79% Telecom 5.4% Consumer Staples 3.97% Utilities 2.15% Data from MSCI The discretionary sector is composed of really solid companies but the sector also serves as an excellent example of why individual investors should suffer the tedium of going through the holdings when practicable. First, one of the sector’s top holdings is Volkswagen AG ( OTCPK:VLKAF ). The ’emission control bypass scandal’ has made global headlines. No doubt there will be seemingly endless fines, testimonies and restitutions. However, not to justify it by any means, but for the purpose of being objective, this scandal should be viewed in a larger context. For example, the environmental damage pales in comparison to the Exxon (NYSE: XOM ) Valdez or the BP (NYSE: BP ) Gulf of Mexico deep-water platform accident. It took Exxon and BP years to make restitutions on many levels. In terms of automobile liability, GM (NYSE: GM ), Toyota (NYSE: TM ) and Takata ( OTCPK:TKTDY ) oversights have resulted in death, serious injuries and huge recalls. To date, thankfully, there have been no reports of death or serious injury caused by the emission get-around-cheat. The point is that, most likely, Volkswagen will make restitutions and emerge a better company for it. Discretionary 20.913% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Daimler OTCPK:DDAIF 7.265% $91.988 3.25% 33.98 10.47% 11.00 R&D, production, marketing and sales of trucks, light trucks, automobiles; global BMW OTCPK:BAMXF 3.133% $68.25 2.95% 31.24 9.67% 10.57 Autos, light trucks, motorcycles under BMW, MINI and Rolls-Royce; global Continental OTC:CTTAF 2.341% $48.29 1.47% 24.43 11.42% 16.80 Full range of tires; also auto components, safety technology, powertrain, interior components; global Volkswagen VLKAF 2.244% $72.02 3.87% 37.20 13.99% 10.31 Autos, light trucks, parts and specialized components; financial services, fleet management under major brand names; global Adidas OTCQX:ADDDF 1.823% $20.54 1.66% *26.00 6.96% 28.49 Athletic footwear, apparel, equipment under Taylor-Made, Adidas Golf, Adams, Ashworth, Reebok; global Prosieben OTCPK:PBSFF 1.0324% $11.59 3.26% 81.40 0.82% 25.17 Media; commercial TV with 6 channels, internet video, games, music, e-commerce; Europe Averages 2.97% $52.11 2.74% 39.0142 8.89% 17.06 * as a percent of operating cash flow Data from Reuters, Yahoo Finance Data from Reuters, Yahoo Finance There’s also an example of a ‘hidden risk’ in this sector. It suffices to say that, in a complicated ‘merger’, Porsche Automobile Holdings SE acquired majority ownership of Volkswagen Group and Volkswagen Group acquired the Porsche Brand . The important point is that any restitution VW will undoubtedly make will affect the holding company, Porsche Automobile Holdings; a smaller holding of the fund. However, the point is that when making the decision to include a fund in a long-term portfolio, it’s worth the time and effort to uncover any links in the holdings. Financials 18.41% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Allianz OTCQX:ALIZF 7.147% $80.13 4.21% 48.77 1.19% 11.60 Holding company of PIMCO and Allianz Group; financial services, insurance asset management, reinsurance; global Deutsche Bank DB 3.110% $35.00 3.24% *9.823 -1.49% NA Investment Bank, retail through corporate, manager of this fund; global Muenchener Rueckver OTCPK:MURGF 2.989% $33.57 4.16% 41.87 3.54% 10.04 Holding company for Munich Health and Asset; ERGO insurance; Munich Re; primarily insurance as reinsurance; global Deutsche Boerse OTCPK:DBOEF 1.460% $16.58 2.67% 49.12 0.98% 18.42 Managing company for Xetra, Eurex, Clearstream, Market Data and Analytics; cash, electronic and specialist trading Vonovia OTC:VONOY 1.256% $14.08 **NA **NA **NA 19.94 Fmr: Deutsche Annington Immobilien: residential real estate management; Germany Commerzbank OTCPK:CRZBY 1.021% $13.48 **NA **NA -9.20% 20.92 Private and corporate banking services mainly Europe Averages 2.83% $32.48 3.57% 37.396 -1.00% 16.184 *as a percent of operating cash flow ** no information available; excluded from average Data from Reuters , Yahoo