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Marking Time

Dollar's Strength Hinders Returns, but Optimism Persists at Germany Fund

September 16, 1997

Germany's stock market has been roaring this year, but Hanspeter Ackermann has fought an uphill battle bringing those gains to his shareholders in the Germany Fund.

While the blue-chip German stock index, the DAX 30, has surged 32.2% year-to-date as measured in German marks, the index is up about half as much in dollar terms--thanks to the dollar's strength for much of this year versus the mark.

Likewise, the share price of the Germany Fund, a closed-end fund, is up just 13% year-to-date on the New York Stock Exchange. Still, with dividends included, Ackermann's fund gained 27% in the 12 months ended Aug. 31. Fund tracker Morningstar Inc. gives the fund an above-average rating.

Ackermann, a 41-year-old Swiss national and father of two, serves as a director of Deutsche Morgan Grenfell, the investment arm of Germany's Deutsche Bank. From his office in New York, he manages $1.2 billion in European stock portfolios, including the closed-end New Germany and Central European Equity funds. Most of his earlier career was spent at Swiss Bank Corp.

Ackermann concentrates the Germany Fund in about 30 mostly blue-chip stocks and supplements those with smaller stocks that he believes have attractive long-term growth prospects. He views Germany as an intriguing restructuring play. For investors who take that view, the Germany Fund is a discounted way to buy in: The fund's stock price, now $14.25 a share, is about 19% below the actual value of the stocks owned, which is about $17.50 a share.

Ackermann spoke recently with Russ Wiles, a mutual fund columnist for The Times.

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Times: What's your overview of Germany's investment and economic climate?

Ackermann: We think Germany is a great restructuring story. For starters, there are some proposed changes in the tax laws that are attractive. The purpose is to lower taxes. As you probably know, Germany has some of the highest taxes in Europe, both corporate and personal. On top of that, there's a "solidarity" tax of about 7%, which has been maintained since East and West Germany merged.

The proposal is to reduce [the solidarity tax] over the years until it eventually disappears. Another notable tax change already has gone through. It involves the abolition of the wealth tax.

Times: What's that?

Ackermann: This was a tax on wealth, not realized gains. There are still many German companies where a family owns a large percentage of the firm. These families had little interest in generating earnings because once you did that, the company's share price would go up--and so would your tax liability. You would have had to sell part of your stake to pay tax.

This was a very inefficient system of taxation that ended earlier this year. We think that this will significantly benefit certain companies that became masters in hiding earnings by reinvesting in nonproductive facilities like real estate or other assets that didn't immediately generate returns.

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Times: Is the economy coming out of its recent malaise?

Ackermann: We think so, driven mainly by export-oriented industries. To a large extent, Germany still depends on big companies like Daimler-Benz and Siemens that derive a large percentage of their earnings from exports. That has been the key, as the deutsche mark has been relatively weak against the dollar, pound and some other European currencies. This weakness has significantly benefited these companies, which has given the economy a jump start.

So the recovery still is geared heavily to export stocks rather than domestic ones. We think, however, that this will change. . . . In every other German economic recovery, domestic stocks bounced back during the second year. This is still the first year.

Times: But isn't the fear that the economy's recovery, and the central bank's desire to keep the mark from weakening further, will mean higher interest rates soon?

Ackermann: The Bundesbank is getting somewhat uncomfortable with the steep decline of the mark relative to other currencies. Therefore, people are talking about an increase in interest rates.

But we don't think this will happen before 1998, primarily because German unemployment is around 11.4%, which is close to an all-time high. That obviously creates a difficult environment in which to raise rates because of the danger of aborting the modest economic recovery.

We had GDP growth of 1.4% last year. In 1997, we estimate it will pick up to about 2.2%. In 1998, it probably will get close to 3%. Inflation, the other factor, continues to be modest, running below 2% for two years now.

Times: How's the economic integration with Eastern Germany going?

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