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Global X Southeast Asia ETF: Un-Emerging Market

Regional growth is very dependent on China’s economy. The fund is very heavily weighted in financial services. A few of the holdings operate in unique niches, with little competition. A proverb is timeless and has application generation after generation. For example, in Southeast Asia one might often hear that ‘ a tray full of money is not worth a mind full of knowledge ‘. That proverb will no doubt catch the attention of any ‘experienced’ investor. There’s quite a difference between “not knowing something” and “not realizing something”. The former seems to imply a lack of information: not knowing. The latter seems to imply that the information is there, but not understood: not realizing. Unfortunately, investors are often lost in the misty in-between of not knowing and not realizing. However, logic dictates that in either event, the odds are not in your favor. With that in mind, the question must be asked: has the emerging market expansion run its course? A critical bit of information is determining whether the Chinese economy is experiencing a normal correction, or looking for a sustainable bottom in an ongoing economic contraction. It’s difficult to say. There is one certain fact, though: the amazing bull market expansion of China’s once emerging economy pulled the entire global economy along with it and, in particular, the economies of Southeast Asia. Hence, are the odds in favor of a rebound in Southeast Asia? Picking and choosing individual investments from among countries with different varied rules and regulations would be a daunting task. If an investor were to choose an ETF, there’s only one way to enter that market: Global X Southeast Asia ETF (NYSEARCA: ASEA ) . According to Global X, the fund ” …seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/ASEAN 40 Index …” The fund employs a passive methodology; 80% of total assets are invested in American Depository or Global Depository receipts; hence, most of the companies will be listed on OTC exchanges. The index is one of the five FTSE ASEAN Index series. The selected stocks of all of the ASEAN indexes are selected from “… Bursa Malaysia, Hanoi Stock Exchange, Ho Chi Minh Exchange, Indonesia Stock Exchange, The Philippine Stock Exchange, Singapore Stock Exchange and the Stock Exchange of Thailand… ” According to FTSE-Russell, the FTSE/ASEAN 40 index “… is designed to represent the performance of the largest companies in the ASEAN region’s markets …” So, the first bit of basic information is to know the geographic allocation of the fund. Data from Global X A quick overview of the included country’s annualized growth is outlined in the table below. Country Annualized GDP as of Q3, 2015 Core Inflation Debt/GDP Unemployment Rate Sovereign 10-Year Bond Ratings S&P, Moody, Fitch Singapore 1.9% 0.3% 99.3% 2.0% AAA, Aaa, AAA Malaysia 4.7% 2.5% 52.5 3.2% A-, A3, A- Indonesia 4.73% 5.02% 25.02% 6.18% BB+, Baa3, BBB- Thailand 2.9% 0.88% 45.7% 0.9% BBB+, Baa1, BBB+ Philippines 6.0% 1.8% 45.4% 5.7% BBB, BAA2, BBB- Averages 10.93% 3.60% Data from Trading Economics No doubt, these particular emerging markets have experienced a rate of growth that is the envy of the entire region, even when compared to the larger, more established economies such as Japan and Korea. However, this seems to be the ‘modus operandi’ of emerging markets throughout history. So without the economic pull of China, can these economies readjust and grow organically? Data from Global X Clearly, the fund heavily weights the Financial sector. Of the fund’s 40 holdings, 14 holdings, totaling 35% of the fund, are financials. Several of these financial services companies are global and importantly, most offer Sharia compliant financial services in a region of the world where 240 million Muslims or 40% of the entire population resides. Of the 14 financial holdings, there’s only one REIT. Also, six are either ‘holding companies’ or ‘groups’. This may serve as an advantage as the financial services of these holding companies are well diversified among the full spectrum of financial services, and in several cases, diversified internationally. Lastly, DBS Group Holdings ( OTC:DBSAY ) , Malayan Banking ( OTCPK:MLYNF ) , CIMB Group Holdings ( OTCPK:CIMDF ) , and Bangkok Bank ( OTC:BGKKF ) all have offices in the UK or New York, thus established in the major global financial centers. Financials 48.72% Ticker Fund Weighting Market Cap ( USD Billions) Yield P/E 5-Year EPS Growth Rate Primary Business DBS Group Holdings OTC: DBSAY 7.44% $41.267 3.66% 9.55 12.95% Global Financial Services Holding Company; Full line from retail to wealth management; Main subsidiary in London, UK; operations in Asia Overseas Chinese Banking OTC:OVCGF 7.02% $35.528 4.18% 9.48 12.23% Financial Services group; retail banking, insurance; equities and futures trading; headquartered in Singapore United Overseas Bank OTCPK:UOVEF 5.87% $30.935 4.44% 9.95 10.68% Banking Services from retail through corporate