Interesting relative value opportunities
Coal will continue to be one of the most important sources of energy for China and the emerging markets in the future. So demand is secured for decades to come. Despite this positive industry outlook and improved fundamentals, Indonesian coal mining companies such as ABM Investama & Geo Energy have suffered significantly in recent months. Not least for this reason, Rutz sees considerable potential for investors here: “Since exports of both companies are usually traded in US dollars, they have minimal currency exposure and volatility in the Indonesian Rupiah (IDR) does not affect the companies negatively, but can even have a positive effect on their profit margins as they are actually rising through lower operating costs (which are paid in IDR).” Both companies demonstrate solid performance with increasing EBITDA figures and moderate leverage. “Given the industry outlook and fundamentals of the two companies we expect them to trade 80-100 basis points tighter vs. their peers,” adds Thomas Rutz.
Potential for continued growth
The Indonesian economy performed well in the third quarter and is forecasted to continue to grow by a good 5 percent over the next few years. The foreign debt is low and the national debt amounts to only about 29 percent of the gross domestic product (GDP). “With currency reserves of between 115 and 120 billion US dollars, Indonesia is more than well positioned,” the fund manager says. In addition, president Widodo plans to support growth further through government spending, increasing it by 10 percent in 2019. “Recently, quasi-sovereign bonds such as IDASAL (Indonesia Asahan Alumini) have become very attractive and we expect more opportunities to emerge. In the course of just one week, its credit spread vs US Treasuries has already narrowed by 64 basis points to 299,” explains Thomas Rutz. Fixed investment, supported by higher commodity prices and government consumption, is likely to receive a boost ahead of elections in April next year. At the same time, the additional spending should help to underpin domestic demand. "In the longer term, rising incomes and steady growth of the middle class and population will also contribute to this," says Rutz, giving a positive outlook of the future.
Effects of demographic change
Falling numbers of workers in relation to pensioners will lead to a decline in labour force and employment and thus to lower productivity. One example of the consequences of an ageing population is Japan, where senior citizens already make up 27 percent of the population. "The historical development in Japan shows that an ageing population leads to a decline in consumption. In contrast to young families, the older generation has settled and does not foster growth trends," explains Daniel. A further complicating factor is that the low willingness to consume leads to price pressure among competitors and thus to deflation. "Mature consumers are less willing to make new purchases if they can assume that they will be even cheaper in the future". According to the fund manager, conditions in Japan can be taken as a blueprint for the euro zone and Germany is considered as being most affected by the loss in population. "For the younger generation, the challenge of creating growth is becoming increasingly difficult," says the fund manager.
New growth markets offer opportunities for investors
But demographic change also offers opportunities from a microeconomic point of view. Genetic medicine is already advanced and will in the long term enable the development of tailor-made, targeted medication and thus reduce treatment costs. Thus, healthcare companies have interesting opportunities to position themselves. The nursing sector is also a growth sector. "Companies can benefit from demographic change if they deal with the needs of older people". In this context, automation is also an interesting topic, even though - except in Japan - there are still great reservations about "robo caregivers". At the same time, this sector is promising for the future wherever traditional workers can be replaced. In China, for example, there is an increasing shortage of migrant workers, and automation should now help to counter the shortage of labour.
Structural growth trends enable long-term return prospects
"Investors can take advantage of structural growth trends, as they can be forecast well in advance and are long-term. This means greater security for investors," explains Daniel. This is shown by history where sectors have alwayas dominated for an average of 50 to 70 years. "However, in order to take advantage of this growth, we need comprehensive expertise and an analysis-based forecast," says the fund manager. "In this way, returns can be generated with an attractive risk/return profile despite demographic changes."
Read the interview (p. 22f)
"Increasing computing power combined with falling production costs continues to be the biggest growth driver for technological innovations," says Schwarz. For example, smartphones today do not only have more memory capacity than a classic desktop computer 15 years ago. Every single byte of memory is also produced more cheaply: For example, the production of one gigabyte of storage space in 1957 cost around two million US dollars, but today its price is only 0.02 US dollars. "The same development can also be seen in current innovations such as batteries for electric cars or 3D printing, which are only at the beginning of their development and use," reports the fund manager. For example, the production costs of electric car batteries have fallen six-fold in the past twelve years, and the costs of 3D printing have even fallen by a factor of 400 within just seven years.
Information technology as growth accelerator
Technological change is not just progressing, it is accelerating. In information science, this is explained, for example, by Moore's Law. It states that computing power doubles every two years, which is attributed to the doubling of transistors in an integrated circuit. Only the boundaries of physics limit this growth. According to Ray Kurzweil, one of the heads of engineering at Google, new technologies make it possible to overcome these physical limits. He postulates in his Law of Accelerating Returns that computing power begins to double every year once information technology is the driving force behind innovation.
"Not only end-users benefit from the ever faster technological progress. The winners are also companies that satisfy the growing demand for data in technological trends and thus make progress possible," says Schwarz. For example, Nvidia, which is one of the largest developers of graphics technologies and chipsets, recently posted record growth. In the second quarter of 2018, the data center segment alone recorded growth of 83 percent. Also in the long term, Nvidia is one of the innovators with its latest developments: "The latest Nvidia graphics card is six times as powerful as its predecessor. With completely new technologies, it offers applications beyond the entertainment industry," says Schwarz. Nvidia now also serves sales markets such as artificial intelligence, autonomous driving and medical diagnostics: "The graphics card can be used in biophotonics for cancer detection, for example," says Schwarz.
Just as smartphones and big data are driving economic growth today, structural growth trends such as automation, artificial intelligence and e-mobility are likely to shape the economy in future. Schwarz, therefore, sees accordingly positioned innovative companies as sources of attractive returns, despite temporary volatility, which should deliver high growth rates in the long term.
MainFirst is widely recognized for excellence in equity research, ranking as the number one provider of country research in both Germany and Switzerland, according to the 2018 Extel Survey. Coupled with Stifel’s existing strength in the U.K. market, the merger creates a Pan-European platform with deep local expertise and distribution power throughout the continent’s major markets. MainFirst carries a full German banking license, enabling Stifel to continue offering corporate advisory, brokerage and investment banking services and clear and settle secondary equity and fixed income trades post-Brexit.
