Active Investment Managers A member of the FirstRand Group.
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Transcript of Active Investment Managers A member of the FirstRand Group.
Active Investment Managers
A member of the FirstRand Group
www.ashburton.comAshburton | A part of the FirstRand Group
Veronika Pechlaner, CFA
Investment Manager, Global equities
June 2012
Equity investing today - embracing global change
Section One
Implications of global change
3Ashburton | A part of the FirstRand Group
Equity investing today – embracing global change
Section Two
Our investment approach
Section Three
Current views
Ashburton | A part of the FirstRand Group 4
Global connectivity increases correlations
Source: Bofa Merrill Lynch Global Research
Correlation of weekly returns between major indexes
Note; Daily data from 26-May-95 to 22-May-12 for pairwise correlation between Inverted Dollar Index, S&P GS Commodity Index, MSCI World equity index, BofA Merrill Lynch US High Yield Master II Index
1 2 3
Ashburton | A part of the FirstRand Group 5
“BRICs” remain the world’s growth engine
Source: Ashburton survey of broker forecasts
Consensus estimates for regional GDP growth (%)
x3
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Ashburton | A part of the FirstRand Group 6
Developed government bonds not risk free
Source: Barclays Capital
1 2 3
Government debt levels as % of GDP in developed economies
Ashburton | A part of the FirstRand Group 7
Low yield for low risk the “new normal”?
Source: Bloomberg
1 2 3 Nominal 10yr government yields for major developed countries (%)
Ashburton | A part of the FirstRand Group 8
Nominal equity yields close to relative highs
Source: Bloomberg
1 2 3Equity dividend yield premia over 10yr government bonds (%)
Ashburton | A part of the FirstRand Group 9
Are long-term inflation expectations too low?
Source: Bloomberg
1 2 3Longer term US inflation expectations (Breakeven inflation rates)
Ashburton | A part of the FirstRand Group 10
Source: Factset, Ashburton
Commodity price curves not linear
P
Q
Chinese urban population increasingly consumes
Emerging demand still to rise 1 2 3
Ashburton | A part of the FirstRand Group 11
Source: CEIC, CRR, CSLA Research
Asian low-cost workbench to disappear
Chinese labour force aging Yoy wage inflation to continue
1 2 3
Ashburton | A part of the FirstRand Group 12
Higher inflation a politically acceptable route
Source: ECB, Eurostat, Berenberg projections
1 2 3
Note: Actual and Announced as per 22. May 2012
Ashburton | A part of the FirstRand Group 13
Preservation of capital or purchasing power?
August 13, 1979: Business Week proclaims “The Death of Equities”
1 2 3
Source: Merrill Lynch
Ashburton | A part of the FirstRand Group 14
1 2 3
Look for inflation protected yields in equities
Source: Bloomberg
+30%
Click to edit Master title style
Section Two
Our investment approach
Section One Section Three
Current views
Implications of global change
Equity investing today – embracing global change
Ashburton | A part of the FirstRand Group 15
Ashburton | A part of the FirstRand Group 16
Global equity offering
3
Actively managed, benchmark unconstrained
Diversified across regions incl. emerging exposure
Philosophy: identify companies well-positioned in attractive industries that benefit from global structural change
Process: consistent theme-led investment process with relative value based stock selection. “Thematic” GARP (growth at reasonable price) underpinned by quality (sustainably growing dividends).
Portfolio construction: combination of (i) medium-term thematic exposure; (ii) global relative investment opportunities
Relative return approach: aim to outperform MSCI World equity benchmark on 3-year rolling basis
Tracking error: 5-10%
1 2 3
Ashburton | A part of the FirstRand Group 17
Global equity philosophy
Benefit from structural change globally through diversified portfolio of equities in developed & emerging markets
Top-down roadmap driven by global macro- and fundamental industry trends
Bottom-up stock selection aims to exploit mispricing of value and growth opportunities in attractive industries
Approach allows for relative investment opportunities taking into account positioning in the industry, management quality and relative valuation
Acknowledge importance of sustainably growing dividends as component of total return over time
“Even the best management will find it difficult
to perform if the macro-environment or industry
is presenting disproportionate headwinds to its business.”