levels; asset, wealth and venture capital management; Clearing operations; Singapore Public Bank Berhad OTC:PBLOF 4.74% $16.316 3.02% 14.60 12.06% Banking group, retail, corporate lending, proprietary trading,, securities trading, some property holding; Kuala Lumpur PT Bank Central Asia OTC:PBCRF 4.23% $24.419 1.29% 18.43 19.07% a.k.a. Bank BCA conventional and Sharia retail services; underwriting and brokering; Jakarta Malayan Banking OTC: MLYNF 3.68% $18.736 6.84% 10.97 NA Holding Company for Maybank Group; offices in Singapore, Malaysia, New York, London Hong Kong and Bahrain; HQ: Kuala Lumpur Bank Rakyat OTCPK:BKRKF 2.995% $20.037 2.72% 10.90 26.92% a.k.a. Bank BRI; retail services, lending, and Sharia services; Jakarta PT Bank Mandiri Persero OTCPK:PPERF 2.12% $15.320 2.43% 10.21 20.47% a.k.a. Bank Mandiri; retail conventional and Sharia services; insurance, business finance, securities brokering; Jakarta CapitaLand OTCPK:CLLDF 2.05% $13.421 2.87% 11.79 -0.47% Real Estate investment; consulting, development, holding; shopping malls, residences; HQ Singapore CIMB Group Holdings OTC: CIMDF 2.04% $8.723 1.80% 16.89 -1.17% Financial services holding company; conventional and Sharia services; Offices in Malaysia, Indonesia, Singapore, Thailand, Cambodia and London, UK; HQ Kuala Lumpur SM Investments Corp. OTCPK:SVTMF 2.01% $13.851 1.29% 22.03 11.23% Investment holding company property, retail and banking service; convention centers, hotel holdings; merchandise trading; HQ Pasay, Philippines Siam Commercial Bank OTCPK:SMCBF 1.96% $11.665 4.86% 8.82 20.77% Financial service for retail and small-medium size business; non-performing loan solutions; Bangkok Kasikornbank PLC OTCPK:KPCPF 1.82% $10.207 2.61% 8.36 25.66% Commercial Banking; small-medium size business, credit, home loans, insurance, international transaction, security services; Bangkok Bangkok Bank Public Company OTC:BGKKF 0.75% $7.982 4.32% 8.15 12.06% Commercial Bank; retail, cash management, project and trade financing, credit; China, Hong Kong, US, UK, Singapore, Indonesia, Laos, Vietnam, Philippines; HQ: Bangkok Averages 3.48% $19.17 3.31% 12.15 1 14.04% 1 Excluding MLYNF Data from Reuters, Yahoo! The main reason mobile communication rooted itself so well in so many emerging markets is because it was far more cost efficient to construct cell-phone towers, or transmit content via satellite, than it was to run thousands of miles of copper across the country or countries . These are not so much ‘outstanding companies’ as much as they are necessary , particularly in rural areas. Telecom Service 20.05% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Singapore Telecommunications OTC:SGTCF 7.16% $43.402 4.56% 15.80 -0.66% Telecom investment holding company; consumer, enterprise, digital solutions; Singapore, Australia, Asia, Africa; HQ : Singapore PT Telekomunikasi Indonesia NYSE: TLK 3.82% $21.323 2.75% 19.31 -24.81% Domestic and international telecom services; internet, Wi-Fi, data and satellite services; HQ: Bandung, Indonesia Advanced Info Services OTC:AVIKF 2.35% $15.902 6.47% 15.27 16.60% Mobile, call centers, broadband; IT solutions; Bangkok Axiata Group OTCPK:AXXTF 2.24% $12.350 3.62% 22.16 4.84% Telecom investment holding company; network services, mobile services; Kuala Lumpur Digi.com OTC:DIGBF 1.59% $9.047 4.81% 20.66 15.21% Telecom investment holding company; mobile, internet and services; Malaysia; HQ Kuala Lumpur Maxis OTC:MAXSF 1.45% $11.386 4.71% 30.70 -3.44% Telecom investment holding company; mobile, fixed line, international, broadband Philippine Long Distance NYSE: PHI 1.31% $8.984 6.63% 13.51 -5.62% Telecom services; fixed line, wireless, satellite and fiber networks; Makati, Philippines Averages 2.85% $17.48 4.79% 19.63 0.30% Data from Reuters, Yahoo! The industrial companies, again, are often diversified holding companies which span many other sectors. For example, Jardine Cycle & Carriage ( OTCPK:JCYCF ) may be considered a consumer discretionary holding via its marketing and sale of motor vehicles, but it also has investments in heavy equipment manufacturing, mining, agriculture and infrastructure management. Similarly, Sime Darby ( OTCPK:SMEBF ) has investments in agriculture, property holdings, equipment leasing, energy, utilities and land management. The most notable, unique and focused holding in the sector is Singapore’s Kepple Corp. (STI: KPLM) . Kepple is one of the few global, large scale, diversified marine engineering and construction companies. Further, its base of operation is centered among the busiest seaports on the planet. Industrials 9.69% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business PT Astra International OTCPK:PTAIF 3.20% $18.103 3.66% 14.31 13.82% Diversified vehicle component manufacture; financing, service; agri-logistics and IT; Jakarta Keppel Corp. Ltd. STI: KPLM 2.32% $8.199 7.55% 6.30 2.13% Marine construction, service, management; ship construction, repair, refitting; Singapore Sime Darby OTC: SMEBF 2.01% $10.347 3.46% 21.02 20.11% Industrial agriculture