MainFirst also adds significant capital raising capabilities to Stifel’s already robust equity issuance business. Through the first three quarters of 2018, Stifel ranked as the fourth largest fundraiser on the London Stock Exchange, based on both volume (25) and value (1.8 billion pounds) of deals. MainFirst is increasingly focused on syndicate roles, leveraging the firm’s core expertise in research and distribution.
“We are excited to join Stifel, and work with our new colleagues,” commented Ebrahim Attarzadeh, CEO and Head of Equities of MainFirst. “Combined, we will be more relevant to clients in both our brokerage and investment banking businesses.”
“We are extremely pleased to partner with MainFirst, as we continue to make opportunistic investments in our business,” said Eithne O’Leary, President of Stifel Europe. “Given the evolving European regulatory environment and changing market dynamics, we will continue to pursue strategies that enable us to best serve current and future clients with a wider range of products.
Upswing in GPD growth and business cycle likely
A first upswing in the markets had already become apparent shortly before the elections and was further confirmed after Bolsonaro barely missed the majority with 46 percent of the votes in the first round of elections at the beginning of October and his PSL became the second largest party in parliament. Since then, the Brazilian Real (BRL) has already recovered against the US Dollar (USD) from 4.2000 at the beginning of September to 3.7000 by mid-October, while Brazil's credit spread (JP Morgan CEMBI Z-Spread to Worst) has narrowed by around 70 basis points from 430 to 360. Rutz assumes that the USD/BRL range will remain similarly tight until the end of the year. Brazilian assets have also repriced quickly - correcting the overshooting of recent months. "We are likely to experience some further repricing as many shorts are now squared and real money folows might return," adds Rutz.
The Emerging Market expert also sees further potential in the economic cycle. "The Brazilian economy has corrected sharply in recent years, inflation is low, the currency is cheap and external balances are healthy. Brazil is therefore ripe for a long and sustained upswing in the business cycle, which could could support Brazilian markets long after the turmoil surrounding the election will have passed," the fund manager emphasizes. Brazil's GDP growth is expected to accelerate in the third quarter to 1.8 percent year-on-year and to around 1 percent quarter-on-quarter. The current forecast for 2018 assumes a growth in gross domestic product (GDP) of around 1.5 percent. The forecast for 2019 is even more positive, expecting GDP growth to exceed 3 percent.
Bolsonaro’s expected win strengthens positive market sentiment
The markets are particularly in favour of Bolsonaro, because if he wins, he is likely to live up to his nickname “Trumpinho” (little Trump) and form strong alliances with business and create economic liberty. At the same time, he will take measures against corruption and even more so against crime. He has a strong economic team led by Paulo Guedes, a renowned economist, who advocates pension reform and the privatization of state-owned enterprises. Rutz adds: “The stronger than expected performance by Bolsonaro’s allies, and the right generally, in the congressional election on 7 October means that pension reform and other changes should be within reach.” This is particulary important as the pension reform is by far the most pressing issue in Brazil from an investor perspective due to the massive fiscal cost of the deficit in the public system (about 3% of GDP per year). The topic is therefore sure to retake centre stage when the the election is over. “Bolsonaro has the good fortune of inheriting an economy that is enjoying a cyclical upturn and a reform initiative to social security that is far enough advanced that it should be hard to reverse,” highlights Rutz.
Its theme-based approach focuses on structurally growing investment themes such as digitization, automation and decarbonization. The investment strategy is long-term, with an investment horizon of over five years. "This allows the fund to benefit strategically from the longer-term performance of the companies and to free itself from short-term fluctuations," clarifies Frank Schwarz.
The fund operates independently of its benchmark, the MSCI World Index EUR Index, and has a high active share. The fund is generally 100 percent invested and operates without tactical hedging. All stocks are carefully selected and continuously analysed with a focus on growth stocks. "Finding fast but organically growing companies that are at the forefront of structural megatrends is at the centre of our approach," explains Frank Schwarz. The team, consisting of Frank Schwarz, Patrick Vogel, Jan-Christoph Herbst, Adrian Daniel and Johannes Schweinebraden, has many years of investment experience and the track record of the five-year old MainFirst Global Equities Fund gives an indication of the potential of the investment strategy.
MainFirst Euro Value Stars
‘Euro’ reflects the focus on the Eurozone as its investment universe
‘Value’ stands for the investment into value titles
‘Stars’ highlights the search for promising companies with high price growth potential
Within the general approach of value investing, the fund managers, Thomas Meier and Christos Sitounsis, employ an unusual method using four different value strategies to achieve attractive performance for clients. The four strategies are:
- Classic Value Investing
- Deep Value
The fund combines the four strategies in order to achieve an attractive performance over all market phases. In the fundamental analysis of titles both quantitative and qualitative factors such as promising earnings growth potential, solid cash flow and high-quality business models are taken into account. Since its inception in 2002, the fund has built a solid track record and outperformed its benchmark.
Emerging Market fundamentals are much more resilient than they used to be. Although uncertainty over trade tariffs, a strengthening dollar and Trump’s Twitter tirades recently led to market corrections, compared to the time of the taper tantrum Emerging Markets are much less vulnerable to such factors as the macro economic backdrop and credit fundamentals remain constructive.
Find out more in the article (German only)
The Barbell strategy for a balanced investment approach
The central approach used for the dividend fund is the Barbell strategy, whereby established large caps are blended with small and mid caps (currently 46%) in such a way as to obtain a balanced, attractive risk/return profile for investors.
The two types of investment that create an attractive balance in the MainFirst Global Dividend Stars are: on the one hand, defensive, solid, relatively non-cyclical companies with a high market capitalisation, such as consumer goods manufacturers and insurance companies that bring stability to the portfolio. On the other hand, this is balanced by smaller companies which offer opportunities to generate high returns and dividends. The latter tend to be family-run international niche market leaders (INML), characteristically with a leading market position, great growth potential, strong balance sheets and profitability as well as high quality of the management.
