The iShares MSCI Ireland Capped ETF: Ireland Revisited
Ireland is generating growth well in excess of its fellow Eurozone member states. Ireland employed a corporate ‘tax haven’ strategy, at 12.5%, in order to attract foreign investment. Many global, best in class companies now officially headquarter in Ireland. Ireland had been bestowed with the title “Celtic Tiger” and it has been well earned. During the worst of the EU recession years, 2008 through 2010, Ireland’s GDP contracted over 14% . Ireland, however, was not alone in its struggle to revive its economy. With few exception, advance economies around the globe were struggling; some on the very brink of complete economic collapse. In response, the Irish government jumped aboard the ‘austerity bandwagon’, raised taxes, reduced public sector spending and requested nearly $90 billion in bailout funds from the EU. The persistence has paid off. Over the past two years, the Celtic Tiger roared back with a vengeance. According to the European Commission , Ireland’s 2014 GDP growth was 5.2% with year over year inflation of 0.3% and debt to GDP of 107.5%. For 2015, it is expected that Ireland will have 6.0% growth with year over year inflation of 0.3% and a debt to GDP ratio of 99.8%. Over the past two years, unemployment has gone from 11.3% to 9.5%. The forecasts are equally impressive with 2016 GDP growth expected to be 4.5%, unemployment at 8.7% and debt at 95.4% of GDP. One of the cornerstones of Ireland’s recovery is the low corporate tax rate at 12.5%. Finance Minister Michael Noonan intends to reduce it again by half, to 6.25%. Recently, the pharmaceutical giant Pfizer (NYSE: PFE ) , acquired Ireland based Allegan in order to reestablish Pfizer’s corporate headquarters in Ireland and take advantage of the low tax rate. Spain’s pharmaceutical giant Grifols (NASDAQ: GRFS ) has also ‘taken the leap’. Ireland’s Knowledge Development Box , which includes the favorable tax rate, has attracted other global giants such as Medtronic (NYSE: MDT ) , Horizon Pharma (NASDAQ: HZNP ) , Endo (NASDAQ: ENDP ) , Pentair (NYSE: PNR ) and a host of others. The most recent data indicates that US companies now employ over 140,000 citizens of the Irish Republic. To be sure, all is not perfect with the Irish economy. Aside from those positive projections, the European Commission has made observations and recommendations which Ireland needs to address, including, “…High level of private and public debt …” as well as “…Financial sector vulnerabilities…” The European Commission has determined that these issues, among others, require “…decisive policy action and specific monitoring…” So it seems that, so far, the Irish economy has continued to outperform the rest of Europe, is aggressively pursuing major global corporations with its low corporate tax and R&D tax credit policy, however, the country still has concerning macroeconomic issues. So is it worth the risk to hold a piece of the Emerald Isle in your portfolio? If so, you’re limited in your choices. BlackRock ‘s (NYSE: BLK ) iShares portfolio has the best possible venue with its MSCI Ireland Capped ETF (NYSEARCA: EIRL ) . According to iShares, the fund is over 87% invested in Ireland, the rest in the UK, US and a wee bit in ‘other’. It’s important to note something here. The fund concentrates on the EU member: Republic of Ireland . Northern Ireland is a constituent part of the United Kingdom. Also, Northern Ireland’s Finance Minister has recently announced a ‘tax matching’ corporate tax rate reduction of 12.5% hoping to make that economic region of the United Kingdom a competitor for direct foreign investment. This bodes well for the fund since, as the pie chart below demonstrates, includes UK based company exposure . Data from iShares It’s also interesting to take note of the fund’s sector allocations. Interestingly, the heaviest allocation belongs to the Materials sector, which is usually very sensitive to the business cycle. This is followed by the more defensive Consumer Staples, then Financials and then Industrials. Healthcare and Consumer Discretionary middleweights follow. The observant investor may notice that many global pharmaceutical