Back to basics

The stock market boom is ancient history, and many investors have been left with killer hangovers and, above all, an unwillingness to make further direct investments in companies. Rather than shun shares, change the way you choose them – focus on actual results instead of anticipated profits or revenues.

Historically, all stock market bubbles were caused by excessive expectations relating either to a sector or a geographic region. So in the second half of the ’90s everything related to the internet or new technologies “flew” on stock markets. Or, for example, a few years ago there was great interest in central and eastern Europe, so even the Prague Stock Exchange experienced a little bubble. Following a sharp rise in share prices, investors took their money elsewhere, and share prices started falling precipitously, since there were no domestic buyers, so in time Czech shares found their true value. The recent technology boom progressed similarly.
“In the aftermath of the technology bubble burst, analysts are returning to the fundamentals, searching for an investment rationality – the true inner value of firms,”says Pavel Tichý of ČSOB Asset Manage-ment. “While in the ’90s, anticipated future growth in profits and market shares was inflated, and the market ignored some basic economic principles, today information on P/E (Price/Earnings ratio of market price to a firm’s profit per share) and dividend yields have taken priority,” he adds. A reasonable P/E ratio (how many dollars it costs to buy one dollar of profit annually) and regularly paid dividends are indicators of a company’s true value. A firm’s ability to create profit – real money – is a characteristic that most technology companies lacked, and at a time of a market decline is probably the only thing that can induce investors to buy shares.

Kateřina Dalecká

Funds for declining markets

The problem of declining markets bothers not only the buyers of particular shares, it also bothers funds. Stock markets are still seeking their bottoms, and equity mutual funds, including those not focused on technology, are still declining. This is another reason for going back to basics. While an aggressive strategy is appropriate during times of growth, with shares with expected growth being sought out (with funds, this mainly involved funds focused on growth fields – technology, the net, telecommunications), at times when stock markets are in decline, it is better to buy into funds with defensive strategies, funds that buy shares of well established companies with decades of history. This mainly brings the certainty that development will remain stable in the future, which cannot be currently said of the Internet or new technology companies. These strategies are generally built on the selection of firms according to fixed parameters linked to the firms’ value or results – e.g., dividends paid out or the P/E ratio.

Pavel Tichý

ING Global High Dividend, of the investment company ING, is an example of funds focusing directly on shares of companies that regularly pay dividends. A firm’s stable dividend policy is the key criterion for choosing which shares to buy. This fund’s portfolio contains food producers, energy, and banking firms. By choosing these defensive sectors, the fund is recording good results on a declining market. While during the last two years global stock markets declined by 45% (as measured by the MSCI World index), this fund rose in value by nearly 2% during the same time. The ABN AMRO Global Leaders fund has a slightly different strategy, but it also places great emphasis on dividend-yielding shares. “The fund focuses on leaders in certain fields. The first selection criterion is good fundamental indicators, and the second is a stable dividend policy,” explains Jan Žák of ABN AMRO. Porsche, Deutsche Bank, Wallmart, AXA, and Dell account for the greatest share of the fund’s holdings. All of these companies are high-profile, they report good long-term results, and they pay dividends regularly. This also applies to Dell, which, although it is a technology firm, has a history of nearly twenty years.
These two funds are certainly not the only ones with defensive investment strategies. Such strategies can also be expected from funds that invest in stable sectors – food producers, distributors, real estate companies. However, these sectors’ current advantage – smaller share price fluctuations – can become disadvantages on growth markets. The business sector that is “in” at a given time, as was the case with the internet a few years ago, will record high share price growth, while your defensive shares will noticeably grow more slowly. But here too there is the question of how long this difference will last. Three years ago, at the height of internet fever, it would have been hard to find an advocate of conservative investment – as the yields on his investments were substantially lower than those of others, who are doing much better today than those who put their money into the internet (or some other fashionable sector).