Dividends 2.0 for constant, attractive returns
At the same time, the stock picking process is focused on high quality dividends, so the returns are as attractive and sustainable as possible. These can be found in companies using robust business models. The selection process, which spans different regions and sectors, includes a detailed, bottom-up analysis of the companies. As well as the quality of dividends, emphasis is placed on criteria such as balance sheet strength, structural profitability, substance and growth potential.
Strong companies for good performance
Companies that meet these criteria include – on the defensive front – Tiffany and Occidental, and – on the INML front – Sixt, Sika and Washtec.
Tiffany is a world-famous American jeweller established over 180 years ago. Time and again over the years, the company’s innovative ideas have been a talking point and it has successfully overcome challenges and steadily evolved. Since Alessandro Bogliolo was appointed CEO in October 2017, the sales figures have soared. The first quarter of 2018 saw net sales leap 15%, due not least to the company’s success in China and Japan. Overall, quarterly profits rose 53% year-on-year, thanks also to the positive effects of President Trump’s tax reform.
One international niche market leader is Sixt. For years, the mobility firm’s strong growth has been in the headlines time and again. In 2017, group net profit was EUR 204 million, which corresponds to growth of 31% over the previous year. Another international niche market leader is the company Washtec, which provides integrated and service solutions in the carwash industry. The company’s turnover grew by 14% in 2017.
Another good example of an INML is Sika, which is headquartered in Switzerland but operates worldwide as a specialist in the manufacture of various chemical products for industrial bonding, sealing and reinforcing. In 2017, the company grew by 9% and consolidated profit grew by more than 14%. Sika’s main priority is growth through R&D to achieve an annual growth of 6% to 8% between now and 2020.
This strategy has enabled the fund managers of the MainFirst Global Dividend Stars, Thomas Meier and Christos Sitounsis, to achieve a total performance of 21.8% since its inception almost three years ago. This represents an outperformance of 7.5% versus the MSCI World High Dividend Yield Net Return (as at: 05/31/2018, ISIN LU1238901596). The twice-yearly dividend distributions have been 3.5% on average since its inception.
European equity markets have showed gains overall recently, but in global terms have been significant relative underperformers. As an example, excluding currency factors, the MSCI EMU Index (European Economic and Monetary Union) generated 50 percent lower returns than the MSCI USA over the last six years. So it would already have paid off to take a more global approach in the past. But in the future this is likely to be even more important, as leading indicators appear to have hit temporary highs at the start of the year indicating a potential slowdown in growth momentum in the eurozone. As an example, the ifo Business Climate Index was at a long-term high of around 105.2 points in November, and has since fallen. “The DAX is currently enjoying its longest upswing of the post-war era, and at the same time we remain in a low interest rate environment”, according to Daniel. Against this backdrop, the challenge for eurozone savers is to find other sources of return.
For it is highly likely according to Daniel that the ECB will miss the window for interest rate hikes – although after a planned changeover in mid-2019 the European Central Bank will have to start by taking stock. And should the economic upturn in the US falter and the Federal Reserve end its policy of normalising interest rates, it is questionable whether the ECB will be able to raise rates. The opportunities for returns in fixed-income investments should remain relatively low, while the trend in European equity markets seems to have run a long way.
The only solution to this tricky situation is to permanently expand one’s investment horizons, according to Daniel, who is banking on a mixture of bonds and equities. He believes in selecting securities for the long term and, most importantly, concentrating on investment themes with structural growth. “Structural trends are significantly more important for us than economic cycles. Their influence on portfolio performance is much longer lasting”, explains Daniel, whose fund follows an absolute return strategy independent of any benchmark.
For example, Daniel is currently backing groups generating major parts of their earnings with e-commerce, such as Amazon and Alibaba. Other investment themes are mobile internet, Industry 4.0 and global brands. The team uses both technical indicators and bottom-up and top-down fundamental research as the basis for stock selection and allocation decisions in the fund. With an annualised return of 5.5 percent since its launch on 29 April 2013, MAINFIRST - ABSOLUTE RETURN MULTI ASSET has exceeded its targeted long-term return of 5% p.a. (as at 30 April 2018, ISIN LU0864714935).
To find out more, read the article (German only)
Find out more in the article (German only)*MainFirst Absolute Return Multi Asset C, as at: 30.04.2018
Adrian Daniel and his team follow an investment approach that focuses on long-term, structural trends such as digitalisation and automation. Besides offering high growth potential, such structural trends carry more weight than macroeconomic cycles. The more technology advances, the greater its influence will be on the standard macroeconomic data that is used by the capital markets to shape their investment strategies. By carrying out detailed analyses, the team is able to tap into new trends early and generate particularly attractive returns.
Digitalisation has led to profound changes in many areas of business. Amazon has built a huge e-commerce empire and entirely changed the future of the retail industry in the process. Google and Facebook’s social and news networks have transformed the way we share information. This has also led to major changes on the capital markets, where many digital companies (such as Apple or Alphabet) now have the highest market capitalisations.
Automation is also continuously advancing innovative disruptions. This is affecting the wage-price structure; while low-skilled workers are earning less, skilled workers’ wages are going up. At the same time, companies are generating higher revenues thanks to increased automation. As higher productivity combined with lower costs can lead to higher earnings or provide an opportunity to expand into new business areas. Innovative business segments offer strong long-term growth. The fund’s investments in companies driving structural trends have significantly contributed to its performance in the equity component over the past few years.
But it is also worth taking a long-term approach to bonds by analysing issuer business models in terms of structural changes and disruptive technologies. For example, Toys R Us was still a leader on the credit market at the turn of the millennium, but was recently forced to declare bankruptcy due to competition from online retail. These are the kinds of risks that should be identified before they materialise. In addition to this far-sighted approach, general trends on the interest rate markets such as low core inflation are also taken into account, despite indications that the ECB’s bond-buying programme is to end in the near future. While duration in the fund was extended to 4.8 years at the start of 2018 due to attractive return opportunities, it has now been brought below 4 years again. In total, the portfolio comprises around 30% corporate bonds and 20% government bonds in order to optimise the risk/return profile of the bond component.
This combination of a flexible approach with a focus on long-term structural trends offers an attractive opportunity for investors in Europe. This is because in addition to demographic changes, digitalisation and automation are key reasons for the low core inflation in the eurozone. In light of the low interest rate environment, MainFirst Absolute Return Multi Asset, which invests worldwide, therefore offers an attractive source of income for risk-conscious investors.
