Post on 29-Jan-2015
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For professional use only – Not for Public distribution
May 2012
Europe: Finding value on our doorstep
Ben Ritchie CFA, Senior Investment ManagerAberdeen Asset Management
2
Aberdeen equity structure
Andrew McMenigallAnn DewarBruce Stout Cindy Rose
Ella-Kara BrownFionna RossGail McCullie
Jamie CummingJamie GovanJill Sneddon
Martin Connaghan Samantha Fitzpatrick
Stewart MethvenVictoria MacLean
Source: Aberdeen Asset Management, 31 Mar 12
Ben RitchieBertie Thomson
Charles LukeEdward BealIan Hewett
James LaingJonathan AllisonKurt CruickshankLaurent IngelbertLouise KernohanPhilip WebsterRodney WellsRomney Fox
Samantha BrownleeSanjeet Mangat
Yoojeong Oh
Douglas BurtnickFrancis RadanoHughes McLean
Jason KotikJoe McFadden
Qie ZhangRalph Bassett
Robert MattsonMichael Sayers
Peter Hand
LondonAndy Brown
Catriona EdmondGabriel SacksFiona ManningJoanne Irvine
Mubashira BukhariOsamu Yamagata
Stephen ParrSusan McDonaldWilliam Scholes
Peter Taylor
São PauloBrunella IsperNick Robinson
Eduardo Figueiredo
+
Pacific Basinin
SingaporeThailandMalaysia
Hong Kong
Adrian LimAndrew GillanChou Chong
Christopher WongMark Gordon-James
Flavia CheongJames ThomKristy Fong
Louis LuPruksa Iamthongthong
Gan Ai MeeThomas Reeves
David Smith
Andrew PrestonCamille Simeon
Chhai UngMark Daniels
Michelle LopezNatalie Tam
Robert Penaloza
Adithep VanabrikshaOrsen Karnburisudthi
Ratanawan Saengkitikomol
Bharat JoshiGerald Ambrose
Jalil RasheedAndrew San
Mohd Najman Md IsaJolynn Kek
Evan Cheah
Frank TianKathy Xu
Nicholas ChuiNicholas Yeo
Keita KubotaSandy LimYuki Meyer
Chief Investment Officer
Hugh Young
Anne Richards
Head of Equities
Stephen Docherty Jeremy Whitley Paul Atkinson Devan Kaloo Hugh Young Kwok Chem Yeh
Global UK/Europe US GEM Pacific Basin Japan
3
Investment process
• Use models
• Filter for mandate
• Refine weightings
• Compliance checks
Company visit note
Quality
Pass or fail?
Aberdeen universe
Price
Cheap or expensive?
Portfolio construction
Model c35 - 74 stocks
Risk controls
Potential revisit
Watchlist/review
Monitor
Step 1 Step 2 Step 3
4
An intensive programme of company meetings
Year No meetings
2011 734
2010 725
2009 720
2008 854
2007 917
2006 984
2005 884
2004 845
2003 700
2002 364
A typical equity manager spends much of their time visiting companies …
Source: Aberdeen Asset Management
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Why Aberdeen?
• Disciplined and robust investment process
• Stable and experienced team with culture of sharing and challenging ideas
• Proprietary research/visit note conducted by the Fund Manager
• High conviction portfolios; c35 – 50 holdings
• We don’t own companies we don’t like, regardless of benchmark weight
• Invest for the long term; accept periods of short term underperformance
Buy-and-hold approach, with low turnover, we are true company stakeholders
UK Equity Income
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Dividends – a key component of returns
• Dividends and their reinvestment represent a significant proportion of total returns
• A touchstone that indicates the strength of a company
• They encourage a disciplined and long-term approach
Original Artist - Reproduction rights obtained from www.CartoonStock.com
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Quality is key to a sustainable and growing dividend
Dividend and company analysis are intertwined
Shareholder distributions are the output of a business model
Key issues:
• Attractiveness of the industry over the long term
• Can the company maintain or improve its competitive position
• Cyclicality – peak to trough profitability
• Operational leverage – translation of changes in sales to profits
• Cash flow dynamics – working capital cycle/capital requirements
• Strength of the balance sheet
• Management’s attitude towards distribution to shareholders
• Other stakeholders’ interests
Business Prospects
Financing
Management/Governance
Good quality companies can sustain and grow their dividends over the long term
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Relative attractiveness of dividend prospects
• A combination of quality and valuation analysis
• The absolute/relative level and sustainability of the initial yield
• The long term prospects for sustainable growth in the dividend
Initial YieldLong Term Dividend Growth
TotalIncome Return=+
Sustainability and growth are critical but often overlooked
10
The significance of reinvesting dividends
• Reinvested dividends have been the dominant contributor to long term returns
• High initial yields seem attractive but are they sustainable?
