The cautionary tale of Volkswagen

Thursday, October 08, 2015

Volkswagen – Is there a better case for portfolio diversification? Is your investment portfolio adequately diversified to avoid unexpected risks? Angus Dockrill, IMFG Wealth Specialist, takes a closer look.

My first memories as a youngster are of being driven around the streets of Tamworth, Country Music Capital of Australia, in my Mum’s Volkswagen Beetle.  It was the 1970’s and life was simple.  Mum’s VW Beetle, or ‘Bug’, was off white in colour with orange leatherette seats.  The suspension was stiff with no power steering and the sound of the engine, emanating from the boot, has since been described as similar to that of an ‘out of sorts’ lawnmower.  You could occasionally smell fuel in the back seat. I loved it. 

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Global brand, premium product, efficient supply chain - great investment, right?

In an increasingly open and global economy it would be easy to have built a case to invest in the Volkswagen Group over the years. Many investors have. Volkswagen Group has been named the:

  • 8th largest company in the world by Fortune 500 [i];
  • Competes with Toyota as the world’s largest car manufacturer, and;
  • 67th most valuable brand in the world as determined by Forbes [ii].  

In the 40 years since my Mum’s Bug was cruising the streets, Volkswagen (‘VW’) have expanded their product range to other cars, including the popular VW Golf, across more than 150 countries.  Interestingly, VW Group now owns other premium car brands including Bentley, Bugatti, Lamborghini, Audi, Porsche, SEAT, Skoda and Ducati motorcycles. By all accounts the products and process VW employ in getting vehicles to market has long been considered first class. It has been a staple investment for many in the global investment community.

That was until recently, when it was announced VW had installed a ‘defeat device’ software code in diesel models sold from 2009 to 2015 which effectively hides the level of emissions on what is estimated to affect around 11 million cars worldwide.  The share price has crashed falling more than 20% in the few days following the initial news. The VW Group share price has fallen more than 50% over the last 6 months, which is significantly more than markets. 

My car loving mates tell me you lose around 20% of your car’s value when you drive the new car out of the showroom.  The share price has halved. Who knew buying a new Porsche would be a better investment than buying a share in the manufacturer?

CHART: Share price of Volkswagen Group over the 6 months to 7 October 2015 (blue) compared with the DAX, Dow Jones, Nasdaq and S&P 500 indices.

During the same period that the VW Group share price has halved the S&P500 Index has fallen around 6% and the German DAX Index has fallen around 16%.

Challenge your (pre-conceived) views on what is a good investment

If ever there was a case for diversification in your investment portfolio, this is it.

Had you invested a significant amount of your capital in this leading company - considered a ‘blue chip’ by many - your financial health would now be compromised. And the trigger for what could be significant destruction of wealth has been unexpected and almost unbelievable.

Who would have thought that such a large and respected car manufacturer with a rich and long history would put so much at risk? Particularly on the increasingly important issue of emissions. Incredulously, this breach of trust and presumed short-sighted focus on profit over the future has happened during a period where VW have been investing in lower emissions vehicles including Hybrid vehicles and Electric vehicles[iii] and new competitors, like Tesla, are emerging.   

Why VW reminds us of the benefits of diversification

We see too many investors, particularly here in Australia, who do not practice smart diversification and are exposed to risks that may not reward them.  How many Australian investors’ portfolios are exposed to only a handful of ‘blue chip’ ASX-listed companies? What would be the impact on your financial future if one or more of BHP, CBA, Woolworths or their competitors experienced something as negative and unexpected as what VW Group shareholders are currently enduring? Some would argue that these shareholders are already sharing some of the pain associated with a lack of diversification, with all three businesses falling significantly in recent months.

Diversification reduces your exposure to those random and unpredictable forces that can wash away your investment returns. Smart diversification in your investment portfolio:

  • Helps you capture what investment markets offer
  • Reduces risks that have little or no expected return
  • May prevent you from missing opportunities
  • Smooths out some of the bumps
  • Helps take the guesswork out of investing

“Diversification is your buddy” – Merton Miller, Nobel Laureate

In uncertain times, we trust the market.  We just don’t believe in concentrating too much of your wealth in only a few companies, industries or countries. What risks are you taking? And how do you know you will be rewarded? It pays to take a closer look. Your future self will thank you for it.

 

ABOUT THE AUTHOR:

Angus Dockrill is a professional Financial Adviser for successful people and their families in the Sydney area.  

IMFG is a financial services business with a difference. Our clients are supported by a team of specialists, not generalists. We believe that the most successful people have their financial house organised within an elegantly simply framework aligned with their dreams, vision, values and goals.

[i] Source: Fortune 500, as published on 22 July 2015.

[ii] Source: http://www.forbes.com/companies/volkswagen-group/

[iii] Volkswagen Group first implemented environmental goals in 1996. Source: Wikipedia

Identity McIntyre Pty Ltd and its specialist financial advisers Scott Douglas, Angus Dockrill, Dan Blatch are authorised representatives of Apogee Financial Planning Limited, Australian Financial Services Licensee Registered Office at: 105 - 153 Miller Street North Sydney NSW 2060. These representatives are trading as IMFG.

This article is intended to provide general information only and has been prepared without taking into account any particular person's objectives, financial situation or needs. Persons should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend persons obtain financial advice specific to their situation before making any decision regarding a financial product or decision.

 

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