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COPYRIGHT 2002 Adams Business Media
The international marketplace simply does not recognize traditional borders anymore. Commodities from oil to information flow freely across countries and continents, with demand in Singapore dictating prices in Seattle.
Two years ago, Deutsche Bank Alex. Brown realized that without a global grasp on the issues impacting the local markets, the bank and its customers were going to miss the early warning signals and initial groundswells of opportunity that this newly global economy was producing.
So the bank began knocking down some borders of its own. Creating a fourth "region" of international research, the firm created a new global research division to work closely with its North American, European and Asian groups, bringing the global perspective to each of its areas of coverage.
"We are building a global perspective into everything we do," says David Manlowe, Deutsche's director of North American research. "And not just by saying, 'Gee, let's take an over-worked associate, call him global for six months and rotate him around."'
Instead, Deutsche has recruited some of the top analysts in their fields to lead the global research, including John Willis, Deutsche's former head of European utility research, who was tapped to lead the new Global Sector Research Group. In 2000 Willis was ranked No. 1 in the Reuters survey of fund managers and No. 1 by Institutional Investor for European and global utility research.
"You look around at the investment banks and we all have research basically structured regionally," Willis says. "We made a decision that we were not keen to have these silos. People have a misconception that we are about globally managed money, but it's really to enhance the regional research."
For instance, a U.S. fund manager probably would not be interested in a European retailer, but they would certainly want to know about Wal-Mart's European expansion plans and the health of the overseas retail market.
"If you are looking to buy British Telecom, you would expect the analyst to know if there is something relevant going on with France Telecom or Deutsche Telecom," Willis explains. "Not because you are going to buy it, but because you want to know if the money is about to move. If I were a fund manager, I would want to make sure the analyst has looked beyond the local region."
The global group complements the bottom-up research that Deutsche is known for. The research division has always made a commitment to knowing each industry it covers from the inside out, usually by hiring industry insiders to head up their research.
"We have to be constantly in touch with the suppliers, the salespeople, the people at the grassroots level of the industry, to really get a feel for what is going on," Manlowe says. "You are going to have a much better chance to see the full mosaic."
That global mosaic gave Deutsche one of the clearest views in the industry into the wildly fluctuating world of oil prices over the last couple of years.
"We've been out in front of the competition at every twist and turn," Manlowe says.
Deutsche was also out in front of the spectacular collapse in the technology sector that began nearly two years ago. Thanks to their ground-level research, they began pulling clients back from that brink before the floor collapsed and were among the first to start noticing recent signals of improvement from certain software companies.
When Deutsche saw the first cracks forming in the tech sector, it realized that when the industry that had supported the market for so long gave way investors would need another pillar to stand on, so two years ago the firm started beefing up its coverage of other key industries, including media, healthcare and capital goods.
"We made a commitment to those spaces, recognizing what we thought would be an increase of importance in the relative scheme of things for our large institutional customers," Manlowe says.
Deutsche is continuing that expansion, adding coverage to fill out its small-cap and mid-cap universe and deepening its research into the S&P 500. But with projected market returns of only six percent during the next couple of years, picking the right analysts who can add value is as important as picking the right stocks.
"Good analysts these days are worth their weight in gold," Manlowe says.
Deutsche Banc Think Tank
Mari Kane
One such analyst, Mark Greenberg, has a somewhat unorthodox method of gathering research. As Deutsche Bank's beverages analyst, he spends a lot of time haunting bars, restaurants and supermarkets to get a down-to-earth view of consumer demand.
"I can stand around in a supermarket parking lot or do surveys of 130 bars in Manhattan to see what's going on with imported beer," says Greenberg. "I think that gives the analyst who wants to learn a great opportunity and venue to do it and you can find out everything without ever talking to the company. It's also a lot of fun to just watch what consumers do."
Greenberg prides himself on primary research done in advance of the releases of company information. Having knowledge of the industry is important, since ultimately that knowledge translates into stock selection and outperformance and helps him identify trends before they happen.
"I also take a different approach to valuations," he says. "Typically, they do not correlate well to P/E, but instead to returns on capital. Our way of looking at things is more predictive of stock valuation."
Greenberg thinks the pricing environment is going to be weak for at least the next year. The recession's lower inflation produces lower pricing, so this year's returns, relative to the last couple, are likely to be down.
"I think a lot of the value in my stocks has been captured.
"Beer consumption patterns don't change that much, but when and how it's consumed does," he explains. "It's not only tied to the economy, but is also tied to consumer confidence, and those are the things to watch very closely. The one real long-term opportunity was and always will be Coca-Cola -- the ultimate global brand."
When times are good, food investment is often a second thought. But when times are tough, the food industry shines. Eric Katzman has a mouthful of comparisons to other sectors hut he safely says we'll always have to eat.
"Food stocks performed well in 2001 due to the recession and concerns about the war," he says. "Looking into 2002, assuming that the economy rebounds, we have been fairly cautious about exposure to the group. We think it makes sense to hold some names, but that one must be selective because, when the economy rebounds and corporate profits accelerate, that is not necessarily the time to own defensive stocks such as food. The industry has gone through a wave of consolidation, yet it is not clear whether that consolidation will help companies address their No. 1 problem -- the consolidation of their retail base and [the encroachment of] the Wal-Marts, Krogers and Safeways of the world."
Katzman points to his rigorous proprietary approach to valuation, in which he examines incremental cash flows. His work is also fairly independent with buy and sell recommendations, using the gamut of investment opinions to communicate his points to clients.
"We do a lot of writing, putting out longer reports about the companies in the industry, which I think clients appreciate. I also think we are fairly diversified," says Katzman. "We cover packaged food companies as well as some of the agribusiness companies. The names are well-known brands that people have an interest in and are part of an industry that reacts to the pessimism or optimism of the overall economy."
Alain Karaoglan was an investment banker for 10 years covering the insurance sector prior to becoming an equity research analyst. That allows him to have a different perspective on the industry. One thing he finds challenging about non-life insurance is that it is one of the few industries where, at the time of sale, companies do not know the cost of goods sold,
"There is a lot of uncertainty with that and therefore it makes it quite interesting as things never are exactly as you see them," he says. "I tend to emphasize return on invested capital, a thorough industry analysis and detailed models on companies in the industry. What, hopefully, the extensive analysis allows me to do is see trends a little earlier than others and to be a little contrarian. For example, on September 24, we moved the sector to an overweight recommendation."
Karaoglan explains how the industry is prone to very sharp cycles in certain periods. Prices start increasing then and sometimes a catalyst may accelerate these price increases.
"In my view the WTC catastrophe is the catalyst, similar to ones that have happened in prior sharp cycles in the mid-1980s and mid-1970s, which lead to a new era in the property-causality industry," Karaoglan says. "The supply has shrunk, the capacity of the industry has decreased and demand had increased, and management has become more disciplined about pricing their business properly. One of the things that is very powerful for the sector is the improving fundamentals of 2002. They are completely independent of whether the economy is in a recovery that is U, V or any other shape, so management are masters of their own destiny. That is one of the reasons...
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