Global Values


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 minted 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.-- John Bishop

European Values

Why did you choose to change the fund's mandate now?

Douglas Beck: Region-, country- and, to some degree, sector-focused funds have come under significant competition from exchange-traded funds ( ETF ). 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, fixed-income instruments.

What's the new investment strategy for the fund?

Fabian Degen: 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?

FD: 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?

FD: 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 ( GDP ), Greece accounted for 2 percent and Portugal accounted for 1.3 percent. But Spain contributed 8.8 percent of GDP, a meaningful percentage.

How have you positioned the fund for 2011?

FD: 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.

Rhoen-Klinikum (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 ConocoPhillips ( COP ) 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 PepsiCo ( PEP ), 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 Enbridge (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 experienced. 

Koninklijke KPN (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 over time.

What's your outlook for the US and the emerging economies?

FD: 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 right companies.

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 in 2011?

FD: 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 appreciation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Stocks

Referenced Stocks: COP , ETF , GDP , PEP



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