investment holdings; property, equipment; energy, utilities; palm oil, rubber, land management Wilmar International OTCPK:WLMIF 1.53% $13.079 2.78% 11.71 -7.97% Industrial agri-investment holdings; palm products, oil seeds, grains, sugar; Singapore Singapore Airlines Ltd. OTCPK:SINGF 1.39% $9.351 2.46% 23.58 11.70% Passenger and cargo transport; air charter services; operations managements, maintenance services; Singapore Airports of Thailand OTC:AIPUF 1.33% $11.811 2.00% 24.96 55.81% Airport and hotel management and services; Bangkok SM Prime Holdings OTC:SPHXY 1.24% $12.885 0.99% 21.90 4.60% Property Developer: malls, residence, office, hotel and convention centers; Pasay, Philippines Jardine Cycle & Carriage OTC: JCYCF 0.97% $9.473 3.46% 12.32 9.90% Auto and motorcycle, heavy equipment, mining manufacturer, mining, agribusiness, infrastructure management Averages 1.86% $11.97 3.27% 17.86 14.31% Data from Reuters, Yahoo! The utilities sector is pretty much focused on just that: utilities. These three companies focus on gas and electricity distribution, with some overlap in the energy sector via exploration and drilling. Utilities 5.60% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Tenaga Nasional OTC:TNABF 3.90% $17.086 2.21% 12.12 13.05% Electric Utility; generation and distribution; Kuala Lumpur Petronas Gas OTC:PNAGF 1.50% $10.340 2.56% 19.88 NA Gas utility; processing, storage, transport and distribution; Kuala Lumpur Perusahaan Gas Negara OTCPK:PPAAF 0.70% $4.338 5.82% 9.91 3.36% Gas Utility; natural gas distribution; oil and gas exploration; Jakarta Averages 2.03% $10.59 3.53% 13.97 2 8.21% 2 Excluding PNAGF Data from Reuters, Yahoo! In consumer staples, CP ( OTC:CPBQF ) has a unique niche as the exclusive manager of all 7-Eleven stores in Thailand. Consumer Staples 4.69% Ticker Fund Weighting Market Cap Yield P/E 5 Year EPS Growth Rate Primary Business CP All Public CPBQF 1.79% $10.421 1.92% 30.44 15.27% Convenience store management; includes 7-Eleven; bakery, coffee shops, health and beauty; Bangkok Unilever Indonesia Tbk OTCPK:UNLRF 1.03% $20.052 2.19% 45.05 13.52% Household, personal care and food products under a dozen brand names; Jakarta Averages 1.41% $15.24 2.06% 37.75 14.40 Data from Reuters, Yahoo! There’s only one discretionary holding, Genting ( OTCPK:GIGNF ) , a diversified hospitality company. What makes it interesting, on its own merits, is its global reach, managing properties not just in Southeast Asia, but also in Australia, the UK and the Bahamas with plans to expand to China and Japan. Consumer Discretionary 4.64% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Genting Singapore PLC OTC: GIGNF 1.18% $6.558 1.31% 54.22 NA Resorts, Hotels and Casinos, Australia, Bahamas, Malaysia, Philippines, Singapore, UK. Other regions in development Data from Reuters, Yahoo! The ‘drag’ on any fund these days is the energy company holdings, particularly the smaller scale exploration and drilling companies. The current market price simply cannot justify costs. Energy accounts for 3.12% of the fund. Energy 3.12% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business PTT Public OTC:PUTRF 1.95% $17.460 5.00% 12.65 1 -1.59% Gas and petroleum fuel and chemical products domestic and overseas distribution; Bangkok PTT Exploration and Products PCL OTCPK:PEXNY 0.75% $6.177 4.46% 15.15 1 -4.15% Petroleum exploration and production; pipeline and general energy investment; Bangkok Averages 1.35% $11.82 4.73% 13.9 -2.87% 1 Approximate Data from Reuters, Yahoo! Similarly, many materials manufacturers, like building and plastic related chemicals, have experience decreasing demand during the regional economic slowdown. The two materials manufacturer holdings are in those sub-sectors: chemicals and building materials. Materials account for 2.92% of the fund. Materials 2.92% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business Petronas Chemicals Group OTC:PECGF 1.61% $12.31 2.40% 20.72 NA Material investment holdings; chemicals, olefins, glycols, polymers, aromatics, fertilizers; Kuala Lumpur Siam Cement OTC:SCVPF 1.28% $14.203 3.40% 11.94 6.67% Industrial Supplies and building materials, ready mix, concrete, pulp, and chemicals; Bangkok Averages 1.45% $13.26 2.90% 16.33 ——– Data from Reuters, Yahoo! Lastly, the most defensive sector, Health Care, accounts for only 1.48% of the fund with IHH Health Care ( [[ IHHHF]]) . In a perhaps ‘over bought’ health care sector, this company occupies an interesting niche as a hospital management company with services in Central and Eastern Europe, the Middle East and North Africa. Health Care 1.48% Ticker Fund Weighting Market Cap Yield P/E 5-Year EPS Growth Rate Primary Business IHH Health Care BHD OTC: IHHHF 1.48% $0.416 0.48% 68.38 Health Care holding company; hospital management in CEE, Middle East, N. Africa and Malaysia; Kuala Lumpur Data from Reuters, Yahoo! As for the fund itself, it first listed in February 2011. It’s comparatively small with $13.7 million in net assets. Its yield is relatively good, although it must