Last week, I couldn’t believe what I was hearing when it was announced that the company that I considered as a benchmark for integrity was accused of cheating and manipulating emission controls in their engines.

The worst was that this was all true. Quoting the CEO of Volkswagen's US group "we totally screwed up!"

I felt like switching off the screen and going back home. Investing and trust go hand-in-hand and we had just witnessed one of the most reputable companies in the world fall to its knees after having deceived customers and shareholders alike.

When I start to consider whether a company is worth investing in, the first thing I look at, even before the financials, is the management team. Who are the people that are taking care of the company I am investing in? Most importantly can I trust them with my hard earned cash?

With people like Tim Cook at Apple, Howard Schultz at Starbucks or Michael O’Leary at Ryanair, I know that half of my work is done. All I have to worry about is getting my financial forecasts right. If I do that, I know I’ll be making money because these people have a track record of delivering on expectations.
Volkswagen won’t regain my trust in the short term. In the meantime, I am shifting my focus to other companies that continue to emphasize product excellence.

The following are my thoughts on these opportunities.

Are Volkswagen shares a buy?

Just because Volkswagen shares lost 50% of their value from the peak reached in March of this year, it does not make them a buy for the following reasons:

The first is a fear of the unknown. Apart from the size of the penalty for having lied about the emissions in the US, there is still uncertainty about how the company is going to handle the 11 million cars which have been sold to consumers with misleading emissions.

The second being lack of confidence in management.

The third is a negative hit on goodwill. How many consumers will shift to Volkswagen competitors due to losing faith in the brand?

For these reasons, I would avoid Volkswagen shares.

What should an investor switch into?

There are two companies in the same industry which I believe will deliver attractive returns in years to come. These two being BMW and Valeo.
BMW has been one of our conviction buys even before the Volkswagen event. Not only are we confident that the company could continue to deliver positive results in the years ahead but we also expect some customers to shift from Volkswagen to BMW.

Valeo is also an attractive stock to be looking at. We are forecasting an increase in demand for its products mainly due to our expectations of more stringent rules on emissions going forward.

Valeo has placed the reduction of emissions at the very heart of its strategy, with the goal of improving the energy efficiency of vehicles.

Should an investor reduce exposure to an auto ETF?

It depends on the allocation of Volkswagen in the ETF. For example, the ishares automobiles and parts has a 9% exposure to Volkswagen. My advice would be to move out of the ETF and into individual names like BMW, Valeo and Daimler.

Should I reduce exposure to the markets?

No. the recent sell-off in the markets due to the Volkswagen scandal has created attractive entry points. Going back to the drawing board and revising our valuation models, we are seeing that even if company delivers mediocre growth in sales and no improvement in margins (which is unlikely), there is still attractive upside from these levels.

In times like these we learn how important it is to have a portfolio which is well diversified. Having said this, in order to make up for some of the losses suffered in the short term, it would be a good idea to shift out of a market ETF and into conviction buys in order to generate a performance better than that of the market as we head towards the close of 2015.

I continue to remain confident that with quantitative easing in Europe, a strong growth rate in the US and other expansionary policies in China, the equity markets are set to benefit from an improvement in markets sentiment in the weeks ahead.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.