The state wants a piece
CHOOSING DIVIDEND shares (or funds that pay dividends) as an investment can have one unpleasant consequence – tax liability. Czech joint-stock companies deduct taxes from dividends for individuals and legal entities, which thus receive their net dividends – without tax. “When investing in specific shares the most important thing is to look at overall profitability, in which tax is only one of many factors,” says Pavel Tichý of ČSOB Asset Management.
But if you invest in funds it is certainly a good idea to consider taxation. There is generally a possibility of choice, as many funds exist as dividend funds (yields are paid out as dividends) or as growth funds (yields are not paid out but are rather “added” to the shareholder’s account), and some funds even exist in both forms. For individuals growth funds are better, because their yields are not taxed (if they don’t leave the fund in six months), but for legal entities the dividend form is most suitable. This is because dividends are taxed by means of withholding, at a lower rate (by 15%) than the income tax on legal entities (31%), which are applied to yields from growth funds.
ING’s crown funds are an example of the two classes of funds. It is always just one fund, but some of its shareholders get dividends (mainly legal entities) while for the others the yields appear as additions to the value of their holdings (suitable for individuals). “Mainly institutional investors seek out dividend funds,” notes Kateřina Dalecká, marketing manager for ING Investment Management.Dividend shares the Czech way
EVEN AMONG the few shares that are actually traded on the Prague Stock Exchange it is possible to find a really good dividend share. The former Tabák, a.s., now Philip Morris, has a very long, good dividend history in Czech terms. It has been paying excellent dividends every year since 1993. As of 1994 its dividend yield (the ratio of paid dividends to the share’s market price) has been steady at 10%. Some analysts even compare it to bonds, but that is far from the truth. However, several years ago it became popular among pension fund portfolio managers due to its regular dividends. A legal amendment that ordered them to include only stocks traded on the main Prague Stock Exchange in their portfolios put a halt to their interest in these shares, since Philip Morris shares are not traded on this market. This is probably because the company doesn’t want to publish information that is required by the exchange if a share is to be traded on the main market. In this case, the firm’s consistent dividend policy serves not so much as an attraction for investors, but rather as a means for the majority stake-holder to pocket its profits each year. Czech shareholders go along for the ride.
Philip Morris, the American company that owns Tabák, has also been paying dividends regularly for many years. However, its results last year were not as good as were those of its Czech subsidiary. A dividend of 2.56 dollars per share means a dividend yield of only 7.08%, while Tabák paid a gross dividend of CZK 1,240, so its dividend yield was 11.13%.

A scientific approach to moneyWhat is the proper procedure when deciding among a building savings account, an insurance policy, shares in a fund, and a term deposit. Which financial products should you buy sooner, and which later?

Tomáš Skřivánek
Photo: V. Vlk

While a person’s needs are well-structured according to the so-called Maslow pyramid, the hierarchy of financial needs is determined by a so-called personal financial plan. The basic financial planning tool is the budget – a classic estimate of revenues and expenditures – and its ongoing updating and control. However, making purposeful use of debt can be useful for satisfying your basic needs, and especially for financing long-term investments. If your basic needs are already taken care of, you should not forget to cover risks, either your own – such as death, injury, permanent illness, health care, and work disability – or risks to your property, such as household insurance, auto insurance, and liability insurance against damage caused by you to a third party.
Now are your risks covered with some money left over? Start saving regularly. This third level of your financial plan includes in particular the use of building savings for housing purposes and supplementary pension insurance to maintain your lifestyle after you retire. The last level involves investing, which can help you acquire assets for household furnishings, study abroad, or a trip around the world. Basic investment products include monetary market equity funds for financial goals covering six months to a year, bond funds covering one to two years, mixed funds for purchases in three to five years, and mutual funds for covering costs you will encounter in five years or more.
If you can cover your current expenditures from your regular income, if your major risks are insured, if you have established some financial reserves, and if you are setting money aside for housing and your retirement and investing in your future financial goals, you have successfully managed the essential elements of personal financial planning.

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