Finance Financials Holdings Less than 1% accounting for 1.423% Deutsche Wohnen AG ( OTC:DWHHF ) 0.792842% Hannover Rueck ( OTCPK:HVRRY ) 0.630016% Data from Reuters , Yahoo Finance Aside from Deutsche Bank, the financials are dominated by insurance, reinsurance, including world-class companies Allianz and Muenchener Rueckver (holding company of Munich Re ), REITs and also asset exchange corporation Deutsche Boerse . Hence, the fund’s financial holdings mostly avoid the European banking sector. Health Care 15.06% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Bayer OTCPK:BAYRY 9.364% $104.00 1.91% 51.08 6.27% 26.43 Healthcare, Crop-Science, Material-Science; Bayer Business and Technical Services and Currenta Fresenius OTCQX:FSNUY 2.411% $38.078 0.67% 19.03 10.62% 28.43 In and outpatient hospital care Manages Fresenius Medical Care; Fresenius Kabi, Fresenius Helios Fresenius Vamed * Fresenius Medical Care FMS 1.595% $27.99 1.04% 55.46 7.08% 24.08 Division of Fresnius SE; focus on kidney and dialysis; products for dialysis, renal disease and treatments; global Merck MRK 1.166% $149.845 3.43% 47.74 9.02% 14.29 Pharmaceuticals R&D, production, market & distribution, vaccines, therapies; animal health; global Averages 3.63% $79.98 1.76% 43.328 8.25% 23.31 *division of healthcare holding Fresenius Data from Reuters , Yahoo Finance The fund leads off the sector with a major, world class player in Bayer, accounting for about 62% of the health care sector’s weight. Once again it’s important to point out some overlap. Fresenius Medical Care is a subsidiary of Fresenius . Both are solid, established and well based holdings. However, the investor must keep in mind that, in a sense, Fresenius Medical Care is counted twice in that sector; once on its own and once as part of the parent company. Qiagen (NASDAQ: QGEN ) is a smaller but no less interesting holding in that it provides the means by which DNA, RNA or proteins are extracted from cells and analyzed; 0.520327% of the fund. Materials 12.80% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business BASF OTCQX:BASFY 6.439% $71.78 3.84% 49.76 7.95% 13.33 Functional materials and solutions; performance products; agricultural solutions; water management Linde OTCPK:LNEGY 2.447% $27.621 2.30% 51.12 8.74% 22.43 Gas engineering in healthcare, medical, food processing; cylinder packaged or liquified Heidelberg Cement OTCPK:HDELY 0.974% $14.64 1.04% 16.00 2.08% 15.40 Building materials; cement and aggregates, ready-mix concrete, mortar Averages 3.29% $38.01 2.39% 38.96 6.26% 17.053 Data from Reuters , Yahoo Finance Data from Reuters , Yahoo Finance The major component holding of the sector is the renowned BASF, which covers every major subsector of the materials industry including agriculture, electronics, nutrition, plastics and textile materials. BASF accounts for about 50% of the sector holdings. Industrials 11.96% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Siemens OTCPK:SIEGY 7.011% $87.62 3.81% *44.16 1.86% 14.56 Global, diversified, covering over 200 countries, manufactures turbines, automation technology, power transmission, renewable energy technology Deutsche Post OTCPK:DPSTF 2.396% $33.44 3.31% 68.21 3.23% 21.38 Logistics services; mail, freight and supply chain and contract logistics, warehousing services Averages 4.70% 60.53% 3.56% 56.185% 2.55% 17.97 *as a percent of operating cash flow Data from Reuters , Yahoo! Finance Data from Reuters , Yahoo! Finance Siemens accounts for nearly 60% of industrials. The company is participates in nearly every industrial subsector; automation, renewable energy, healthcare, mass transportation, consumer appliances and others. It’s worth mentioning Deutsche Post is an example of how innovative thinking in privatization may not only be successful, but independently and sustainably profitable. IT 8.92% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business SAP SAP 8.850% $96.427 1.55% 42.53 10.47% 28.12 Enterprise management software solutions; cloud services Infineon OTCQX:IFNNF 1.475% $17.00 1.47% 36.29 11.95% 25.34 