Ebrahim Attarzadeh has been with MainFirst since 2006. He started in Sales Trading and took over the management of this unit in 2008. Since 2011, he has been in charge of the Equities division. Attarzadeh began his career in 2002 at Deutsche Bank in Frankfurt. Bjoern Kirchner has been a member of the Management Board since 2007. From 2003 to 2007, he headed Equity Research. Since then, he has acted as Chief Financial Officer of MainFirst Bank AG.
At a General Meeting of MainFirst Bank AG Marc-Antoine Bree was elected as a new member of the Supervisory Board.
Marc-Antoine Bree, Chairman of the Supervisory Board, comments: “With the appointment of Ebrahim Attarzadeh to the Management Board of MainFirst Bank AG we have implemented an internal solution as intended and have achieved the desired management continuity with a competent personality. Regarding the departure in April 2018 of our long-standing CEO Andreas Haindl, we have found a perfect succession solution with Ebrahim Attarzadeh and Bjoern Kirchner forming a dual leadership team. This will facilitate the continued enhancement of the successful positioning of the Bank over the coming years.
The Supervisory Board would like to thank Andreas Haindl for his outstanding work and achievements in the build-up and development of MainFirst Bank AG, where he has made a decisive contribution since 2006. The committees and staff will stay connected with him and wish him every success for future endeavours.”
What is striking is that the regional shift towards Asia is set to increase in the period to 2025. “Among the 20 most important companies, most will have their headquarters in China, South Korea or Taiwan. Only the West Coast of the US, centred around Silicon Valley, will be able to compete. In contrast, Europe will be totally disconnected – and any kind of comeback does not appear realistic,” notes Schwarz. While in 2017, Nestlé and AB Inbev were two companies in the top 20 with their centres in Europe, the experts at MainFirst expect that there will not be a single European company in the list from as early as 2020. “Fifty years ago, things looked quite different as companies in the automotive, oil and steel industries topped the rankings. But now technology firms are beating all the others," explains Schwarz. In his opinion, the reason for this is: “Here we have global brand manufacturers and producers of luxury goods. The USA, for instance, has benefited in recent decades from immigration policy together with upward mobility opportunities afforded by the education system and a strong venture capital scene. Many children of immigrants have been exceptionally successful as founders of businesses – one example being Sergey Brin, one of the founders of Google.“ In Germany, in contrast, political conditions and an underdeveloped digital network hampered technological advancements, adds Schwarz in a critical note. “As a result, the best German minds have voted with their feet and have now conquered the second and third management levels of companies such as Amazon and Microsoft.“
MainFirst's Emerging Markets team, consisting of Cornel Bruhin, Dorothea Fröhlich and Thomas Rutz, has a long track record of managing funds and mandates across different asset classes, including fixed income, equities and currencies. The team currently manages the MainFirst Emerging Markets Corporate Bond Fund Balanced as well as the MainFirst Emerging Markets Credit Opportunities Fund - and this very successfully. Since inception, both funds have achieved a performance of 35.8% and 23.6% respectively. In February 2018, Citywire rated all three managers with AAA, the highest rating. Furthermore, both funds have received a 5-star rating from Morningstar. In addition, the MainFirst Emerging Markets Corporate Bond Fund Balanced has been awarded with the €uro-FundAward.
The approach of the Global Equity Team around Frank Schwarz is to look for global companies that have the highest potential for growth over the long-term, i.e. seven or more years. Their focus are not short-term sector rotations and leave to the side smaller and short-lived fluctuations in the stock markets. Instead, they research which structural trends are likely to shape the future and, thus, which companies are likely to be the frontrunners promoting and developing these trends. Three such important trends are e-commerce, digital advertising and artificial intelligence (AI).
The global growth rate of e-commerce for 2018 is estimated to be 21 percent. The two biggest companies are Amazon in the US and Alibaba in China. Amazon’s penetration in the US is currently 42% of online sales and 4% of retail sales. This makes it the number one platform worldwide (except in China). Both firms are constantly developing their product range and use data to react to new developments and trends in order to consolidate their position as industry leaders.
Amazon’s overall net revenue in 2017 was almost 178 bn USD, up from almost 136 bn USD in 2016. While Amazon has a range of products such as advertising, Amazon Web Services, and the Amazon Echo, in 2017, the majority of its net revenues were generated through online retail product sales. It is estimated that its projected valuation for 2019 will be 7 times the Gross Operating Profit and 2.5 times of sales revenue.
Alibaba already had a penetration of 80% of the Chinese e-commerce in 2014 and 10% of all retail. In 2017 its gross merchandising value grew by 22% to 547 bn USD in China. Its high growth rate is expected to continue over the next years as it continues to expand its retail, cloud and financial business.
In 2016, digital advertising revenue surpassed TV ad revenue for the first time. In the first six months of 2017 alone digital advertising grew by 23 percent YoY to 40 bn USD. Social media advertising grew by 37 percent to 9.5 bn USD. The social network giant Facebook, one of the two biggest digital advertising providers worldwide, generated 40.7 bn USD of revenue in 2017 compared to 27.6 bn USD in 2016. Facebook now has a total of 2.1 bn users, WhatsApp 1.5 bn, Messenger 1.3 bn and Instagram 0.8 bn – the latter is growing at the fastest rate.
The social network company Tencent in China, well known for its messaging service WeChat, also has a fast growing online advertising business. In 2017, it reported a 61 percent rise in third-quarter sales, online advertising revenue increased by 48% and this growth rate is likely to continue as it gets more of the market share.
Another trend that is increasingly establishing itself as a long-term fundamental is AI. While the worldwide AI chips revenue was 3.2 bn USD in 2016, it is expected to rise to almost 90 bn USD by 2025.
Nvidia, known as a manufacturer of graphics cards originally designed for gaming only, has diversified into AI-optimized computer chips which are now are now also available for data centers, a fast growing part of the business. The revenue of data centers accounted for roughly 20.8% in the last quarter of 2017 (compared to 13.6% one year before) meaning the business grew by 104% YoY based on the last quarter of 2017. It is believed that these high growth rates will continue.
