Investment Risks

Funds shed auto stocks

main 58025769 Reuters – red traffic light VW headquarters Wolfsburg 2015
For some fund managers, the cartel allegations are a red sign. Source: Reuters

A perfect storm may be in the making for Germany’s carmakers. Last month, allegations emerged Mercedes-maker Daimler, BMW, VW and its subsidiaries Audi and Porsch may have colluded since the 1990s on everything from emissions to which suppliers they used.

The European Commission is investigating the issue, which follows on the heels of possible driving bans for diesel cars and Dieselgate investigations, which spread from VW to Daimler and car parts maker Bosch. Diesel bans have scared European consumers, who are turning their backs on diesel cars and choosing gasoline-powered or electric vehicles instead.

Although BMW has rejected the antitrust charges, it has led some asset managers who follow strict social responsible investment guidelines to scrap BMW or Daimler shares from their list of potential stocks to buy. So-called SRI criteria, which can differ from firm to firm, take into account social, environmental or ethical issues, in addition to purely financial considerations. A mutual fund might, for instance, ban bomb makers or companies which use child labor, from its portfolio. Sometimes, the term sustainability or ESG – environmental, social and governance – is also used to describe this type of investing.

“But instead of open competition to develop the cleanest and most efficient autos it seems as if this was actually suppressed behind the scenes.”

Walter Hatak, fund manager, Erste Asset Management

Union Investment, Germany’s third-biggest fund manager with more than €300 billion ($353 billion) in assets, has barred its sustainability funds from investing in Daimler shares due to the “in recent weeks and months increased legal risks,” fund manager Ingo Speich said. The sustainability funds, totaling around a tenth of total assets, have sold Daimler shares or will do so. Legal risks for BMW were considered smaller, meaning this stock was still on the Union’s  sustainability list. VW shares had already been removed from the list due to Dieselgate.

The cartel accusations have also prompted Austria’s Erste Asset Management to remove both BMW and Daimler shares from its list of sustainable investments. It was not clear immediately whether Erste’s sustainability funds managed had actually divested BMW and Daimler stock.

Germany’s car companies were global leaders and frontrunners in the industry, giving them a special responsibility, said Walter Hatak, a member of Erste’s sustainable investment team. “But instead of open competition to develop the cleanest and most efficient autos it seems as if this was actually suppressed behind the scenes,” Mr. Hatak said.

Brussels-headquartered Candriam, the European asset management arm of US insurer New York Life, is reviewing whether to ban BMW and Daimler shares from its sustainable investment list, a spokesperson said. If it would block the stocks, funds holding them would have divest them. For Swisscanto, a subsidiary of Zürich Cantonal Bank, conventional carmakers never complied with its sustainability investment guidelines, meaning the likes of VW, BMW and Daimler were never part of its portfolio of sustainable assets.

Ethical considerations aside, the cartel allegations of course could have a billion-euro impact on the carmakers if the European Commission finds them guilty of collusion. The EU can fine companies up to 10 percent of their annual turnover in the event of cartel-building. Volkswagen’s turnover in 2016 was more than €200 billion, Daimler’s was more than €150 billion. Not to mention any individual lawsuits. All together, that could put the penalties well above the roughly €25 billion that VW has paid out to date for Dieselgate. The German carmakers’ shares indeed fell in the days after the cartel allegations surfaced on July 21.

Not all asset managers, however, are concerned. Deka, Germany’s fourth-largest asset manager, believes a general ban on auto stocks is not productive. It argues that individual carmakers like BMW may not even be affected by the antitrust charges. According to DekaBank, a subsidiary of the German Savings Bank Finance Group that manages around €257 billion, a complete exclusion of all automobile shares would lead to a general suspicion that it does not share. It argues that engagement with the car companies is “extremely important in reinforcing our call for good corporate management, governance and the targeted development of future-oriented mobility concepts in the auto industry.” However, Deka’s sustainability equity fund has not held any shares in German automakers for some time, although the company said this was merely an active investment decision.

For fund manager Christian von Engelbrechten from Fidelity VW is one of the top shares in the US asset manager’s Germany Fund, which is an ordinary fund, not one focused on sustainability. On the other hand, he cautioned: “The relatively low weighting of the auto sector in the fund compared to the index weighting in the DAX (about 15 percent) reflects my cautious stance toward automobile manufacturers.”

If more investment managers start thinking alike, more might scrap German car stocks from their portfolios.

 

Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets. Ingo Narat is an editor with Handelsblatt’s finance section. Gilbert Kreijger, an editor with Handelsblatt Global, contributed to this article. To contact the authors: landgraf@handelsblatt.com, narat@handelsblatt.com and kreijger@handelsblatt.com

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