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Fund Manager Focus - October 2012


Michael Beyer-Enke, Deka Investment - Frankfurt


Michael Beyer-Enke

Deka is the investment management arm Germany's public savings bank network. There are around 457 savings banks and together they form the largest banking group in Germany with over 16,000 branches. Savings banks are by far the largest customers of Deka. With total assets under management around $200 billion, Deka is one of the largest fund managers in Germany, running 640 mutual funds and 550 special funds. Deka has 125 billion ($160 billion) in equities and invests worldwide.

After 12 years of dedicating himself to technology stocks, Michael Beyer- Enke became a senior portfolio manager, US equities in May 2012. He was previously head of the telecommunications, media and technology team at Deka. He joined the firm in 2000 and was previously at DIT Deutscher Investment-Trust, now part of Allianz Global Investors.



Are all equities managed in-house - how much is active, is some passive?

"Deka has 125 billion ($160 billion) in equities and all of these equities are managed in-house with the exception of two small funds 400 million [$516 million] and 200 million [$258 million]. We have some quant guys who run 30 billion ($38 billion) and they do enhanced indexing almost passive. Not all of 30 billion but part of it."

Which screens do you use?

"BAM Bernstein Asset Model. 1,500 US companies in a database where you rank price to book, p/e, forward p/e, EBITDA growth, three month momentum. Everything is first or last or somewhere in the middle. The beauty of the database is that I've worked with it for almost 14 years now and it still works. If it is 5/5/5, i.e., last quintile I won't buy that company. I'm not buying bad value, bad growth so to name a few examples JDS Uniphase and JC Penney. Even if someone says it is a most compelling case, an ex Apple guy has come to JC Penney I still wouldn't buy."

Do you have any particular likes and dislikes?

"I really hate companies that don't listen to investors. HP is an example of this - they never listen to us. They say 'we are great, we are #1 and #2' and eventually they become #3 and #4. The car industry is another example. A commoditizing industry with no growth in core products, restructuring and trying to copy IBM in their business model but failing because they are 10 - 15 years too late. So I avoid those stocks even at cheap historic multiples."

Describe your investment style?

"A growth tilt and we look for a reasonable price. Kind of GARP but some momentum component in it. Let's take housing, we had a confirmation of the trends. Would you buy Home Depot after it has risen 60% plus, Sherwin-Williams after 75% and Bank of America up 50%? Perhaps not if you are GARP but I did because I believe the housing cycle takes longer than one or two months."

How does Deka compare to its peers?

"Our main difference is that we are buy-side focused. I have a team of 30 - 35 colleagues who cover their own sectors. (I am the hardware and telco equipment guy). We have a consumer guy, a retail guy, a healthcare guy and a banking and insurance guy etc so I don't have to do all my own deep in-depth analysis."

How do you as a PM work with Deka's sector analysts?

How do you as a PM work with Deka's sector analysts? "Here's an example. I have in my database Home Depot. Excellent in growth, valuation is perhaps not as great and I have good capital use in my database. My analyst says not that much upside in my DCF but I look at the trends and they raised operating margin by 100 basis points year-on-year and they have raised same store sales 5.8% and housing. So first point from database, second point from analyst and it is large cap. So it fits into that category. I need exposure there so I would be a fool not to buy it. Analysts may say way too expensive but my database shows me it has great momentum so you should ignore the valuation as it has relative strength. So I wouldn't put a maximum weight on it. Probably a neutral so as not to upset my in-house analyst!

Another example is Priceline. In terms of valuation the in-house analyst said no way but when it missed once its expectations I had to say thank you - you were right but the stock by April was a better performer than Apple!"

Favored sectors? Do you favor technology because you were a technology fund manager for so long?

"No I don't favor technology - this is the biggest mistake in behavioural finance. You become over-confident. I am perhaps more critical of my own sector as I know it best. Currently I favor healthcare (defensive), consumer discretionary (offensive) and as of August, financials."

Least favored sectors?

"I hate everything that has a connection to China but not Apple. Big cap goods with huge exposure to China. I think China will take longer than everyone thinks. I don't like utilities, cap goods (offensive), telecos (defensive) - they are at historic highs and they will be crushed by the iPhone."

Largest holdings discuss why and when you bought them?
Apple $151m

"I like Apple as I cover it. It's never too wise to bet against Apple during a major product launch. If you look at Apple vs the hardware index, Apple is 47% of that index. So I can spend half of my time on Apple which makes it strange to believe that hardware will work without it. You have to own it. It's a weird argument. Look at the composition of the rest of the index, you have disk drive companies, and EMC (beating the index) but of the 47 members of the index, only 6 outperformed the index so if you didn't own Apple you lost. You would be a fool trying to outperform the index with Seagate, Western Digital and EMC. Apple have more product cycles ahead, one more carrier with China Mobile, 800 million subs, dividends growing into the valuation, a $100 billion cash pile and the iPhone 5. So I'm pretty sure Apple will make it. If they ramp it up too fast I don't know if it can last the whole of 2013. So what's my time horizon? I don't usually buy stocks for one or two months but in Apple's case I fear the headline 'Apple's margins peak' in the next 12 months."