Keyence is a key player in artificial intelligence and robotics producing advanced automation sensors as well as bar-code readers and digital microscopes. It is benefiting hugely from industrial-automation boom as well as from the Internet of Things’ need for sensors and connectivity. It is also a producer of 3-D vision systems, a sector that is growing at a rate of 30% a year. Its revenues rose by almost 22% over 2017 and net income grew by 30%.
Structural trends that grow at these or comparable rates are the reasons for the choice of this approach to achieve attractive returns for investors, which has resulted in an alpha of 51% against the MSCI World Index since inception of the MainFirst Global Equities Fund C on 1 March 2013.
Most recently the MainFirst Germany Fund (A) received the “Deutscher Fondspreis” in the category Equity Funds Germany. It is awarded to companies for their particularly "outstanding" investment results. Managed by portfolio managers Olgerd Eichler, Evy Bellet and Alexander Dominicus, the fund achieved a performance of 35.38 percent in 2017, outperforming its benchmark, the HDAX, by 20.58 percent.
No less than 5 of the MainFirst funds received a Euro Fund Award, with which the Finanz Verlag GmbH honours the best German funds of the year. These included the following MainFirst funds:
MainFirst Absolute Return Multi Asset (A) in the category “Absolute Return” over one year (1. place) and over three years (2. place).
MainFirst Emerging Markets Corporate Bond Fund Balanced (A) in the category “Emerging“ over three years (2. place) and over five years (3. place).
MainFirst Germany Fund (A) in the category “Germany Equities / Small and Mid Caps” over three years (3. place) and over five years (2. place).
MainFirst Global Equities Fund (A) in the category “Global Equities” over one year (1. place) and over three years (2. place).
MainFirst Top European Ideas Fund (A) in the category “Equity Europe” over one year (3. place).
Morningstar also awarded 5 of the MainFirst funds the highest rating of 5 stars and 2 funds the second highest rating of 4 stars:
MainFirst Absolute Return Multi Asset (C) in the category EUR Flexible Allocation – Global
MainFirst Emerging Markets Corporate Bond Fund Balanced (C) in the category Global Emerging Markets Corporate Bond
MainFirst Emerging Markets Credit Opportunities Fund (C) in the category Global Emerging Markets Corporate Bond
MainFirst Germany Fund (C) in the category Germany Small/Mid-Cap Equity
MainFirst Global Equities Fund (C) in the category Global Large-Cap Growth Equity
MainFirst Classic Stock Fund (C) in the category Eurozone Flex-Cap Equity
MainFirst Top European Ideas Fund (C) in the category Europe Flex-Cap Equity
The power of platforms is growing
The stock market expert expects particularly strong growth from online platforms better able to monetise their business models in 2018. “Platforms, in particular those belonging to the established top dogs, are seeing their power growing. The reason for this is the increasing importance of digital advertising – today a quarter of all global digital advertising revenue goes to Google and a further ten percent to Facebook,” says Mr Schwarz. Based on forecasts from market research company eMarketer, global advertising revenue will rise by almost eight percent in the coming year to around USD 629 billion. By the end of 2017, global revenues for digital advertising will have exceeded those for TV advertising for the first time. Mr Schwarz sees potential to benefit from rising advertising budgets at Facebook in particular: “User numbers for Facebook, including the in-house Messenger app, the independent WhatsApp messaging service and the photo and video platform Instagram, have been on a constant upwards trend for years. We believe that the advertising potential of Instagram in particular has been massively underestimated by the market.” The expert sees even stronger growth potential for Asian market leader Tencent, whose WeChat messaging service has a monopoly in the Asian market. The major players in the e-commerce sector are likely to also continue to take market share from traditional retailers, with market leaders Amazon in the West and Alibaba in China the main beneficiaries.
Automation and self-driving vehicles require increasing processing power
Mr Schwarz believes that NVIDIA, market leader in graphic processors and chip sets, is also a very promising stock for 2018: “NVIDIA is a beneficiary of growth in the computer games sector, where trends like virtual reality mean there is a requirement for increasingly powerful graphics performance, but there are other future-oriented trends working in their favour as well,” says Mr Schwarz. As an example, NVIDIA manufactures chips for data centres used for AI applications and the self-driving vehicles sector. Mr Schwarz believes that the company is so well-positioned in these areas versus the competition that it is possible that by 2025 NVIDIA could be the fourth-largest company worldwide by market capitalisation. Mr Schwarz also considers Japanese automation group Keyence a very promising stock, which will benefit from the trend for self-driving vehicles and greater utilisation of robots in production.
“In the current year we have outperformed the MSCI World Index in euros by a good 33 percent with these and similar future-oriented shares from sectors such as semiconductor automation,” reports Mr Schwarz, adding: “We are convinced that the shares in our portfolio have the potential to achieve revenue and earnings growth of around 20 percent in 2018.”
 As at: 30 November 2017, MainFirst Global Equities Fund (C), ISIN: LU0864710602.
Read the complete column by Gerd Bennewirtz, author of the SJB FondsEcho here. (German only)
Read the article, published in Börsenzeitung (German only), here.
Trends in automation
Keyence is a Japanese leader in automation. It manufactures the sensors, controls, bar code readers and many other devices used in manufacturing automation. Meaning that quality control now takes place in an automated fashion not only at the end but throughout the production process, picking out faulty parts much earlier, faster and more efficiently and thereby lowering manufacturing costs. Solutions include, for example, machine vision systems such as high speed cameras, smart camera sensors as well as many added services.
Another important player in the automation market is Teradyne, which currently holds approx. 60 per cent of the market share for collaborative robots or cobots. They form a central part of their product portfolio, as the current annual revenue increase lies at 50 per cent. Teradyne projects that his growth rate will continue over the next five years. Cobots work alongside humans and are increasingly spreading across production lines. While not as fast as robots, they are cheaper, mobile, can perform a variety of tasks and can be easily programmed through learning by imitation. In addition, Teradyne is expanding its distribution network as well as his third party hard- and software to be able to serve a wider variety of industry specific tasks.