Industrial semiconductor solutions; power control, automotive, security solutions United Internet OTC:UDIRF 0.596% $11.173 1.20% NA 13.06 23.43 Internet access, subscription provider and mobile internet services in Germany. Averages 3.64% $41.53 1.41% 39.41 11.82% 36.85 *as a percent of operating cash flow Of the 8.92% of the total IT holdings, 8.850% or over 99% is weighted by SAP a premier global name in enterprise, analytics, and mobile technology in nearly every business sector; aerospace, financial, consumer products mining and minerals and others. Telecom Services 5.407% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Deutsche Telekom OTCQX:DTEGY 5.110% $80.547 3.04% 100.09 -0.61% 33.36 Telecom and IT services in Germany, Europe and the U.S.; internet and mobile Telefonica Deutschland OTCPK:TELDF 0.297% $16.630 4.60% *57.63 8.07% NA Retail and business telephony services and small business solutions Averages 2.70% $48.59 3.82% 78.86 3.73% 33.36 *cash flow per share The fund weights Deutsche Telekom at 5.11% of the 5.407% of the sectors holdings; almost 95%. There’s good reason since not only is it the major telecommunications service provider in Germany, it also has a global reach in Europe and the U.S. providing broadband, mobile and corporate system solutions. Consumer Staples 3.999% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Henkel & Co KGAA * Vorzug 1.785% *$45.104 1.25% 32.07 *3.89% 30.06 Beauty care, home care, adhesives ( * Vorzugsaktien = preferred shares) Henkel & Co KGAA OTC:HELKF 0.893% $45.104 1.56% 32.07 3.89% 25.72 Common of the above company Beiersdorf OTCPK:BDRFY 0.823% $28.785 0.83% 25.69 1.80% 30.68 Cosmetics, personal care products, skin care Metro OTCPK:MTTRY 0.498% $10.108 3.46% *614.58 *NA *194.81 Holding Company hypermarkets, Metro Cash & Carry, Real hypermarkets, Media Market and store brands Averages 1.00% $28.00 1.78% 28.88 2.85% 28.82 *omitted The average Consumer Staples sector weighting is about 1.00%. Once again, due diligence is in order. The larger part of the top weighting is Henkel & Co. preferred shares at 1.785%, while a lesser amount, 0.893% are the common shares. The company is worthy of its position in the fund, no doubt; but the point is that in essence, it weights the sector’s holding more than might be expected. The company seems to be a mix of consumer staples as well as consumer discretionary products and markets household products as well as having retail and professional cosmetic distribution. Utilities 2.90%% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business E.ON SE OTCQX:ENAKF 1.719% $18.906 5.60% *5.77 6.88% NA Energy via fossil, nuclear and renewables; energy commodity trading; exploration and production; Europe, CEE, U.K. RWE AG OTC:RWNEF 0.571% $7.623 8.21% 61.97 -0.64% 7.22 Electric & gas, energy commodity trading, lignite mining, nuclear, fossil, renewable electricity generation U.K., CEE, SEE Averages 1.15% $13.26 6.91% 33.87 3.12% 7.22 *as a percent of operating cash flow The lightest weight is the Utilities sector, accounting for 2.90% of the fund total and of that nearly 60% E.ON , which seems to be a run-of-the-mill energy company with good reach, covering generation, exploration and distribution in Europe, U.K., Russia, central and eastern Europe. It’s important to conclude with a few notes on the fund. First, it’s a solid investment with the potential for capital appreciation and continued distributions. The holdings, especially those top-weighted best-in-class companies anchor the fund’s NAV. Lastly, as a Eurozone industrial export economy, Germany has the added advantage of having a weak Euro on its side. In the case of this fund, the ‘overlapping’ holdings may be justified by their market capitalization and capital flow. In all fairness, though, since the fund uses a ‘passive’ approach, it merely emulates the MSCI index holdings. This means that the index is, essentially, governing the fund’s holdings. All said and done, the fund may be summed up in a word: Außerordentlich! Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.