be seen in the context of an ‘EM’ region with slowing growth. Management fees are rather high at 0.65% and the 3-month average daily volume is low at approximately 9,500 shares a day. The returns reflect the region’s economic slowdown: -19.57% year to date, -22.50% in the past year and -6.14% over 3 years. Since inception, the fund has been essentially flat, totaling a -1.26% return. If the fund presents any advantage, it’s in the list of those 40 companies. A few have what seems to be great future potential when the region turns the corner. (click to enlarge) Currently, there’s more risk on the downside than there is on the upside. The chart demonstrates clearly that. The shares traded at an all-time low in mid-August and well off the May 2013 all-time high. There’s absolutely no doubt that Southeast Asia has made remarkable strides among emerging markets. However, these cycles simply don’t go on forever. Even the arguably second largest global economy, China, has admittedly met the end of its externally sourced expansion and is now transitioning to a domestically driven economy. It’s just as reasonable to expect that China’s economy will find a bottom and start an expansion cycle again. Hence, the point of the matter is that, right now, realizing the risk is worth far more than knowing that there will be a turnaround, eventually. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

DBGR: Industrial Engine Of The EU

Germany is the cornerstone of EU industrial output. The majority of German products and services are considered top-of-the-line, globally. The weak Euro will make Germany’s best exports price competitive in every advanced economy market. Export economies are currency sensitive. In fact, export economies are almost always under the suspicion of purposely taking actions to weaken their currencies in order to be more ‘price competitive’. This is particularly true when the global economy slows. In the case of commodities, the competitive pressures are now even more intense. When demand for, say, iron ore or copper declines, the mining industry must clear inventory. Sometimes the problem is more complex; crude oil, for instance. Presently, not only has demand slowed, but production has continued on full tilt. ‘Semi-manufacturing’ trade is also complicated by currency imbalances. The trade of semi-completed products may be more expensive in one direction, but less expensive at the point of sale. So the middle manufacturer pays more for the parts and then receives less for the sale. That’s a nutshell description; the semi-manufacturing trade is far more complex. Having a common regional currency mitigates the problem and an entire region has a little more of a ‘currency hedge’. This is particularly so for an economy which manufactures discretionary durable goods and then exports globally. Take Germany for instance. Germany engages in the semi-manufacturing trade, markets and then distributes its products around the world. Hence, the German economy, a Eurozone member, benefits from a weak Euro. Germany’s economy had recovered strongly from the global credit collapse in 2008. Through innovative renegotiations with trade unions, and increasing production efficiency the economy has ‘motored ahead’ of its fellow EU members. Is the right time to take a share in the German economy? Deutsche Asset & Wealth Management , a German-based financial services company, offers an opportunity through its X-trackers portfolio of funds : the MSCI German Hedged Equity ETF (NYSEARCA: DBGR ) . (click to enlarge) According to X-trackers: The fund “… seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Germany U.S. Dollar Hedged Index …” Further, by hedging the tracking index mitigates “… exposure to fluctuations between the value of the U.S. dollar and the euro. ..” A word about hedging: in this case, it doesn’t hurt to hedge, but over the long term it may not be all that helpful. The European Union has its very strong economies as well as its very weak economies. Every leading global economy will have its ‘ups and downs’: the U.S., China, Japan as well as the European Union. The EU has a strong core including Northern Italy, the Nordic members, France, Germany and the U.K. Even Spain seems to be well on track towards better economic times. The point is that having a hedge is a little extra insurance. So then, does the fund itself have a good foundation? First off, it’s well concentrated with 56 holdings, totaling about $149,344,364.00 in assets. The fund first listed on the NYSE on June 9, 2011, and has semi-annual distributions; management fees are in line with the industry average, at 0.45%. The table below makes an interesting comparison of annualized returns since listing. Average Annualized Returns 1 Year 3 Years Since 6/9/2011 listing Market Share Price 1.74% 6.43% 2.83% Net Asset Value 1.51% 6.10% 2.86% MSCI Germany U.S. Doller Hedged Index 1.77% 6.38% 3.22% MSCI Germany Index -9.26% -0.21% -1.42% The next important observation is the way the fund allocates its capital. This is summarized