Change is constant in the ever-evolving financial markets,
forcing individual and professional investors alike to reevaluate
and fine turn their strategies. DWS in December relaunched DWS
Europe Equity with a new name, mandate and management. The newly
DWS World Dividend Fund
(SERAX) scours the globe for dividend-paying stocks. Though the
fund has shed its exclusive Europe focus, it retains a significant
weighting toward the EU. We spoke with portfolio manager Fabian
Degen and Douglas Beck, head of US product management, about the
fund's new strategy and their outlook for Europe in 2011.--
Why did you choose to change the fund's mandate
Region-, country- and, to some degree, sector-focused funds have
come under significant competition from exchange-traded funds (
). We've transformed our European fund to one with a global mandate
that targets dividend-paying stocks.
Investors are in the early stages of returning to equity
markets. For the last couple of years investors have moved from
cash holdings into the fixed-income markets; now they'll shift
capital from fixed-income and cash allocations into equities. But
investors aren't going to immediately adopt an aggressive equity
investment strategy. They want significant cash flow, and some
dividend strategies offer better income streams than short-term,
What's the new investment strategy for the fund?
Our dividend strategy calls for low turnover on investments with
low volatility. Our bottom-up investment process is simple and
straightforward. Using a two-step investment process, we identify
the most attractive dividend stocks in our universe of around 2,000
to 3,000 names. The first step is quantitative pre-selection, in
which we screen our universe according to three factors: dividend
yields, payout ratios and dividend growth rates. We end up with a
pre-selected portfolio of 100 to 250 stocks and then apply our
second qualitative step. We meet with a company's management. We
check the balance sheet, capital structure and debt levels. At the
end of the process, we come up with about 40 to 60 stocks that will
make up the portfolio.
Currently we have about 60 stocks in the portfolio. We've
focused on sectors with an above average dividend yield. These
firms are typically in the telecom, utility and energy sectors.
What portion of the fund's investable assets is allocated
to Europe given all the turmoil there?
About 34 percent of the fund's investable assets are allocated to
the US, 27 percent to Europe, 5 percent to emerging markets. The
fund also has strong exposure to resource currencies such as the
Canadian and Australian dollars.
What's your outlook for Europe in 2011?
No one can deny that Europe's fundamental problems are acute.
Everything that's been done to address the European debt crises has
been aimed at ensuring the solvency of the banking system,
especially the French and the German banks. If you look at spreads
on sovereign and bank credit default swaps (CDS) in the eurozone
you'll find they're still close to all-time highs. This indicates
that the emergency stimulus funds haven't reduced the risk in the
system. The story's not over in 2011.
Markets will refocus on the European debt crisis in 2011 and
2012, which will have implications for the euro. Europe's long-term
problems will require a complete solution that will take more than
one or two years.
The obvious problem areas are Ireland, Greece and Portugal. But
the EUR750 billion rescue fund that was established should be able
to cover a bankruptcy in one of these countries. However, it would
be problematic if Spain or Italy required money from the fund. In
2009, Germany accounted for 20 percent of EU gross domestic product
), Greece accounted for 2 percent and Portugal accounted for 1.3
percent. But Spain contributed 8.8 percent of GDP, a meaningful
How have you positioned the fund for 2011?
We haven't invested in the peripheral economies such as Greece,
Spain, Italy or Ireland. We've invested in attractive
dividend-paying stocks in Germany--one of the EU's bright
spots--that will benefit from the recovering world economy.
(Germany: RHK), is a private hospital operator in Germany that's
buying hospitals from the government. The German health system is
under significant cost pressure, and government-run hospitals are
inefficient. Rhoen-Klinikum buys hospitals from the government,
often for a symbolic payment of EUR1 because of the hospitals' huge
debt loads. The goal of the company is to the recoup efficiencies,
renegotiate contracts and increase net income. The firm doesn't
have the highest dividend yield in the industry but it has
increased its dividend substantially.
US energy firm
) has the largest weighting in our fund. The energy firm changed
its strategy 12 months ago, with the aim of returning value to
shareholders. Management has made it quite clear that it will
allocate surplus capital to a major share repurchase program of
about USD20 billion over the next two years--making it the oil
industry's biggest repurchasing program in the last decade. That
indicates an intention to return value to shareholders. On top of
that the company should grow its dividend by about 10 percent in
2011 and 2012.
Another US stock we like is
), another name that has consistently created value for
shareholders. Over the past five years the company's dividend has
grown by 14 percent, a trend that should continue. From 2002 to
2009 the firm has returned about USD37 billion to shareholders
through share repurchases and dividends--roughly 37 percent of the
firm's current market cap.
We also like Canada's
(TSX: ENB, NYSE: ENP). It's a pipeline company that has increased
dividends every year for more than a decade. It has a stable
business model and generates reliable cash flow. The business model
is conservative and the management is reliable and
(Holland: KPN), the Netherlands' leading telecommunications
company, provides wireline and wireless and Internet and TV
services. The stock offers dividend yield of about 6.6 percent and
dividend growth of 40 percent. The dividend payout ratio is 50
percent, so the company has plenty of room to increase dividends
What's your outlook for the US and the emerging
I'm not so pessimistic about the US economy. The latest
unemployment data was the first sign that the Federal Reserve's
quantitative easing program is working, so the drivers for
constructive growth in the US economy are in place. The US economy
could surprise people in 2011.
We will increase the fund's exposure to emerging markets over
time. We're planning to increase our exposure to the Chinese market
and are in the process of finalizing our ideas and hunting for the
Emerging markets will account for more than 50 percent of global
GDP growth in 2011, with China leading the way. At the same time,
investors should monitor inflation in developing markets. Some
commodity prices are peaking--copper prices, for example, have
reached a new high--and that will lead to significant inflation
pressure in developing countries in 2011.
Nonetheless, emerging markets should be fine over the next six
months. Inflation in the emerging markets is already tightening.
The renminbi has appreciated slightly, which should reduce the
inflation in China a bit. The Chinese have raised lending rates to
cope with the housing bubble, so they're doing well to combat
inflation. However, the price of oil could be a problem,
particularly if it reaches the USD100 to 105 per barrel level. That
could hurt the US consumer.
Why do you think the dividend strategy is a winning one
We've seen an inflection point in fund flows in the US and Europe;
institutional investors are slowly rotating out of the bonds and
into to equities. Even in Germany retail investors have started to
buy stocks again. Investors exiting the bond market want a stepping
stone back to equity markets. That's dividend stocks. Corporations
are stuffed with cash, and they have access to inexpensive
financing, providing significant room to increase dividends. Many
equities, particularly in Europe, offer dividend yields
significantly above the corporate bond rate, a situation that
doesn't occur too frequently. Investors should ask themselves why
they aren't investing in dividend-paying stocks when the yields are
higher and they can also participate in the higher price
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