Investing In Closed-End Funds In Emerging Markets - Rainer Vermehren - DWS Investments Distributors, Inc.

Wall Street Transcript

67 WALL STREET, New York - February 15, 2012 - The Wall Street Transcript has just published its International Investing and Other Investing Strategies Report offering a timely review of market trends for serious investors and industry executives. This International Investing and Other Investing Strategies Report contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Latin American Strategy - Exposure to Emerging Markets - Asia Pacific Investment - MLPs

Companies include: Targa (NGLS); Adidas (ADS.DE); Altria (MO); Asian Paints (ASIANPAIN.NS) and many more.

In the following brief excerpt from the International Investing and Other Investing Strategies Report, interviewees discuss the outlook for the sector and for investors.

Rainer Vermehren is the Lead Portfolio Manager of The New Germany Fund, Inc.; The European Equity Fund, Inc.; and The Central Europe and Russia Fund, Inc., at DWS Investments Distributors, Inc., which is a member of Deutsche Bank. He joined the company in 1997 after three years of industry experience. Before joining, Mr. Vermehren was an Assistant to the Fund Manager in Latin American equities at Morgan Stanley. He has a B.A. from Towson University and an MBA from Fordham University.

TWST: Please tell us about some of the important themes driving your investment decisions right now.

Mr. Vermehren: Within The European Equity Fund, Germany is a big theme. One reason is wage competitiveness theme. A big problem in Europe is that many peripheral countries had high growth in the last few years, much of it driven by subsidies from the European Union, which drove up wage costs. In Germany, however, wage growth was only about 7% over the past 10 years, lagging the rest of Europe. Another reason is export strength, as I mentioned earlier. Germany has a large industrial sector, with exports making up more than 40% of GDP in 2011, many going to emerging market countries that are still growing. Thus, we have overweighted Germany in exchange for underweighting France. The Central Europe and Russia Fund has the same theme from a different angle. There, we seek companies that could benefit from continued growth in Germany.In regard to The New Germany Fund, while Germany has looked good on the macroeconomic side, stocks have been hit hard in the past year, in line with the rest of Europe. However, the country is looking good relative to its peers, stock prices have come down significantly, and valuations are historically cheap - historically and relative to other indices. That brings us to the one positive we see in this crisis. The consensus view for Europe and Germany is negative, meaning that there is the possibility that a political solution could arise while investors are underweight in these countries.

TWST: Would you highlight some sectors you like right now?

Mr. Vermehren: In the New Germany Fund, we like the industrial sector because the German equity market has high cyclical exposure. We avoid banks, preferring the insurance sector. We like the software sector, where many companies are benefiting from strong industrial growth overseas. And we like the automobile sector, because autos, particularly auto suppliers, have had great follow through after the 2007-2008 crisis. Automobiles may not seem like they'd appeal in this environment, but Germany was the inventor of the Cash for Clunkers program. Despite the argument that they were just pulling forward purchases that would have been made in 2009, the expected 2009 sales drop never materialized, and people continued buying cars. Growth has come in large part from the emerging markets, namely China and India, but now the United States is stepping up purchases again. Looking broadly at The European Equity Fund, we prefer the core countries. We don't like the periphery. We like the northern countries. We like less the southern countries. While we are overweight consumer discretionary, we're doing it less with automobiles and more with areas of media, retailing and durables. We are also playing the industrial sector. However, we're more into health care, which we really aren't playing in The New Germany Fund at all. Energy is important in The European Equity Fund and The Central Europe and Russia Fund. In Russia, historically, energy has always played a big part because that's where the biggest companies, such as Gazprom (GAZP.ME), are. However, since we have become more defensive, we have reduced some of that overweight there and put it in telecommunications, which is generally displaying higher dividend yields. Telecoms are giving us the safety. They're giving us the higher dividends. They're giving us domestic demand versus export demand. In The Central Europe and Russia Fund, we own telecoms in every one of the five countries that we focus on because they all display similar characteristics.

TWST: Overall, what would you say are the advantages and the challenges of investing in the emerging markets?

Mr. Vermehren: For the U.S. investor, the emerging markets became attractive when U.S. gross domestic product, GDP, was slowing and domestic growth prospects were diminishing because many U.S. industries moved elsewhere to take advantage of cheaper costs. The attractiveness of investing globally is that you can find stocks in countries or industries that are much earlier in the growth cycle and display more potential. The difficulty in doing that often starts with operational issues. If you want to invest overseas, you need to set up accounts in every one of the countries targeted, and you need to set up agreements, so you essentially need licenses. Then, when you want to buy stocks, you find that they're missing the identifiers generally known to U.S. investors, such as an ISIN or a SEDOL.If you own the investments for some time, you'll find that on a daily valuation basis your fund price, in the fund's own currency, is subject to the exchange rate fluctuations of the other underlying currencies. The domestic currency-based investments in Malaysia, Indonesia and China, for example, can really create havoc in your daily price calculation. You are following not one macroeconomic scenario as when you are investing in the United Ststates alone. You're following 10 or 15. Every country has different situations, different inflation levels, different interest rates, and the direction of each varies.More severe issues materialize when it comes to ownership structures. In Latin America, for example, you find company-holding structures that offer less protection for the minority investor. Let me explain. Many emerging countries are happy to have grown their domestic exchanges and listed companies because it funnels a lot of capital into those companies and the country as a whole. With insufficient regulation, however, you suddenly find a single investor owning some construction of common and preferred shares in a particular company, and while he only has, say, 30% economic value, he manages to control the company with a majority voting stake. These rules have evolved over time, and some countries, like Brazil, have come a very long way in providing the levels of investor protection seen in many of the developed countries. Very often, however, you find yourself squeezed out with some investment or you find yourself with stocks that are very illiquid because the majority investors are either taking their shares off the market or aren't trading their blocks anymore. So yes, for all these risks, an investor generally expects to achieve a higher rate of return when investing outside his home market. In practice, we haven't seen that over the last several years - 2007 and 2008 were undoubtedly poor years, 2009 was a recovery year, 2010 then was bombastic, and in 2011, investors went into the year with great expectations but were surprised on the low side again. So over the last five years, it's been very, very difficult to make money, whether investing at home or abroad, but our investment orientation along persistent investment themes has served us well with respect to these three closed-end funds.

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