in the pie chart below and does not differ much from the MSCI Germany Index allocations as demonstrated in the table below the pie chart. MSCI Germany Index Allocations Discretionary 20.54% Financials 18.23% Health Care 15.30% Materials 13.44% Industrials 12.18% Info Tech 8.79% Telecom 5.4% Consumer Staples 3.97% Utilities 2.15% Data from MSCI The discretionary sector is composed of really solid companies but the sector also serves as an excellent example of why individual investors should suffer the tedium of going through the holdings when practicable. First, one of the sector’s top holdings is Volkswagen AG ( OTCPK:VLKAF ). The ’emission control bypass scandal’ has made global headlines. No doubt there will be seemingly endless fines, testimonies and restitutions. However, not to justify it by any means, but for the purpose of being objective, this scandal should be viewed in a larger context. For example, the environmental damage pales in comparison to the Exxon (NYSE: XOM ) Valdez or the BP (NYSE: BP ) Gulf of Mexico deep-water platform accident. It took Exxon and BP years to make restitutions on many levels. In terms of automobile liability, GM (NYSE: GM ), Toyota (NYSE: TM ) and Takata ( OTCPK:TKTDY ) oversights have resulted in death, serious injuries and huge recalls. To date, thankfully, there have been no reports of death or serious injury caused by the emission get-around-cheat. The point is that, most likely, Volkswagen will make restitutions and emerge a better company for it. Discretionary 20.913% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Daimler OTCPK:DDAIF 7.265% $91.988 3.25% 33.98 10.47% 11.00 R&D, production, marketing and sales of trucks, light trucks, automobiles; global BMW OTCPK:BAMXF 3.133% $68.25 2.95% 31.24 9.67% 10.57 Autos, light trucks, motorcycles under BMW, MINI and Rolls-Royce; global Continental OTC:CTTAF 2.341% $48.29 1.47% 24.43 11.42% 16.80 Full range of tires; also auto components, safety technology, powertrain, interior components; global Volkswagen VLKAF 2.244% $72.02 3.87% 37.20 13.99% 10.31 Autos, light trucks, parts and specialized components; financial services, fleet management under major brand names; global Adidas OTCQX:ADDDF 1.823% $20.54 1.66% *26.00 6.96% 28.49 Athletic footwear, apparel, equipment under Taylor-Made, Adidas Golf, Adams, Ashworth, Reebok; global Prosieben OTCPK:PBSFF 1.0324% $11.59 3.26% 81.40 0.82% 25.17 Media; commercial TV with 6 channels, internet video, games, music, e-commerce; Europe Averages 2.97% $52.11 2.74% 39.0142 8.89% 17.06 * as a percent of operating cash flow Data from Reuters, Yahoo Finance Data from Reuters, Yahoo Finance There’s also an example of a ‘hidden risk’ in this sector. It suffices to say that, in a complicated ‘merger’, Porsche Automobile Holdings SE acquired majority ownership of Volkswagen Group and Volkswagen Group acquired the Porsche Brand . The important point is that any restitution VW will undoubtedly make will affect the holding company, Porsche Automobile Holdings; a smaller holding of the fund. However, the point is that when making the decision to include a fund in a long-term portfolio, it’s worth the time and effort to uncover any links in the holdings. Financials 18.41% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Allianz OTCQX:ALIZF 7.147% $80.13 4.21% 48.77 1.19% 11.60 Holding company of PIMCO and Allianz Group; financial services, insurance asset management, reinsurance; global Deutsche Bank DB 3.110% $35.00 3.24% *9.823 -1.49% NA Investment Bank, retail through corporate, manager of this fund; global Muenchener Rueckver OTCPK:MURGF 2.989% $33.57 4.16% 41.87 3.54% 10.04 Holding company for Munich Health and Asset; ERGO insurance; Munich Re; primarily insurance as reinsurance; global Deutsche Boerse OTCPK:DBOEF 1.460% $16.58 2.67% 49.12 0.98% 18.42 Managing company for Xetra, Eurex, Clearstream, Market Data and Analytics; cash, electronic and specialist trading Vonovia OTC:VONOY 1.256% $14.08 **NA **NA **NA 19.94 Fmr: Deutsche Annington Immobilien: residential real estate management; Germany Commerzbank OTCPK:CRZBY 1.021% $13.48 **NA **NA -9.20% 20.92 Private and corporate banking services mainly Europe Averages 2.83% $32.48 3.57% 37.396 -1.00% 16.184 *as a percent of operating cash flow ** no information available; excluded from average Data from Reuters , Yahoo Finance Financials Holdings Less than 1% accounting for 1.423% Deutsche Wohnen AG ( OTC:DWHHF ) 0.792842% Hannover Rueck ( OTCPK:HVRRY ) 0.630016% Data from Reuters , Yahoo Finance Aside from Deutsche Bank, the financials are dominated by insurance, reinsurance, including world-class companies Allianz and Muenchener Rueckver (holding company of Munich Re ), REITs and also asset exchange corporation Deutsche Boerse . Hence, the fund’s financial holdings mostly avoid the European banking sector. Health Care 15.06% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Bayer OTCPK:BAYRY 9.364% $104.00 1.91% 51.08 6.27% 26.43 Healthcare, Crop-Science, Material-Science; Bayer Business and Technical