• What are the long term prospects for dividend growth?
“Those who understand compound interest are destined to collect it. Those who don’t are doomed to pay it”
Albert Einstein
US: total return 10.1% pa UK: total return 10.1% pa US: capital gain 5.4% pa UK: capital gain 5.1% pa
0
1
10
100
1,000
10,000
100,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Index value (start -1900 = 1.0; log scale)
Start of the year
16,797
16,160
198149
Source: Triumph of the Optimists, Elroy Dimson, Paul Marsh and Mike Stauton, Princeton University Press, 2002, p.145 as referenced in “The High Dividend Yield Return Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with Attractive Returns Over Long Measurement Periods”, Tweedy, Browne Fund Inc
FY 2012 forecast top 20 income producers
• Confident that our holdings can fulfil their dividend commitments
• We also employ a limited option writing programme, with options typically between 5 -10% out of the money with a 1 - 2 month duration to generate a small additional diversified income stream
Forecast revenue%
Vodafone 9.5
Centrica 6.6
Royal Dutch Shell 6.6
GlaxoSmithKline 6.4
British American Tobacco 6.3
AstraZeneca 5.6
HSBC 5.1
Unilever 4.3
National Grid 4.2
Aviva 3.9
Total 58.5
Forecast revenue%
BP 3.8
Tesco 3.7
BHP Billiton 3.1
Prudential 2.9
Pearson 2.6
Wm Morrison 2.1
Dunedin Smaller Companies 2.1
Standard Chartered 1.9
Compass 1.4
Provident Financial 1.4
Total 83.5
Source: Equities only, Aberdeen Asset Managers, Apr 12. The above securities have been included for illustrative purposes only 11
Ten largest portfolio investments and revenue split
Source: latest full year available data, Bloomberg and Aberdeen Asset Managers, Apr 12. The above securities have been included for illustrative purposes only
Investment Assets%
UK%
Europe%
US%
Rest of the world %
Royal Dutch Shell 5.7 10 27 21 52
British American Tobacco 5.7 2 35 5 59
Centrica 5.5 71 3 26 0
Vodafone 5.0 8 40 28 24
Unilever 4.8 6 21 21 42
GlaxoSmithKline 4.8 7 26 36 31
HSBC 4.7 15 33 18 34
BHP Billiton 4.2 3 16 11 71
Prudential 3.8 26 0 48 26
BP 3.6 22 23 34 21
• A diversified mix of well-known, good quality companies
• Portfolio provides access to attractive growth opportunities overseas with experienced management teams and strong corporate governance within a first-class legal framework
12
0
2
4
6
8
10
12
14
16
18
20
Gilt Yield
Dividend Yield
Relative to bonds UK equities look cheap
Source: Citigroup, Apr 12
%
13
1982 1986 1990 1994 1998 2002 2006 20100
10
20
30
40
50
60
70
80
90
Number of FTSE 100 Stocks Yielding More than UK Bond Yields
Market expectations for dividend growth remain progressive
UK dividend growth
Source: Citigroup, Apr 12
%
14
Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12-20
-15
-10
-5
0
5
10
15
20
2009 - Div Growth 2010 - Div Growth 2011 - Div Growth 2012 - Div Growth 2013 - Div Growth
Payout ratios are low
UK payout ratio
Source: Citigroup, Mar 12
1965 1970 1975 1980 1985 1990 1995 2000 2005 201030
40
50
60
70
80
90
UK Payout Ratio
15
UK – Net Debt to EBITDA (x)
Company balance sheets are strong
Source: Citigroup, Feb 12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Mega Caps Large ex Mega Mid Caps
Forecasts
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The attractions of investing in Continental Europe
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Euro Crisis – Spanish and Italian 10y spreads, 2009 - now
ECB support reduced bond yields in Spain and Italy but the underlying problems persist
• Can over-indebted sovereigns complete fiscal rebalancing?
• Policies resulting in subdued growth
• With risk of further recession … and a bigger debt problem
• Against this the ECB role remains uncertain
Source: Datastream, CIRA, Citi, 12 Apr 12
Italy spreads vs bunds (bps) Spain spreads vs bunds (bps)
Apr 12Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12
0
100
200
300
400
500
600
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Continental European equity markets are attractive
• A highly liquid market with a very wide range of potential investments
• Well-known larger companies with strong global franchises
• World-class mid-sized companies with excellent prospects for growth
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European companies have many competitive advantages
• Intellectual property – highly developed in Europe due to early industrialisation. Often protected by internationally recognised patents and strong brands
• Experience of operating abroad – a legacy of empire and a small landmass that forced companies to be international from the outset.