or healthcare companies have reestablished themselves in Ireland. It should be emphasized that as well as the 12.5% corporate tax credit, Ireland offers a 25% Research & Development tax credit ; R&D is a major expense for pharmaceutical companies. Data from iShares Before examining the individual fund holdings it’s a good idea, as always, to know a bit about the index the fund is tracking. In this case it’s the Morgan Stanley Capital International ” All Ireland Index “. The fund is a ‘Regulated Investment Company’ subject to an IRS ‘capping’ requirement so that .. .at the end of each quarter of a RIC’s tax year no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets… The fund is small, even by single country focused fund standards, with only 24 holdings. The net assets totaling approximately $170,027,303.00 and has 4.2 million shares outstanding. The 3 month average daily volume is good for a small fund and more than adequate for a retail investor to enter or exit a position. (click to enlarge) The question then becomes, is there a proverbial “pot o’ gold” at the end of the rainbow? In order to answer that, it’s necessary to look a little deeper into the fund’s holdings. Materials 25.90% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 year Dividend Primary Business CRH Plc CRH 22.0086% $24.266 2.33% 35.58 17.74 3.45% Building Materials; global product distribution; minority ownership in Yatai Building Materials; 50% joint venture with My Home Ltd ., India Smurfit Kappa Group Plc. OTCPK:SMFTF 3.8954% $6.283 2.38% 19.69 8.64 NA Paper packaging products, container board, corrugated containers, etc. European, US and Central Americas Averages 12.95% $15.27 2.36% 27.635 13.19 *2.54% *Industry Average Data from Reuters, Yahoo! Finance Surprisingly, for such a large sector allocation, there are only two holdings and then almost 85% of that in just one company, CRH Plc. and maybe for good reason. CRH qualifies for an NYSE-ARCA listing. CRH does have global reach and services across the entire spectrum of building materials through two segments: Heavyside materials for major construction, Lightside materials for smaller projects. CRH is a good example of the type of cross-border reach of an Ireland based company. CRH has 18,400 employees in 44 US states in 1200 US locations. CRH is also established in Brazil and Canada, not to mention Europe. However, as well established and global as it is, building materials are still subject to business cycles. Consumer Staples 24.2233% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 Year Dividend Primary Business Kerry Group Plc OTCPK:KRYAF 12.3368% $13.804 0.62% 25.16 19.73 0.91% Ingredient and flavor products in food, beverage and Pharma. Primarily in the EU Glanbia Plc OTC:GLAPF 4.0275% $5.396 0.66% 31.96 22.52 1.11% Performance, nutritional, vitamin/mineral premixes; Dairy and non-dairy products C&C Group Plc OTCQX:CCGGY 3.8715% $1.31 3.16% **16.41 **12.83 2.16% Hard cider, beer, wine and soft drinks; over 15 brand; UK, EU, US and Canada, Asia, Australia Origin Enterprises Plc OTC:ORENF 2.9352% $0.972 2.87% 11.98 9.88 2.87% Agricultural products and agronomy services in UK, Poland, Romania, Ukraine Total Produce Plc OTC:TTPPF 0.5455% $0.482 1.78% 16.00 8.07 3.21% Fresh produce, flowers, vitamins, minerals, health foods in UK, Scandinavia, Poland, Czech Republic Fyffes Plc OTCPK:FYFFF 0.4448% $0.480 1.61% 11.03 8.85 3.30% Tropical produce distributer, warehouses in Florida, UK, Germany; holds 40% of Balmoral Land Holdings Donegal Investment Group DGICA 0.062% $0.060 2.81% 31.76 17.37 3.64% Farm and dairy supplies, seeds and products; Specialty dairy and vegetable products Averages 3.46% $3.21 1.93% 20.614 14.18 2.46% **Approximate Data from Reuters, Yahoo! Finance Again, it seems that about 50% of the Consumer Staples sector is weighted by one company, Kerry Group Plc . This company occupies a niche in consumer products, through food additives for taste and nutrition, including enzymes, probiotics, specialized proteins and ‘life staged nutrition’ products. Kerry Food Brands include popular European brand names such as Dairygold , Richmond , Wall’s and more. Lastly, Kerry’s agribusiness