Services and Currenta Fresenius OTCQX:FSNUY 2.411% $38.078 0.67% 19.03 10.62% 28.43 In and outpatient hospital care Manages Fresenius Medical Care; Fresenius Kabi, Fresenius Helios Fresenius Vamed * Fresenius Medical Care FMS 1.595% $27.99 1.04% 55.46 7.08% 24.08 Division of Fresnius SE; focus on kidney and dialysis; products for dialysis, renal disease and treatments; global Merck MRK 1.166% $149.845 3.43% 47.74 9.02% 14.29 Pharmaceuticals R&D, production, market & distribution, vaccines, therapies; animal health; global Averages 3.63% $79.98 1.76% 43.328 8.25% 23.31 *division of healthcare holding Fresenius Data from Reuters , Yahoo Finance The fund leads off the sector with a major, world class player in Bayer, accounting for about 62% of the health care sector’s weight. Once again it’s important to point out some overlap. Fresenius Medical Care is a subsidiary of Fresenius . Both are solid, established and well based holdings. However, the investor must keep in mind that, in a sense, Fresenius Medical Care is counted twice in that sector; once on its own and once as part of the parent company. Qiagen (NASDAQ: QGEN ) is a smaller but no less interesting holding in that it provides the means by which DNA, RNA or proteins are extracted from cells and analyzed; 0.520327% of the fund. Materials 12.80% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business BASF OTCQX:BASFY 6.439% $71.78 3.84% 49.76 7.95% 13.33 Functional materials and solutions; performance products; agricultural solutions; water management Linde OTCPK:LNEGY 2.447% $27.621 2.30% 51.12 8.74% 22.43 Gas engineering in healthcare, medical, food processing; cylinder packaged or liquified Heidelberg Cement OTCPK:HDELY 0.974% $14.64 1.04% 16.00 2.08% 15.40 Building materials; cement and aggregates, ready-mix concrete, mortar Averages 3.29% $38.01 2.39% 38.96 6.26% 17.053 Data from Reuters , Yahoo Finance Data from Reuters , Yahoo Finance The major component holding of the sector is the renowned BASF, which covers every major subsector of the materials industry including agriculture, electronics, nutrition, plastics and textile materials. BASF accounts for about 50% of the sector holdings. Industrials 11.96% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Siemens OTCPK:SIEGY 7.011% $87.62 3.81% *44.16 1.86% 14.56 Global, diversified, covering over 200 countries, manufactures turbines, automation technology, power transmission, renewable energy technology Deutsche Post OTCPK:DPSTF 2.396% $33.44 3.31% 68.21 3.23% 21.38 Logistics services; mail, freight and supply chain and contract logistics, warehousing services Averages 4.70% 60.53% 3.56% 56.185% 2.55% 17.97 *as a percent of operating cash flow Data from Reuters , Yahoo! Finance Data from Reuters , Yahoo! Finance Siemens accounts for nearly 60% of industrials. The company is participates in nearly every industrial subsector; automation, renewable energy, healthcare, mass transportation, consumer appliances and others. It’s worth mentioning Deutsche Post is an example of how innovative thinking in privatization may not only be successful, but independently and sustainably profitable. IT 8.92% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business SAP SAP 8.850% $96.427 1.55% 42.53 10.47% 28.12 Enterprise management software solutions; cloud services Infineon OTCQX:IFNNF 1.475% $17.00 1.47% 36.29 11.95% 25.34 Industrial semiconductor solutions; power control, automotive, security solutions United Internet OTC:UDIRF 0.596% $11.173 1.20% NA 13.06 23.43 Internet access, subscription provider and mobile internet services in Germany. Averages 3.64% $41.53 1.41% 39.41 11.82% 36.85 *as a percent of operating cash flow Of the 8.92% of the total IT holdings, 8.850% or over 99% is weighted by SAP a premier global name in enterprise, analytics, and mobile technology in nearly every business sector; aerospace, financial, consumer products mining and minerals and others. Telecom Services 5.407% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Deutsche Telekom OTCQX:DTEGY 5.110% $80.547 3.04% 100.09 -0.61% 33.36 Telecom and IT services in Germany, Europe and the U.S.; internet and mobile Telefonica Deutschland OTCPK:TELDF 0.297% $16.630 4.60% *57.63 8.07% NA Retail and business telephony services and small business solutions Averages 2.70% $48.59 3.82% 78.86 3.73% 33.36 *cash flow per share The fund weights Deutsche Telekom at 5.11% of the 5.407% of the sectors holdings; almost 95%. There’s good reason since not only is it the major telecommunications service provider in Germany, it also has a global reach in Europe and the U.S. providing broadband, mobile and corporate system solutions. Consumer Staples 3.999% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Henkel & Co KGAA * Vorzug 1.785% *$45.104 1.25% 32.07 *3.89% 30.06 Beauty care, home care, adhesives ( * Vorzugsaktien = preferred shares) Henkel & Co KGAA OTC:HELKF 0.893% $45.104 1.56% 32.07 3.89% 25.72 Common of the above company Beiersdorf OTCPK:BDRFY 0.823% $28.785 0.83% 25.69 1.80% 30.68 Cosmetics, personal care