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Big might seem boring to most investors. But, increasingly, large-capitalization stocks are looking mighty attractive in the rough market environment we’ve been enduring since May. In fact, for U.S. dollar-based investors and euro investors alike, this is the best time since 1973 to buy global multinationals on the cheap.  Large caps currently sell at a major discount to small and mid-sized companies. And as world markets continue to correct further, the biggest global brands should draw safe-haven flows from nervous investors seeking stable and reliable earnings growth.  There are two excellent ways to play this sector right now. Each enables you to snatch up global category leaders at good prices and collect healthy dividends. The European version of this investment also offers protection against a falling dollar to boot.  Bigger is Better in ‘06  Over the last three years, small and mid-sized stocks around the world have literally gone ballistic while large-cap stocks have lagged (see enclosed chart). This divergence has recently reached its highest level since 1973, when large-caps began their long-term decline relative to small stocks. Since 1926, large-cap stocks have outpaced small-caps during only one performance period — from 1926 to 1957.  Small stocks have historically posted fatter returns than their large-cap cousins for several reasons. Namely, short stocks provide faster growing corporate earnings and greater agility to meet the changes facing the global marketplace. Since 2001, small stocks have gained 12.6% per annum compared to just 4% per year for the S&P 500 Index, or the broader market. And since the bear market low in October 2002, smaller companies have zoomed ahead with a cumulative 96% gain versus only 35% for the S&P 500 Index. But that trend is now history in mid-2006 as hedge funds and investors are dumping the world’s riskiest investments amid the worst reversal for global equities since April 2004.  Time to Get Defensive as Bull Fades  The world’s largest companies, based on their stock-market capitalization, haven’t looked this attractive since the late 1990s. Over the last 3.5 years, investors have neglected stable and reliable earnings (aka “boring stocks”) for the high-flying emerging markets, small and mid-cap equities, real estate investment trusts (REITs), and commodities. But as the Federal Reserve, the European Central Bank and even The Bank of Japan either accelerate or begin a new round of monetary tightening to curb rising inflation, corporate earnings will be revised lower for 2007. That’s especially true for smaller companies, highly tied to the global economic cycle. Historically, small-caps are the first sector to feel the squeeze, a result of slowing global growth and rising interest rates. In this environment of risk reduction, portfolio managers dump high-risk equities and exchange market risk for predictable earnings growth from brand-name franchises.

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When you buy this cheaply valued blue-chip portfolio, you’re getting world-class diversification because all of these great companies derive a significant portion of their gross sales revenues from international markets. Companies like Coca-Cola, Nestlé of Switzerland, Toyota Motor Corporation, Roche Holdings, and Samsung Electronics are just a few of the many brand names deriving a hefty chunk of their sales from fast growing foreign economies. And talk about mega-market caps! The smallest Global Titan is Dell Computer at “just” US$58.4 billion. The index’s largest company is Exxon-Mobil, a beneficiary of the big boom in energy prices this decade commanding a fat US$376 billion market capitalization. Exxon-Mobil’s market capitalization, in fact, exceeds the total gross domestic product value of many emerging market countries! 

The Dow Jones Global Titans Index currently hold s 19.8% in financial services; 17.4% in health care; 16.4% in energy; 14.5% in information technology, and 11.8% in consumer staples. The remaining 20% are diversified across cyclical, telecommunication and consumer discretionary large-caps. Assets are heavily weighted towards U.S. companies with substantial foreign earnings exposure at 62% of the index, followed by 16.5% in the United Kingdom, 7.2% in Switzerland, 3.2% in the Netherlands, and 2.7% in Japan. 

A Falling Dollar is Bullish for the Titans 
Over the last three years, the Dow Jones Global Titans ETF has gained 41.2% or 12.2% annualized. That performance figure is certainly not bad, but it badly trails the huge returns already generated for many international markets since the bear market low in October 2002. But as the market grows more defensive this year and the dollar continues to fall over the next 6-12 months, many of these Global Titans will log strong earnings growth as dollar-based exporters in the United States and Asia grow their market share. Let’s not forget that in 1995—the year the dollar finished its last secular bear market—the S&P 500 Index derived more than 35% of its earnings growth from a falling American dollar. A weaker dollar does wonders for dollar-based multinationals, and I expect more of the same ahead of the next major U.S. dollar bear market. 

Although certainly not a guarantee to future profits, insider buying is usually a very bullish signal for investors looking to ride the coattails of several directors or executives. With many of the Global Titans now trading at multi-year or 52-week lows, it’s no surprise several companies’ insiders are stepping up to the plate and buying stock with cash. 