focuses on sustainability, dairy input products and feeds. Kerry Group distributes in over 140 countries. A quick glance at the entire table demonstrates that this is one of the stronger segments of the fund, with its focus on agriculture, nutritional additives and beverages. Financials 17.3355% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 Year Dividend Primary Business Bank of Ireland OTCPK:IREBY 10.0582% $12.042 *2.27% 12.50 10.98 *1.97% Retail financial services, foreign exchange and hedging products, life assurance Green REIT Plc OTCPK:GREEF 3.4012% $1.10 1.04% 6.57 *18.18 *3.07% REIT: primarily Irish commercial real estate investment company; office, industrial and retail space Hibernia Plc OTCPK:HIBRF 3.3854% $1.002 0.86% 6.79 *18.18 *2.92% REIT: Irish commercial real estate investment company, commercial and residential IFG Group Plc OTC:IFGPF 0.2662% $0.256 2.56% 98.37 *37.52 *1.91% Financial services management, insurance. Pensions, wealth mgmt., financial advisors FBD Holdings OTC:FBDHF 0.2245% $0.254 4.89% *18.51 *13.66 3.78% Insurance underwriting farm and non-farm business. Retail insurance, pension and investment mgmt. Averages 3.47% $2.93 *2.32% *28.548 *19.704 *2.73% *Indicates data was not available; industry average included for comparison Data from Reuters, YaHoo! and Multiple Sources It should be emphasized that the financial holdings are probably the most sensitive area in the fund. As noted above, the European Commission has voiced its concerns about public sector debt. Recently, the Irish Times reported Ireland’s ‘shadow banking’ debt amounted to approximately $2.36 billion. The shadow banking sector includes other entities such as investment funds. Irish banks will undergo an EU stress test in February. On the other hand, it’s also fair to note that the Irish banking sector has seen more difficult times and have survived through them all. Industrials 17.2922% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 Year Dividend Primary Business Kingspan Group Plc. OTC:KGSPF 4.7023% $4.637 0.72% 31.84 22.92 1.28% Energy usage reduction systems and solutions. Water recycling and renewable energy solutions Ryan Air Holdings RYAAY 4.687% $20.869 4.28% 13.76 10.00 *0.23% Well known and popular discount airline serving UK, Europe, Morocco Grafton Group Plc OTCPK:GROUY 4.0124% $1.07 1.68% 17.40 **31.37 *2.67% DIY home improvement and building materials and supplies; home and garden products Irish Continental Group OTC: IRCUF 3.7035% $1.027 2.03% 14.36 11.34 4.63% Maritime freight and passenger ferry services; High speed ferry services CPL Resources Plc OTCPK:CPGLF 0.187% $0.205 1.52% 15.80 15.19 1.66% Placement/Employment services; workforce mgmt., temps, contract, outplacement and training Averages 3.46% $5.56 2.05% 18.63 18.16 2.09% *Indicates data was not available; industry average included for comparison. **Approximated Data from Reuters, YaHoo! and Multiple Sources The Industrial holdings have a more evenly distributed weighting, the most notable one being the successful discount airline, Ryanair . Here in the states, companies such as Home Depot (NYSE: HD ) and Lowes (NYSE: LOW ) have proven themselves as less sensitive to the business cycle. Grafton is a similar company with 37 DIY retail stores in Ireland as well as 313 branches under different brand names in Great Britain and Europe. Grafton also manufactures building materials such as plastic piping and mortar mixes. Health Care 8.5191% Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow Avg. 5 year Dividend Primary Business UDG HealthCare Co Plc OTC:UDHCF 4.3235% $1.959 *0.84% 6.45 12.77 *1.01% Healthcare outsourcing services provider; supply chain services, event mgmt. UK, N America and Europe Icon Plc. ICLR 4.1956% $4.293 *0.48% 22.25 16.13 *0.51% Clinical trial services for pharmaceutical, biotech, medical device industry Averages 4.26% $3.13 *0.66% 14.35 14.45 0.76% *Data not available; Industry Average for comparison Data from Reuters, YaHoo! and Multiple Sources What might be the deciding factor for owning the fund is the Health Care sector. Presently, the fund holds two equally weighted companies. However, as noted above, the