Marking Time

L.A. Times Archives

Sept. 16, 1997 12 AM PT

Germany’s stock market has been roaring this year, but Hanspeter Ackermann has fought an uphill battle bringing those gains to his shareholders in the Germany Fund.

While the blue-chip German stock index, the DAX 30, has surged 32.2% year-to-date as measured in German marks, the index is up about half as much in dollar terms--thanks to the dollar’s strength for much of this year versus the mark.

Likewise, the share price of the Germany Fund, a closed-end fund, is up just 13% year-to-date on the New York Stock Exchange. Still, with dividends included, Ackermann’s fund gained 27% in the 12 months ended Aug. 31. Fund tracker Morningstar Inc. gives the fund an above-average rating.

Ackermann, a 41-year-old Swiss national and father of two, serves as a director of Deutsche Morgan Grenfell, the investment arm of Germany’s Deutsche Bank. From his office in New York, he manages $1.2 billion in European stock portfolios, including the closed-end New Germany and Central European Equity funds. Most of his earlier career was spent at Swiss Bank Corp.

Ackermann concentrates the Germany Fund in about 30 mostly blue-chip stocks and supplements those with smaller stocks that he believes have attractive long-term growth prospects. He views Germany as an intriguing restructuring play. For investors who take that view, the Germany Fund is a discounted way to buy in: The fund’s stock price, now $14.25 a share, is about 19% below the actual value of the stocks owned, which is about $17.50 a share.

Ackermann spoke recently with Russ Wiles, a mutual fund columnist for The Times.

Times: What’s your overview of Germany’s investment and economic climate?

Ackermann: We think Germany is a great restructuring story. For starters, there are some proposed changes in the tax laws that are attractive. The purpose is to lower taxes. As you probably know, Germany has some of the highest taxes in Europe, both corporate and personal. On top of that, there’s a “solidarity” tax of about 7%, which has been maintained since East and West Germany merged.

The proposal is to reduce [the solidarity tax] over the years until it eventually disappears. Another notable tax change already has gone through. It involves the abolition of the wealth tax.

Times: What’s that?

Ackermann: This was a tax on wealth, not realized gains. There are still many German companies where a family owns a large percentage of the firm. These families had little interest in generating earnings because once you did that, the company’s share price would go up--and so would your tax liability. You would have had to sell part of your stake to pay tax.

This was a very inefficient system of taxation that ended earlier this year. We think that this will significantly benefit certain companies that became masters in hiding earnings by reinvesting in nonproductive facilities like real estate or other assets that didn’t immediately generate returns.

Times: Is the economy coming out of its recent malaise?

Ackermann: We think so, driven mainly by export-oriented industries. To a large extent, Germany still depends on big companies like Daimler-Benz and Siemens that derive a large percentage of their earnings from exports. That has been the key, as the deutsche mark has been relatively weak against the dollar, pound and some other European currencies. This weakness has significantly benefited these companies, which has given the economy a jump start.

So the recovery still is geared heavily to export stocks rather than domestic ones. We think, however, that this will change. . . . In every other German economic recovery, domestic stocks bounced back during the second year. This is still the first year.

Times: But isn’t the fear that the economy’s recovery, and the central bank’s desire to keep the mark from weakening further, will mean higher interest rates soon?

Ackermann: The Bundesbank is getting somewhat uncomfortable with the steep decline of the mark relative to other currencies. Therefore, people are talking about an increase in interest rates.

But we don’t think this will happen before 1998, primarily because German unemployment is around 11.4%, which is close to an all-time high. That obviously creates a difficult environment in which to raise rates because of the danger of aborting the modest economic recovery.

We had GDP growth of 1.4% last year. In 1997, we estimate it will pick up to about 2.2%. In 1998, it probably will get close to 3%. Inflation, the other factor, continues to be modest, running below 2% for two years now.

Times: How’s the economic integration with Eastern Germany going?

Ackermann: It’s going, but it has required a huge adjustment process. We believe the high unemployment rate is partially due to that integration. Even though you had skilled labor in Eastern Germany, you had two totally different price levels. The first thing the government did was raise those price or salary levels in the east to stop the migration of East Germans to Western Germany. That created a one-time cost that obviously wasn’t beneficial. But I think the economy is somewhat back in balance, after having adjusted to that huge expense.

Times: You took over as portfolio manager in April 1996. Are you doing anything substantially different from the way the fund was run before?

Ackermann: In the past, we had more of a top-down approach. That has been refocused to a bottom-up analysis.

