Great expectations for European stocks

Germany Fund sells at a deep discount, but that doesn't get itsmanagers down

West European corporate shares are becoming an "in" place for some Americans to put part of their money.

"It's striking," says J. Paul Horne, a London-based economist for Salomon Smith Barney, a major investment banking firm.

That kind of news pleases Hanspeter Ackerman, chief investment officer of Deutsche Bank Investment Management Inc. The New York-based money manager looks after three closed-end mutual funds invested in German and Central European stocks. Listed on the New York Stock Exchange, the funds' shares are all selling at sizable discounts from the value of the stocks in their portfolio.

Unlike open-end mutual funds, closed-end funds do not automatically redeem their own shares. Nor do they issue new shares. So their share price hangs on demand and supply on the Big Board.

At the moment, Mr. Ackerman's Germany Fund shares are trading at an 11 percent discount. His New Germany Fund, which invests in medium and small-size German firms, is discounted some 21 percent. And his Central European Equity Fund, which puts almost 60 percent of its money into Poland, Hungary, and the Czech Republic, suffers a 20.5 percent discount.

So if American investors step up their demand for European stocks and choose one of his funds as a medium, those share discounts might fade.

Growing American interest in European stocks is hard to prove statistically.

But a survey of 75 United States mutual-fund managers and analysts released by Brunswick Group, a New York public-relations firm, found almost all their firms planning to boost the proportion of European stocks in their portfolios in the next two to three years.

Another sign of interest: Europeans and foreigners combined have put a net $64.2 billion into European mutual funds in the 12 months ending Sept. 30, notes Mr. Horne.

Invigorating investors

Ackerman has three ways to boost the price of his funds' shares for investors.

One is good performance. Here, all three of his funds get four stars from Morningstar, a Chicago firm that rates mutual funds on a one-to-five ranking.

Over three or five years, the two German funds have beat the relevant German stock indexes by a little.

Another way to boost the funds' share prices is for the management company to buy them back on the exchange. It did just that in 1997, especially 1998, and some this year.

But those purchases haven't eliminated the discounts. And such buybacks shrink the number of shares in the funds and thus management fees of Deutsche Bank Investment Management.

So the Swiss-born money manager has been employing a third method - talking up his funds with other money managers making European investments and with journalists writing about mutual funds.

Unfortunately for Ackerman, this year's return on his funds looks poor compared with an investment in American stocks. Germany Fund shares are up about 1.8 percent so far this year. But an investor in the Standard & Poor's 500 Index stocks would have done 11.7 percent better. The two other funds' statistics are worse.

Optimistic approach

The pitch of Ackerman and Robert Gambee, chief operating officer of the funds, is that Europe is on an economic path that promises better performance for European stocks, particularly German and Central European stocks.

"We think Europe is the next driving motor that will take over from the United States," says Ackerman.

The two managers point to several favorable factors. The euro has declined in value this year against the dollar, but is picking up again. German corporate tax rates are scheduled to fall sharply in the next two years. Germany's economic growth rate is expected to pick up sharply to 3 percent after inflation next year. And German stocks are much cheaper than American stocks.

At some point the "bubble" in US stock prices will end, predicts Ackerman. German stocks offer an escape.

Ackerman and Mr. Gambee say they look for companies that are growing at a fast and accelerating pace.

A Morningstar analyst notes that since the Germany Fund invests primarily in German blue chips, the fund "is at the mercy of the country's economy. It's therefore appropriate for investors optimistic about Germany."

Something similar could be said for the New Germany Fund.

"It's the closest one can get to pure German mid-cap exposure," reckons the Morningstar analyst, pointing out that the fund invests mostly in smaller companies.

As for the Central European fund, its shares took a beating during the 1998 Russian financial crisis. It had some shares in Russian companies, which it dumped at a loss.

Now the fund has 36 percent of its assets in German and Austrian stocks, and the rest in "transition-to-capitalism" countries that are seen as doing well.

(c) Copyright 1999. The Christian Science Publishing Society

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