aggressive corporate tax rate and R&D tax credit have attracted global Health Care companies to reestablish corporate headquarters in Ireland . Any complicated legal issues aside, these companies, Pfizer, Medtronic, Horizon Pharma and Grifols are perfectly good candidates for the fund. In general, as long as the ‘Knowledge Development Box’ policy continues to attract global leaders, it’s not too far-fetched to expect some kind of allocation of those newly established companies in the fund. It isn’t a given, but shouldn’t be ruled out. Discretionary, IT and Energy Ticker Fund Weight Market Cap (in USD Billions) Dividend Yield P/E Ratio Price to Cash Flow 5 Year Dividend Growth Primary Business Paddy Power Plc. (Consumer Discretionary) OTC:PDYPF 6.1526% $5.581 1.44% 36.39 25.30 1.82% Consumer Discretionary: betting and gaming services and management; UK and Australia and global online access Datalex Plc (NYSE: IT ) OTC:DLEXF 0.2534% $0.236 0.91% 101.55 30.41 0.95% Travel industry digital solutions; e-business services and consulting San Leon Energy (Energy) OTCQX:SLGYY 0.0471% $0.016 NA NA NA Na Oil and gas exploration; N Celtic Sea, France, Poland, Carpathian Basin Data from Reuters, YaHoo! and Multiple Sources The smaller holdings consisting of one company each; Consumer Discretionary , IT and Energy comprise about 6.4% of the fund, and 95% of that weighted by Paddy Power . This is not the energy holding as the name might suggest, but rather a venue for sports betting including internet and live betting. The investor should make note that internet sports betting laws in the US are regulated state by state and Federal law enforcement is constantly monitoring for illegal offshore betting activities. That being said, online sports betting, and sports betting itself is wildly popular in Europe. Lastly, San Leon Energy is an independent oil and gas exploration company. It suffices to note that its weighting is a mere 0.0471% of the fund. All told and in spite of its shortcomings, the fund has proven itself over the past several years. However, the fund seems out-of-step with the new entrants in the Irish economy. This may be more of a result of the tracking index. MSCI’s Investable Market Methodology of the funds objectives and inclusions states that: …Each company and its securities (i.e., share classes) is classified in one and only one country, which allows for a distinctive sorting of each company by its respective country… …Securities may be represented by either a local listing or a foreign listing…The security’s foreign listing is traded on an eligible stock exchange.. ” It may be a technicality for the present, for the present, but it will be difficult to ignore the fact that many global, major league, publicly owned companies have established corporate headquarters in Ireland. However, even without the inclusion of the recently relocated companies, as long as the economy performs well, foreign investment on this scale is certain to be a driving factor for the economy and supportive of its weakest sectors. Hence the fund is likely to benefit either directly or indirectly from foreign capital investment. It should be noted that the fund’s expense ratio is a mere 4 basis points above the industry average .044%, and recently is trading at a discount to net asset value. The fund’s P/E is 21.90 and price to book multiple is 2.51. The annualized distribution yield is 2.39%; trailing 12 month yield at 1.56% and after expense (SEC) yield is 1.09%. Also, the fund has low volatility with a beta of only 0.80% of the market and is passively managed. Returns Comparison 1 Year 3 Years 5 Years Since 5/5/2009 Inception Total Return 14.22% 21.39% 16.23% 12.41% Share Price 15.77% 22.08% 16.67% 12.67% Index 15.24% 22.35% 16.71% 12.96% Data from Reuters, YaHoo! and Multiple Sources Generally, the fund has potential for capital appreciation, as it is now, however, with the potential of having the future inclusion of the global giants that now call Ireland home, the potential is even greater. Like any investment, it’s a rainbow to follow, but one that just might have a pot o’ gold at its end. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.