products, skin care Metro OTCPK:MTTRY 0.498% $10.108 3.46% *614.58 *NA *194.81 Holding Company hypermarkets, Metro Cash & Carry, Real hypermarkets, Media Market and store brands Averages 1.00% $28.00 1.78% 28.88 2.85% 28.82 *omitted The average Consumer Staples sector weighting is about 1.00%. Once again, due diligence is in order. The larger part of the top weighting is Henkel & Co. preferred shares at 1.785%, while a lesser amount, 0.893% are the common shares. The company is worthy of its position in the fund, no doubt; but the point is that in essence, it weights the sector’s holding more than might be expected. The company seems to be a mix of consumer staples as well as consumer discretionary products and markets household products as well as having retail and professional cosmetic distribution. Utilities 2.90%% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business E.ON SE OTCQX:ENAKF 1.719% $18.906 5.60% *5.77 6.88% NA Energy via fossil, nuclear and renewables; energy commodity trading; exploration and production; Europe, CEE, U.K. RWE AG OTC:RWNEF 0.571% $7.623 8.21% 61.97 -0.64% 7.22 Electric & gas, energy commodity trading, lignite mining, nuclear, fossil, renewable electricity generation U.K., CEE, SEE Averages 1.15% $13.26 6.91% 33.87 3.12% 7.22 *as a percent of operating cash flow The lightest weight is the Utilities sector, accounting for 2.90% of the fund total and of that nearly 60% E.ON , which seems to be a run-of-the-mill energy company with good reach, covering generation, exploration and distribution in Europe, U.K., Russia, central and eastern Europe. It’s important to conclude with a few notes on the fund. First, it’s a solid investment with the potential for capital appreciation and continued distributions. The holdings, especially those top-weighted best-in-class companies anchor the fund’s NAV. Lastly, as a Eurozone industrial export economy, Germany has the added advantage of having a weak Euro on its side. In the case of this fund, the ‘overlapping’ holdings may be justified by their market capitalization and capital flow. In all fairness, though, since the fund uses a ‘passive’ approach, it merely emulates the MSCI index holdings. This means that the index is, essentially, governing the fund’s holdings. All said and done, the fund may be summed up in a word: Außerordentlich! 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.

Follow Free Cash Flow Not EPS

Summary Momentum in earnings is a simple and effective investment idea. A company’s profitability can be described by EPS and FCFPS. Momentum in FCFPS lets investors select stocks with higher potential return than momentum in EPS. Momentum in earnings is a fairly popular criterion for selecting companies that could potentially be a good investment. The idea behind this is very simple, but also quite sound. Steadily increasing profits over a long period of time indicate that this trend is likely to continue in the future. Moreover, if profits grow at a consistent pace, it is also safe to also assume that the company will be doing well in the future. When investors talk about momentum in earnings, they are usually referring to EPS momentum – that is, companies that have a steadily increasing EPS over a long period of time. But another indicator that investors should pay attention to is Free Cash Flow per Share (FCFPS). The thing is that Free Cash Flow is seen by many investors as a metric that reflects real company profits more accurately than Net Income. This, first and foremost, is due to the difference in the way CAPEX is factored into these two indicators. We will try to figure out which momentum in which factor EPS or FCFPS lets investors select companies with the highest potential return. In order to do this, we are going to look at two portfolios. One will be based on EPS and the other on FCFPS. We are going to look at 1,500 largest US companies traded on the US stock exchange from 01/01/2008 until the present. We are going to look at EPS and FCFPS growth over the past twenty quarters (five years). The indicators are TTM. This way, we are going to get YoY EPS and FCFPS growth for every quarter. For the first portfolio, we want to select companies with stable EPS growth. Thus, we are going to select companies that post EPS growth at least 17 times over the past 20 quarters. We will accept that a company can post EPS losses no more than three times, since profit is an indicator that can be affected by temporary negative factors, which will not necessarily be reflected in future earnings growth dynamics. For the second portfolio, we are interested in companies with stable FCFPS growth. We are going to select companies that have posted FCFPS growth for at least 14 out of the past 20 quarters. The reasoning behind this is similar to the EPS-based portfolios, but the requirements are less strict because Free Cash Flow is by nature a lot more volatile than Net Income – it is directly affected by CAPEX and Working Capital changes, which are smoothed in Net Income. We are not interested in