For example, Dell Incorporated’s founder and chairman, Michael Dell, along with the company’s chief executive officer, acquired a total of about four million company shares in late May. Valued at approximately US$96 million, the cash-based purchases are certainly a positive omen for future earnings growth. The average insider purchase in the United States is US$60,000. When two powerful executives spend almost US$100 million of their own cash as the stock hits a 52-week low, it’s worth noticing. 

But insider buying doesn’t stop at Dell, either. AIG, the world’s largest insurance company by market capitalization, saw two insiders purchase US$200,000 worth of shares in late May following the market sell-off. 

Another high-value Global Titan, Johnson & Johnson, recently increased their dividend for the 43rd consecutive year, raising the latest annual payout by 15%. Many of the Global Titans have also raised their payout ratios since the bear market low of 2002, including stock buybacks, special cash distributions and even bold compensation plans for executives. 

At Coca-Cola, the world’s largest soft-drinks company, the Board of Directors recently voted to tie corporate compensation and options to performance targets—one of the first schemes now in place at a Fortune 500 company. 

Like all ETFs, the Global Titans in the United States and Germany are inexpensive—certainly much cheaper than actively-managed funds. At 0.5% per annum, a global investor accesses many of the world’s most profitable conglomerates, all in one convenient ETF. 
The German Hub for ETFs 

Exchange-traded-funds provide low cost indexing across sectors, countries and even commodities, while also levying much smaller annual management fees than actively-managed mutual funds. Over the long-term, ETF fees can save an investor a small fortune. The average actively-managed fund in the United States charges 1.47% per annum compared to just 0.35% for ETFs. 

The United States remains the epicenter of exchange-trade-funds with the S&P 500 Index, or “SPIDERS,” the home to US$50 billion in assets, making it the largest ETF in the world. ETFs in the United States managed US$296 billion as of December 31, 2005. 

The problem with U.S.-listed ETFs, however, is that all of these products are valued and denominated in a heavily indebted currency. The dollar remains in a secular bear market since 1971 when the Nixon administration effectively closed the gold standard. And since 1987, the dollar has plummeted more than 50% against the world’s hardest currencies. 

ETFs in Europe have boomed over the last six years. The Deutsche Borse Group in Frankfurt has emerged as the largest hub for exchange-traded-funds denominated in euros. Assets of German-listed ETFs have leapt 64% year-over-year through December 31, 2005, to ¤ 26.9 billion or US$31.9 billion. As of March 31, 2006 (latest data available), German ETF assets have grown a further 20% to ¤ 32.3 billion or US$39 billion. 

If an investor wants to play sectors, countries or even commodities, Frankfurt is by far the best and most liquid destination for exchange-traded products. A total of 117 ETFs now trade in Frankfurt—all denominated in euros.  As the U.S. dollar heads into the foreign currency basement once again this year versus most international units, indexing in non-dollar currencies continues to gain universal appeal among global investors. 

And Now Introducing the Dow Jones Global Titans 50 in Euros!
Listed in Frankfurt, the Dow Jones Global Titans 50 SM EX is denominated in the world’s second most liquid currency—the euro. 
For dollar-based investors seeking not only global diversification across undervalued multinationals, the Global Titans offers a truly ideal hedge in a fundamentally stronger currency. In the last U.S. dollar bear market from 2002 to 2004, the euro rallied a cumulative 45.5%. The next dollar decline should be similar, if not greater. 

With one global investment in Frankfurt, you get low fees, world-class blue-chip diversification, dividends, low p/e multiples, and a great long-term investment denominated in the euro. It’s time to buy large-caps in euros! 
Buy the Dow Jones Global Titans 50 at market in Frankfurt, Germany. The symbol is EX12. ISIN code: DE006289382. Please use the ISIN code for all trade executions. 

Visit the German Stock Exchange at http://deutsche-boerse.com and click “English” at the top right corner of the homepage. Once there, click “Private Investors” and then “Indices.” When you get to “Indices,” click “Funds” located at the top right corner of the page and scroll down for “Dow Jones Global Titans 50 SM EX.” 
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Eric Roseman is the Investment Director for The Sovereign Society as well as founder and editor of Global Mutual Fund Investor (GMFI), a monthly newsletter that highlights the world’s best managed offshore funds. Visit http://www.globalmutualfundinvestor.com. Eric Roseman also founded The Sovereign Society’s investment trading service, Commodity Trend Alert in 2001. Eric’s weekly newsletter, Commodity Trend Alert focuses on the best global commodity plays worldwide. For more information, visit http://www.commoditytrendalert.com.
 

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