Automation in use
A well-known online retailer using automation is Amazon. After they acquired Kiva in 2012, they developed a system that uses mobile robots to bring the wares to human packers instead of them having to go in search for the individual items in an order themselves. Since the roll out in 2014 in the United States, hundreds of these robots move around autonomously in a highly orchestrated manner, allowing Amazon to send a greater selection of wares to more customers more quickly.
Another company that is at the cutting edge of using automation in its processes is Ocado, the world’s largest online-only grocery retailer. The company currently ships more than 200,000 orders a week to its customers around the UK. In order to make its processes more efficient and thus be able to accelerate its growth, Ocado developed its own ground-breaking warehouse automation, increasing its efficiency, scalability as well as modularity. In their newest warehouse a fleet of 1,000 robots are collaborating together to collect the groceries stored beneath them. Ocado thereby succeeded in reducing the time it takes to pack an order of 50 items from two hours to five minutes. The biggest challenges were the coordination and controlling of the large amount of traffic and communication with and between the AI-based systems to make them all work together seamlessly, efficiently and without error.
Opportunities for investors
Given these developments in automation and the rising need for automation, Frank Schwarz and his team see great potential in this trend and hold that it will be long-lasting. It is why this investment theme is being continually monitored by the fund management team. It then chooses the companies with the highest potential and invests in them to generate attractive returns. Using this benchmark independent approach, the MainFirst Global Equities Fund has achieved returns of an average of 19 per cent annually since inception*.
*As at 31.10.2017, MainFirst Global Equities Fund (C), ISIN: LU0864710602.
The concept of platforms is not new. For example, bazaars are an early form of platforms. Yet combined with the possibilities of information technology and the internet, the scalability is considerably faster, vaster and cheaper. Include data mining that helps understand ever better what consumers and producers need and growth can be further enhanced.
Instead of conventional product companies, platform owners create networks that make the availability of a large and diverse set of offerings the main asset, whether this is contact with friends, tracking events or having news posted to one’s wall, to use Facebook as an example. Since such offerings are usually either free or low-cost, benefits are easy to communicate and the threshold for trying is low.
Of course, to make these new business models as successful as they are, the platform owners are continuously working to optimise the infrastructure and to add further offerings and services, which are themselves constantly being developed ever further to make sure that the platform remains the most competitive by providing the largest network with the most capabilities and interconnections as well as the best user experience. In addition, the most successful platform owners do not limit themselves to anything and constantly aim to innovate, to be ahead of the competition and invent the next big thing by not setting themselves any limits.
This is the way to ensure consumers like and use the platform. For, the greater the number of users (both consumers and producers), the greater the attractiveness of the platform as consumers only need to go to one place to get everything, meet everyone, and producers have a higher volume on consumers. The virtuous cycle this creates means that more customers attract more producers which again attract more customers. In addition, tracking customers allows platform owners to get to know their likes and needs before they know them themselves (as Steve Jobs famously said) and in some instances such as Amazon also their concrete buying behaviour. Thus, new features make the platform ever more attractive.
Consequently, one platform usually comes to dominate the industry, which makes life hard for competitors. MySpace and Facebook competed for a while until Facebook won the day. However, China's platform giants (aided by the government) show that different markets can allow other stars to rise.
Moreover, the owner of the platform can set rules conducive to its business model in a wholly different way. Individual features and content can be made available freely, only for paying customers, in customised form or suppressed. Even when content is user-generated and freely available rules will often restrict how easy (or difficult) it is to export it. Content may also appear in a certain order, for example putting paid content such as ads either at the top of the page or in the making it look like native content within Facebook’s news stream.
Benefits for investors can be reaped especially by recognising new trends early and making long-term investments to profit from the immense growth of many of these companies. The fund management team around Frank Schwarz has shown its aptitude for this in the MainFirst Global Equities Fund. The team studies structural trends in detail and has a proven track record of investing early into platforms that came to dominate the landscape. For example, they invested in Amazon already in 2013. Since then its value has risen fivefold.
Further articles on the topic (German only):
Read more in Börse Online (German only)
Read the interview with Olgerd Eichler (German only)
Reasons for restructuring
There are many reasons as to why restructuring measures can be a necessary cause of action. Frequently, it’s down to the management or to a cost base that is too high. In many cases, however, it is also a result of changes in the market environment. For example, overinvestment or weaknesses in demand, whether structural or cyclical, can lead to overcapacities. Likewise, a change in the competitive environment can encourage competing companies with a superior cost structure to lower their prices, thereby dethroning more established companies. This often results in a loss of competitiveness and an accompanying decline in margins, or even negative results. In such cases, a restructuring can bring the companies back on an extremely successful course – if they have the desired effect.
Important factors for success
Whether a restructuring is successful or not depends on a range of different factors. First of all, it is crucial that the company is not experiencing issues with the product spectrum. If the company has no products with which to compete with rivals, it may be able to improve its cost position in the short term, but will lose market shares in the future or will be forced to lower prices to keep up with the competition. The consequence is that any positive effects from the restructuring are devoured by the negative effects of falling prices and volumes. A further important success factor for restructuring is the flexibility of cost structures. For example, a capital-intensive company with large production facilities will pose a particular challenge in a restructuring, while the relocation of production to new locations and the adjustment of the workforce are often cost-intensive. The balance sheet is yet another aspect in the analysis of restructuring investments. A good balance sheet is needed in order to offset potential exceptional write-downs with equity capital. Severance payments or investments are commonly required if restructuring measures are to be implemented quickly and fully. Often, a new management team with special expertise in adjustment processes will be of great assistance.
An example of a successful realignment
One real-world example of a successful restructuring is the printing press manufacturer Koenig & Bauer. Due to the declining market for print media, volumes have fallen for machines in the field of newspaper printing. The company had too much capacity and was not flexible enough to absorb the low volumes. Consequently, the profitability took a hit and an adjustment of the cost structure was unavoidable. The good success prospects for the company were underpinned by a very healthy balance sheet structure alongside an innovative product portfolio in the field of packaging and security printing. Furthermore, the management was resolved to focus consistently on the adjustment processes, as painful and challenging as they were. A board member with experience in restructuring was also appointed. Following high exceptional depreciations, the company has successfully increased profitability year after year. Today, the company is out of the restructuring phase and is once again concentrating on organic sales growth. For the intrepid investors, an early commitment paid off, with stock that has more than quintupled in value over the past three years.