What about Exxon?
$87 million position

"This is more a valuation call, buy backs and dividends. Okay, they wasted a bit of money in the last acquisition - which was mostly in gas - not the right timing. We are constructive on the energy markets as we think there is enough oil but in the wrong spots so either geo-political risk or you have to drill three kilometers deep off Brazil. So the price of oil and raw materials will go up. So it's defensive, it has buy backs and a yield and even if the oil price drops by 10 15% you are better off in Exxon than Schlumberger or Halliburton. My analyst until recently preferred Chevron but now has changed priorities and prefers Exxon. We also hold Chevron."

GE $75m

"GE is a special animal. One of my few overweights in cap goods but this is mostly due to the financial exposure. There are two arguments for owning GE, the special dividend regulated by the Fed from GE Capital. One was approved and we expect more to come. The other thing is the boom in gas turbines as everybody switches from coal to gas. GE is a natural beneficiary and is not expensive. I am happy with it. A no worry stock."

Pfizer $70m

"I own a lot of big pharma for two reasons. Yield, sustainability of yield, patent cliff and patent valley almost discounted by share prices and relative re-rating of sectors compared to consumer staples, utilities and telcos. Within big pharma, Eli Lilly is different - if they get Alzheimer - the stock will move 25%. Lilly is my top pick in healthcare."

What's your buy trigger?

"It depends on the stock. For Apple I seldom come up with more than 15 - 20% but on the other hand I know their track record and they've only missed once or one and a half times in the last 6 or 7 years. I will buy with 2% downside as I know there's another 20% on the stock.

In cyclicals for example, I wouldn't buy a US Steel with 10 - 15% upside. You have to show me at least 100 150%.

Then there's momentum stocks. Facebook - at the moment it's a hate-me stock but we own it for the reason that insiders have tamed their selling aspirations and employees are not selling. We've analyzed the revenue streams and potential revenue streams and it is at 20 times earnings which is not that expensive and 7.5 xs EV/EBITDA - not that expensive. We have media stocks with higher multiples than that."

Did you buy Facebook at the IPO?

"I bought at the time of the IPO for 5 minutes. We made 2% and bought it back below $20. We don't forget stuff, we did a lot of analysis in May and it wasn't good enough but now we're more positive."

Recent sales?

"Tyson Foods - it is good value but with the type of input cost hikes you can't price chicken 30% higher because of crop failure. So it's a margin squeeze.
Principal Financial - it performed but it did not outperform. ACE - it's in the annuity business but I needed some funds for the banks because I wanted to switch and internal rules mean I don't go above 3% overweight in the big sector classifications. i.e. Tech is 21% in the index so I never go above 24%. This is risk management for dummies but it works."

Do you have a US buy/recommended list?

"Yes - the analysts produce the lists. I can go outside it as well."

Average holding period?

"I've only run the fund for 4 months and some things I bought in early May are no longer in the fund but 80% plus are. 6 - 12 months is the average. But IBM I've owned since I started covering it in 2002. So there are exceptions. In the retail trade, in the recession years I didn't want to own the sector but last year was decent and this year surprised everyone. So why sell?"

Average market cap size of US holdings?

"The smallest stock I own is $1.5 billion but that's an exception. Median is $30 billion so I'm pretty large cap focused."

Which benchmark do you use?

"S&P 500 Total Return."

What's your active share?

"The tracking error is around 2%. I have overweight of up to 3% on the sectors. In single stocks I seldom surpass 100 bp over or underweights. The active share as of Sept 27th is 46%."

What about Canadian stocks? Can you own them and do you?

"I own two Canadian stocks - Tim Horton's - not working. Catamaran - working but after the merger we'll see."

Does a stock have to be profitable?

"No - Tesla was a holding of mine until recently."

Do you vote your proxy?

"In Germany absolutely, sometimes in Europe, in the US we are currently not active."

Given that Frankfurt has a very concentrated investment community, how many offers of meetings do you get per week/day?

"If you take September you can take almost 2 meetings every day."

Outlook for the US market for the remainder of 2012?

"Despite the weakish job market and the fiscal cliff, I'm not too pessimistic about the US Stock market for the remainder of the year on a relative basis. 1. We have spare time for most of the action of the fiscal cliff until mid March 2013 2. We'll see a consensus of Democrats and Republicans on the Defense budget 3. Europe and China aren't turning around too fast - that's good for the US."

Best US company at IR?

"I can only answer for technology stocks. Patricia Murphy of IBM. Weak IR - Motorola, HP, Broadcom and Symantec. I seldom see Apple. Good IR - Xilinx and Altera. The Japanese guys are always so responsive - Nidec - very good IR."

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