companies that posted drops in EPS and FCFPS over the given time period. In spite of the strict criteria outlined above, this is still possible if a company’s EPS and FCFPS decreased so much during a particular quarter that it was unable to recover afterward. Moreover, in order to make sure that the growth trend is not over, one of our criteria is going to be that the current EPS and FCFPS values are the highest for the given period. A lot of companies will match the criteria we have outlined. We need to focus on those who have posted the most stable EPS and FCFPS growth. In order to measure stability, we can use the EPS Growth Sharpe Ratio and FCFPS Growth Sharpe Ratio – the higher these values are, the more stable growth in EPS and FCFPS is for a given company. EPS Growth Sharpe Ratio is calculated as the ratio of average EPS growth for a given period (20 quarters) and the standard deviation of this growth. The Sharpe Ratio for FCFPS is calculated in the same way. In order to make sure that our portfolio contains securities that are posting consistent growth, we are going to select the top 40 securities by EPS Growth Sharpe Ratio and FCFPS Growth Sharpe Ratio that have made it through the previous filters. The market usually recognizes and values companies that post stable EPS or FCFPS growth over a long period of time. This is why these companies can rarely be purchased at an attractive price in terms of Valuation. Since our goal entails not only selecting stocks according to EPS or FCFPS momentum, but also evaluating which indicator can bring in more profits, we need to select securities that are moderately priced relative to EPS and FCFPS respectively. In the first portfolio, we will leave only securities with a maximum P/E ratio value of 25. In the second portfolio, we will leave securities with a maximum P/FCFPS ratio value of 25. Thus, we are getting rid of securities that are obviously overvalued. We are looking at quarterly data, so it would make sense for us to rebalance our portfolios every quarter in order to have the most relevant selection of securities. The graph below shows the comparison between the two portfolios we have described. (click to enlarge) FCFPS Portfolio performs way better than EPS Portfolio. Only in 2011 EPS Portfolio had higher return than FCFPS Portfolio. This result confirms that momentum in FCFPS is more prominent driver of stock returns than momentum in EPS. We already mentioned the possible explanation to such a result. Free Cash Flow reflects cash that was generated by the company in the recent period, whereas Net Income doesn’t include present investments but include past investments as Depreciation and Amortization. Current list of stocks in FCFPS Portfolio is the following. Apple Inc. (NASDAQ: AAPL ), AutoZone (NYSE: AZO ), CB Richard Ellis Group (NYSE: CBG ), Deluxe Corporation (NYSE: DLX ), F5 Networks (NASDAQ: FFIV ), Jazz Pharmaceuticals (NASDAQ: JAZZ ), Jack Henry & Associates (NASDAQ: JKHY ), Kennametal Inc. (NYSE: KMT ), Mednax (NYSE: MD ), The Middley Corporation (NASDAQ: MIDD ), Mettler Toledo International Inc. (NYSE: MTD ), NeuStar (NYSE: NSR ), Priceline Group Inc. (NASDAQ: PCLN ), Red Hat Inc. (NYSE: RHT ), Roper Technologies (NYSE: ROP ), Sirius XM Holdings Inc. (NASDAQ: SIRI ), Scripps Networks Interactive (NYSE: SNI ), SolarWinds (NYSE: SWI ), Universal Health Services Inc. (NYSE: UHS ), USANA Health Sciences Inc. (NYSE: USNA ), United Therapeutics Corporation (NASDAQ: UTHR ). Current list of stocks in EPS Portfolio is the following. Ametek Inc. (NYSE: AME ), AutoNation Inc. (NYSE: AN ), AutoZone , Biogen Inc. (NASDAQ: BIIB ), The Walt Disney Company (NYSE: DIS ), Fastenal Company (NASDAQ: FAST ), Home Depot (NYSE: HD ), Henry Schein (NASDAQ: HSIC ), J. B. Hunt Transport Services (NASDAQ: JBHT ), LKQ Corporation (NASDAQ: LKQ ), Mednax , 3M Company (NYSE: MMM ), Mettler Toledo International Inc. , Old Dominion Freight Line (NASDAQ: ODFL ), Omnicom Group Inc. (NYSE: OMC ), Penske Automotive Group (NYSE: PAG ), Paychex (NASDAQ: PAYX ), Polaris Industries Inc. (NYSE: PII ), Portfolio Recovery Associates (NASDAQ: PRAA ), Robert Half International Inc. (NYSE: RHI ), Roper Technologies , Ross Stores (NASDAQ: ROST ), Signature Bank (NASDAQ: SBNY ), Snap-On Inc. (NYSE: SNA ), T. Rowe Price Group (NASDAQ: TROW ), Wabtec Corporate (NYSE: WAB ), Whole Foods Market (NASDAQ: WFM ). It is noteworthy that some stocks are present both in FCFPS and EPS Portfolios. These are AZO, MD, MTD and ROP. These companies had the most consistent growth both of EPS and FCFPS. Conclusion. Momentum in earnings is a simple and effective investment idea. Companies that posted profit increases in the past have good potential for growth in the future. A company’s profitability can be described by EPS and FCFPS. The test we conducted shows that the combination of a steadily growing FCFPS and moderate Valuation by P/FCFPS allows is to select securities with higher potential profitability than the combination of a steadily growing EPS and moderate Valuation by P/E.