How can investors benefit
A great deal of research, expertise and analysis is needed in order to identify companies whose restructuring measures have a high chance of success. Such stock picking of potentially undervalued companies demands precise knowledge not only of the general market situation but also of the sector and product landscape, among other areas. Moreover, in order for such an investment to be meaningful and promising, the balance sheets, restructuring measures, quality of management and growth potential must all be sufficiently examined and tested.
Two funds that have always enjoyed great successes in this regard are the MainFirst Germany Fund (ISIN: LU0390221256, unit class A) and the MainFirst Top European Ideas Fund (ISIN: LU0308864023, unit class A). These are managed by Olgerd Eichler, Alexander Dominicus and Evy Bellet, three fund managers and experts with a total of over 60 years of experience in a range of market segments, which has enabled them to invest consistently in underrated companies that have later gone on to yield profits of over 100 percent.
One answer is provided by Olgerd Eichler, fund manager at MainFirst. Eichler manages, among others, the MainFirst Top European Ideas Fund, which is currently celebrating its 10th anniversary. During this time, it has achieved consistent performance without significant setbacks. At present, Eichler expects the economic recovery that began in 2012 with the defensive stocks to continue in 2017, above all with cyclicals. This catch-up effect was already apparent in the second half of 2016, when sectors such as the automotive industry demonstrated good performance. Nonetheless, the skillful selection of high-growth companies is essential, as not all companies develop equally.
That is why Eichler and his team conduct targeted stock picking. The aim is to identify companies with high growth potential – ‘young SAPs’, so to speak – and to invest in these over the long term. This holds regardless of sector, country and market capitalisation, purely on the basis of the expected performance of the respective company. The basic requirements for the successful implementation of this approach are extensive experience, disciplined and detailed analysis, rigorous selection procedures, and excellent knowledge of the markets and sectors.
Indeed, before the team includes a company in the portfolio, it must undergo a root and branch review – or rather, a review of balance sheets and profitability. Other important criteria are the quality of management, planned further developments, strategic objectives, growth projections and the general market situation. This information is drawn not only from reports, but also validated in direct discussions with the management.
A stock is included in the portfolio only when the fund management team is convinced that there is a high performance potential, in some cases even more than 100 percent. These ‘high-flyers’ are acquired for the long term to enable the full potential of their performance to be properly tapped.
In the ten years since its launch, this strategy of the MainFirst Top European Ideas Fund has led it to outperform the benchmark by a total of 70 percent, despite numerous challenges such as the aforementioned global financial and economic crisis in 2008 or the EU debt crisis, and has achieved an accumulated performance of 101 percent (as of: 31.05.2017, share class C, ISIN: LU0308864965, performance of the benchmark STOXX EUROPE 600: 31%).
Construction & Materials (Europe Overall)
Top Stock Pickers: #1 Christian Korth
Insurance (Europe Overall)
Top Stock Pickers: #2 René Locher
Food & Household Products (Europe Overall)
Top Earnings Estimator: #3 Alain-Sebastian Oberhuber
Top Earnings Estimator: #3 Andreas Heine
Top Stock Pickers: #2 Jean-Baptiste Sergeant
Top Earnings Estimator: #3 Jean-Baptiste Sergeant
Spreads of French government bonds widen
While the yield on Obligations Assimilables du Trésor (OATs) was still at 0.1 percent in the third quarter of 2016, it is now at 0.9 percent despite the fact that the European Central Bank is still purchasing French bonds worth 14.2 billion euros every month. Compared to German Bunds, the spread has expanded from 25 to 70 basis points over the past six months. By way of comparison, the interest rate difference has averaged 39 basis points over the past 25 years.
According to Daniel, the election is a binary event: with Macron and Francois Fillon of the Republicans there are two presidential candidates who would promote structural reforms, especially for a more flexible labour market. Le Pen's uncertainty about the Eurozone thus countered by the chances of reforms, comparable to the German "Agenda 2010". As the production gains are gradually weakening in Germany, a change in politics could possibly turn France into the new European economic leader.
Le Pen's chances of winning a run off are uncertain
"Le Pen currently leads the poll results for the first round, but the polls suggests that this lead is not expected to reach an absolute majority in the first run." On this basis, the MainFirst fund manager predicts a run off between Le Pen and Macron. The polls confirm that for the second round Macron is 18 points ahead of the right-wing populist. And even in the rather unlikely event of an election victory by Le Pen, it remains to be seen how far her campaign promises to weaken the EU could be put into practice. "A majority in the National Assembly could block these plans," Daniel says.
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The concept behind the success of the top fund manager Olgerd Eichler is the investment in often undervalued German medium-sized companies. The selection of individual titles is based on strict selection criteria such as solid balance sheets, above-average profit growth and excellent management. The goal of the fund managers Olgerd Eichler, Evy Bellet and Alexander Dominicus is to achieve an attractive value development for investors in the long term.
The German Fund Award is given to companies who distinguish themselves through their particularly outstanding investment results. The selection of the best funds in each category is carried out by the renowned Institute for Asset Management (IVA), which evaluates active management performance on the basis of a specially developed portfolio and risk analysis.
If you have any questions regarding the product, please contact: MainFirst Asset Management, phone: +49 (69) 78808 143 or email: fonds(at)mainfirst.com or visit the fund page of the MainFirst Germany Fund.
Portfolios of German investors dangerously orientated towards interest income
“The development is alarming,” says Thomas Meier, investment expert at MainFirst. For Germans, asset value allocation may have provided attractive returns in recent years, but only thanks to an unprecedented boom in the interest rate markets. “According to our calculations, the current allocation of assets of German households has enabled an average increase in value of 2.8 percent in the past decade – over the past 20 years, value growth was even as much as 4.1 percent per year. However, in the light of the persistently low interest rate phase, those days are over,” emphasises Meier. The average German portfolio has been strongly oriented towards insurances, default guarantees and classic deposits, with a weighting of around 78 percent. The outcome: With an unchanged investment strategy, Germans will reach their savings goals only later – or they will have to significantly increase their savings.