• Skilled human capital – a function of developed education systems and specialist knowledge
• Strong corporate governance – companies operate within boundaries that protect the rights of shareholders
• Robust legal frameworks – ownership of physical and intellectual property is respected and maintained as a result of sophisticated and independent legal systems
Our companies enjoy market-leading positions with strongcompetitive advantages
21
Corporate balance sheets in good shape
European Net Debt/Equity (ex-financials)
Source: UBS European Market Map, aggregation with 475 stocks, as at 1 Nov 11
2004 2005 2006 2007 2008 2009 2010 2011 2012E30%
40%
50%
60%
70%
80%
• Downside protection
• Underpins valuations
• Gives optionality – expansion / M&A / dividends
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Valuations are cheap on a historical basis
MSCI Europe – FY12E Price to earnings (latest = 10.3)
Source: MSCI, IBES, Morgan Stanley Research, 5 Apr 12
N12M PE Average
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
5
10
15
20
25
30
X
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Valuations low relative to other regions
P/E 2012E by region P/B 2012E by region
Emerging World
Japan
USA
AC World
UK
Europe ex UK
0 2 4 6 8 10 12 14 16 18 20
PE 2012
Emerging World
USA
AC World
UK
Europe ex UK
Japan
0.0 0.5 1.0 1.5 2.0 2.5 3.0
P/B 2012
Source: Factset, 19 April 2012 Source: Factset, 19 April 2012
Dividends are attractive as well
Geographic dividend yields
Source: Citigroup, Feb 12
Eur ex UK
UK
Asia Pac ex Jap
LatAm
AC World
Japan
USA
0 1 2 3 4 5 6
DY 2012E
24
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Outlook
• Stock markets have rallied strongly at the start of 2012 Central bank interventions have averted a systemic collapse of the European banking system
• New governments across the Eurozone have shown willingness to embark on austerity and consider structural supply side reforms
• The United States economy has (once again) begun to show signs of life and employment and housing data has been improving
BUT
• Western world faces years of deleveraging at both a government and consumer level
• Political and social implications remain highly uncertain
• Long term impact of ultra low interest rates and aggressive currency management as yet unknown
• Emerging market economies offer higher growth but also face economic management challenges
• Earnings upgrades yet to follow the market rise
26
Conclusion
• The global economy will remain sluggish at best
• Prospect for dividend growth better than for earnings
• Structural growth will remain at a premium
• Good value available on a selective basis
• Companies with strong business models, pricing power and robust balance sheets to prosper
• Cash returns to shareholders likely to remain a key yardstick of value
• Equity markets to remain challenging
Economic uncertainty has created opportunities for selective long term investors
Appendix
28
UK/Europe equity team
Team members Role Based Years in industry Years at Aberdeen*
Jeremy Whitley Head of UK & European Equities Edinburgh 24 16
James Laing Deputy Head of UK & European Equities Edinburgh/London 18 11
Charles Luke Senior Investment Manager London 14 12
Ed Beal Senior Investment Manager Edinburgh 11 11
Ben Ritchie Senior Investment Manager Edinburgh 9 9
Bertie Thomson Senior Investment Manager London 9 9
Philip Webster Investment Manager London 14 8
Romney Fox Investment Manager London 6 6
Rodney Wells Investment Manager London 13 12
Louise Kernohan Investment Manager London 7 7
Jonathan Allison Investment Manager Edinburgh 9 7
Yoojeong Oh Investment Manager London 8 6
Sanjeet Mangat Assistant Investment Manager London 4 4
Ian Hewett Assistant Investment Manager London 4 4
Kurt Cruickshank Assistant Investment Manager Edinburgh 3 3
Samantha Brownlee Investment Analyst London 3 3
Laurent Inglebert Investment Analyst Paris 9 4
* Or acquired companySource: Aberdeen Asset Management, 31 Mar 12
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Performance summary
EUR Annualised (%)
31 Mar 12 3 months 1 year 3 years 5 years
European Equity Fund 8.65 -4.05 17.49 0.45
FTSE World – Europe (ex UK) 9.84 -11.38 12.31 0.09
Outperformance -1.19 +7.33 +5.18 +0.36
Quartile 4 1 1 3
Total return, gross of fees, EUR/GBPSource: Aberdeen Asset Management
GBP Annualised (%)
31 Mar 12 3 months 1 year 3 years 5 years
UK Equity Income Fund 4.36 6.21 23.59 2.29
FTSE All-Share 6.11 1.39 18.83 1.82
Outperformance -1.75 +4.82 +4.76 +0.47
Quartile 4 2 1 2
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Investors should be aware that past performance is not a guide to future returns, the value of investments and the income from them can fall as well as rise and investors may get back less than the amount invested
The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by professional customers/eligible counterparties (ECPs) and not the general public. The information is being given only to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of AAM
The information contained herein including any expressions of opinion or forecast have been obtained from or is based upon sources believed by us to be reliable but is not guaranteed as to the accuracy or completeness
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Services Authority in the United Kingdom
Not for public distributionFor professional use only