Times: So you focus primarily on individual companies?

Ackermann: We focus on two factors: a company’s management and earnings growth. We are growth investors, and we like to see earnings per share picking up. We look at management’s track record and like to see firms in which management owns a large stake. Other factors include a firm’s financial strength, as seen in the debt-to-equity ratio, for example. And we look at basic valuation ratios such as price-earnings, price-cash flow and yields.

Also, we look at the visibility of earnings, which reflects the frequency of profit revisions by analysts. We like companies that are well followed, and we don’t like surprises. The more a company’s earnings deviate from analyst forecasts, the more we view the stock as relatively risky.

Times: What are some of the industries you favor now?

Ackermann: We have shifted our allocation somewhat lately. We had been over-weighted in car manufacturers. Yet they really have done extremely well, to the point where most of the good news has been discounted.

Daimler-Benz was one of our largest holdings and we still own shares, but we have reduced our weighting significantly. What brought us to that conclusion has been decreasing earnings momentum--that is, lower percentage growth--and higher valuations. Although the firm still has good management, great visibility of earnings and excellent financial strength, it’s now more of a hold than a buy.

On the other hand, we generally considered the financial sector unattractive until the end of last year, when a significant merger took place. Germany is still a country with too much banking and insurance. These industries need consolidation to become more efficient. With this merger, we think there will be further consolidations, which will lead to cost-cutting. We still don’t think the financial sector is all that attractive from a growth perspective. But if consolidation continues, there will be hidden values.

Times: So some of the fund’s major holdings are bank stocks?

Ackermann: Yes. Dresdner and Commerzbank, and the two banks involved in that merger--Bayerische Hypotheken and Bayerische Vereinsbank.

Times: How about some other stocks that you like?

Ackermann: We believe the domestic economy is recovering, which makes some consumer stocks attractive. One, Metro, is a retailer. But even more exciting are some of the smaller stocks like Adidas, which we also own in our New Germany Fund. The company makes footwear, T-shirts, soccer balls--you name it.

Another holding, Hugo Boss, is purely clothing. Later this year or next year, we might increase our domestic exposure, as we expect the economy will pick up.

Times: Do you hedge the fund at all against currency fluctuations?

Ackermann: We don’t hedge. We think that if someone invests in the Germany Fund, he does so with the intention of getting a German exposure. Where do I think the currency’s going? I don’t know.

Times: How much are German exporters threatened by the economic crisis in Southeast Asia, which is expected to slow consumption there?

Ackermann: There will be only a very limited impact. Most German exports are high-quality manufactured goods such as machinery, machine tools, cars and pharmaceuticals. If you really want a Mercedes, would you buy a Hyundai if it got cheaper? I don’t think so. In areas like machine tools, the only products of a similar quality to what Germany makes come from Japan. Yet Japan’s currency hasn’t been through the same turmoil.

Times: What’s your view of the planned economic integration of Europe, and what the planned single currency (European Monetary Unit, or EMU) will mean for Germany? Is it a plus for Germany?

Ackermann: We think so. In the past, Germany always had to compete having a strong currency. We often saw competitive devaluations in Italy, Spain and even France relative to Germany. To stay competitive, German corporations had to restructure to make up for the differential.

With EMU, that will fall away. The competitive devaluations of other countries will cease. Germany should do well.

Times: After the gains this year, how much steam is left in the German stock market?

Ackermann: First, Germany is in a different stage of the economic cycle than the U.S., where growth already has accelerated and monetary tightening is being discussed. We’re still far away from that in Germany. Second, the U.S. market is about 20% more expensive than Germany, based on measures like price-cash flow and price-earnings. So there is more value in Germany.

In addition, our fund is selling at nearly a 20% discount. That means you basically can buy a stock like Daimler-Benz at a 40% discount to what a car stock trades for in the U.S. if you also include the impact of market valuations. So if you factor in the discount plus a market that’s less expensive, the chances are good that an investor in our fund will do well.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Germany Fund

Strategy: Seeks capital appreciation and dividend income by investing in well-managed German companies.

Vital Statistics:

Share price,

52-week high/low: $16.56-$12.25

Monday share price: $14.25,--$0.19

Net asset value per share, as of Friday: $17.51

Current share price discount to NAV: --19%

Five largest holdings as of Aug. 15:

1. Allianz Holding 2. Veba 3. Hoechst 4. Daimler Benz 5. Munchener Ruckversicherungs

Assets: $280 million