Shares – a key driver of future return
Meier is convinced: “German investors can only counteract this development through a change in asset allocation. Without a significant increase in the allocation to equities, which still has the most attractive performance potential in the long run, it will not be possible to achieve their savings targets. In the context of pension provisions, this increase in value is too low to be able to maintain their standard of living in old age – especially as those provisions are being eaten up by inflation.”
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About MainFirst Asset Management
MAINFIRST ASSET MANAGEMENT is an independent European multi-boutique with an emphasis on active management. The firm manages mutual funds and individual special mandates. With its multi-boutique approach, it focuses on investment strategies in selected asset classes, namely equities, fixed income and multi-asset. Experienced portfolio management teams develop strategies with a high active share and individual investment processes. The firm thus combines the expertise and flexibility of focused investment teams with the strengths and clearly defined processes of a broad-based international platform. MainFirst Asset Management forms part of the MainFirst Group, with approximately 180 employees in the locations Frankfurt, London, Luxembourg, Milan, Munich, New York, Paris, and Zurich.
For more information (including legal information), please visit www.mainfirst.com
Read the full interview in the SonntagsZeitung.
The management, partners and Board of Directors of MainFirst Holding AG welcome the offer from Haron Holding. Haron has been a shareholder in MainFirst for two years and supports the business model and strategy of MainFirst Group. On the one hand, this is based on the European equity brokerage platform with highest quality research. On the other hand, this implies the successful multi-boutique approach in asset management, in which highly experienced fund management teams pursue the clearly defined implementation of their respective investment styles. An acquisition by Haron of the majority shareholding will have no influence on the business policy and customer services of MainFirst. Haron Holding is a long-term investor and reliable partner for MainFirst.
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On 17 November, all revenues generated in our Equity Brokerage will be transferred to our charitable non-profit organisation MAINFIRST CHARITY gGMBH and then be passed on as donations to various domestic and international social facilities. The selection of eligible projects takes place in close coordination with team members in our offices who frequently have direct or indirect personal contact with the respective organisations. We particularly promote the support of socially disadvantaged children and young people, the fight against and relief from incurable diseases, as well as the general improvement of the situation of people in distress and acute need.
For many years in Germany we have provided support to the German Child Protection Association ('Deutscher Kinderschutzbund') and the Frankfurt Food Bank ('Frankfurter Tafel') as well as supported the integration of refugees. We have also underwritten a student scholarship for newly immigrated young people. In the UK we support a children’s hospice, in the United States a facility for children with cancer and their families and in Italy two therapeutic facilities for seriously ill children.
Moreover, we strive to provide ad hoc help in crisis situations. This year, we made a donation for the victims of Hurricane 'Matthew', which caused major damage in southern Haiti.
We hope that you may support us in our social commitment and help us to continue to promote the projects that we have been committed to for a number of years. It is our hope that in this way, we can contribute to targeted and effective aid.
We look forward to many contributions to the MAINFIRST CHARITY DAY. For further inquiries please do not hesitate to contact our Sales Team.”
End of the slump in the commodities market in sight
According to Rutz, the recovery of the commodity prices is the most important factor for new growth in the emerging markets, as the extraction of raw materials is responsible for some 50 per cent of their economic development. “The oil price, which serves as an important trend indicator in the emerging countries, is now much higher than at the beginning of the year and a month ago traded only just below the psychologically significant point of 50 US dollars per barrel for WTI crude”, says Rutz. The prices of gold, silver, copper, zinc and sugar have been displaying a sustained upward trend since mid-February. Corporate bonds in the commodities sector also continue to have a correspondingly strong potential for recovery. “Though the market is comparatively tight and the number of attractive titles is limited, new emissions in particular have performed well”, says Rutz. The fund manager takes a largely bottom-up approach and is currently increasing his engagement in Latin America – where higher commodity prices could result in stronger positive effects.
Brexit – The image of the 'safe havens' crumbles
The Brexit vote also has consequences for developing economies. According to Rutz, the unexpected outcome of the EU referendum in Great Britain has damaged the reputation of the apparent 'safe havens'. “We are seeing a new mentality in the market: Europe is no longer seen as the Holy Grail, and although we have got off quite lightly through the first shockwaves of the Brexit, long-term consequences are to be expected – this is particularly true for the property market.” Rutz assumes that Great Britain will slide into a recession as a consequence of leaving the EU. This would have negative consequences for economic growth across Europe, up to a level of 0.5 percentage points. “Against this background, we can expect the current ECB monetary policy to continue unchanged for even longer, along with the resulting low-interest environment”, says Rutz. The search for higher yields increases the demand for bonds in developing economies, especially in the high-yield segment. According to the fund manager, this is confirmed by the fact of constant capital inflows in this asset class.
Limited influence of US Federal Reserve policy
At the same time, Rutz says, the influence of US Federal Reserve Bank policy is currently waning. Recently, the brakes were put on the emerging markets as a result of the comments of various regional FED directors, according to which the possibility of interest rate increases was underestimated by the market. As a reaction to this, the US dollar has gained in value and caused consolidation in the emerging economies. “The attitude of the FED, however, is becoming ever more reluctant. Despite the positive labour market data recently, it is an open secret that the turnaround in US interest rates will take place step-by-step – if at all. This will reduce its impact on the emerging markets”, explains Rutz, before concluding: “Besides that, the local currencies of the emerging countries have stabilised, dampening the impacts of a stronger US dollar.”
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About MainFirst Asset Management
MAINFIRST ASSET MANAGEMENT is an independent European multi-boutique with an active management approach. The firm manages mutual funds and individual special mandates. With its multi-boutique approach it focuses on investment strategies in selected asset classes, namely equities, fixed income and multi-asset. Experienced portfolio management teams develop strategies with a high active share and individual investment processes. The firm thus combines the expertise and flexibility of focused investment teams with the strengths and clearly defined processes of a broad-based international platform. MainFirst Asset Management forms part of the MainFirst Group, with approximately 200 employees in the locations Frankfurt, London, Luxembourg, Milan, Munich, New York, Paris and Zurich.
For more information (including legal notes), see www.mainfirst.com