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Ashburton | A part of the FirstRand Group 18
Top down thematic views
GARP based bottom up analysis
Global equity investment process
Asset Allocation team & External industry experts
Management contact & External research input
1 2 3
Source: Ashburton
Ashburton | A part of the FirstRand Group 19
Global equity strategic roadmap
Recovering West
Evolving Themes
Integrated
E&P
Oil services
Clean & Green
Energy DeleveragingInnovationEmerging growth
Technology
Bio sciences
Consumer & Lifestyle
Commodities
Infrastructure & Real estate
Financial services
Stable Demand
Deleveraging consumer
Fundamental industry trends
Macro induced
Source: Ashburton
1 2 3
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In-house analytical tools to assess relative value
Qualitative profiling: Global industry positioning, management quality
Screening model: Ranks large universe of equities in each global sector according to a number of fundamental criteria
Quality (Profitability/capital efficiency/cash conversion/balance sheet) Growth (EPS growth) Value (P/B and earnings yield) Analyst earnings revisions (EPS change, Up/down revisions)
Cash return (CROCI) framework: In-depth stock analysis complemented by dividend yield and balance sheet considerations
Current valuation upside implied by forward excess cash returns Sustainable improvement of excess cash returns over time
Technical indicators to refine final investment decisions
1 2 3
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Portfolio construction
Source: Ashburton
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Ashburton | A part of the FirstRand Group 22
Medium-term themeApple (Technological innovation)
Source: Factset
1 2 3
Examples
Rationale: May 2011
Global leadership with strong mobile product offering with iPhone and iPad
Global rollout plans into China and product launches of iPhone 4S and ipad 3 expected for next 12 months
Risks associated with Steve Job’s health assumed to be widely discounted
Potential for earnings upside paired with reasonable valuation, strong balance sheet and potential for introduction of dividend
Ashburton | A part of the FirstRand Group 23
Medium-term themeDuerr (Emerging market automation exposure)
Source: Factset
1 2 3
Examples
Rationale: Nov 2011
German listed industrial midcap with global business mix
Globally leading supplier of high-tech car paint coating cabines
Exposure to emerging markets and positioned to benefit from increased need for automation given labour inflation
Following growth scare in summer of 2011 stock traded on 7x forward P/E despite outlook for stronger than expected order growth outlook
Strong management backed by family owners
Ashburton | A part of the FirstRand Group 24
Relative investment opportunity: ABI vs. global peers (US exposure at European multiples)
Source: Factset
1 2 3
Examples
Rationale: May 2011
Globally leading brewer with strong brands (Budweiser, Bud Light, Stella Artois, Beck’s), listed in Europe
Market leadership in US and Brazil with c. 70% of business from these two regions (vs. 11% exposure to Western Europe)
Leadership position allows for superior pricing power
Global leader status allows for consolidation opportunities and growing dividend potential
Relative valuation vs. staples in other regions attractive
Click to edit Master title style
Ashburton | A part of the FirstRand Group 25
Section Three
Current views
Section One Section Two
Our investment approach
Implications of global change
Equity investing today – embracing global change
Ashburton | A part of the FirstRand Group 26
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Global equity strategy views
Valuations support positive view on global equities medium-term, notwithstanding short-term volatility
Earnings-momentum crucial from here
Risks have not changed, but focus and timeline evolving European debt crisis Chinese growth US fiscal deficit Oil price shock
Ashburton | A part of the FirstRand Group 27
1 2 3
Expected returns favour equities & credit
*Assumes equity Earnings Yield is a reasonable representation of expected real return on equity; G4=weighted average of US, Japan, EU, UK; Cash and bond composites averaged by nominal GDP; Corporate yields deflated by 5yr market implied inflation rates (BarCap indices)
**EM govt local = GDP weighted average of real yields on 2020-2023 inflation-linked bonds in Brazil, Mexico, Korea, SA, Turkey, Poland, Thailand, Colombia.The EM US$ aggregate includes the same set of countries ex-Thailand.
Source: Bloomberg, Barclays Capital, MSCI, Ashburton
Ashburton | A part of the FirstRand Group 28
1 2 3
Valuations in some regions getting attractive
Historic range = 20-year to June 1, 2012Note: Diamond indicates current value relative to High/Low and Interquartile rangeSource: Factset, Ashburton
Ashburton | A part of the FirstRand Group 29
1 2 3
Earnings-momentum crucial from here
Source: Factset, Bloomberg, Ashburton
Consensus EPS growth (LHS) and implied forward PE/Growth ratio (RHS)
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1 2 3
Chinese tightening cycle over for now
Source: Bloomberg
China relative performance indexed vs. interest rates (%)
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1 2 3
Source: MSCI, Ashburton
We favour Emerging over Western exposure
Global equity positioning: Regions
Ashburton | A part of the FirstRand Group 32
Macro outlook to remain in focus
Recovering West
Evolving Themes
Integrated
E&P
Oil services
Clean & Green
Energy DeleveragingInnovationEmerging growth
Technology
Bio sciences
Consumer & Lifestyle
Commodities
Infrastructure & Real estate
Financial services
Stable Demand
Deleveraging consumer
Relative value analysis • Oil price• Vehicle miles• Nuclear (Japan)• Shale gas• Rig count • Day rates
• Loan growth• China property• Macau/HK retail• Swiss watch
exports• Shipping data
• Tablet demand• Semiconductor
cycle
• Credit market• Austerity programs• US unemployment & housing• US manufacturing “renaissance”
1 2 3
Source: Ashburton
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Appendix
Ashburton | A part of the FirstRand Group 34
Portfolio risk management tools
Market risk: Active management of cash levels and ability to use futures to reduce equity exposure to below 80% of the portfolio (in extraordinary circumstances)
Active risk to benchmark: Tracking error of 5-10% for relative equity mandates reflecting top-down thematic approach
Drawdown risk: Close monitoring of (relative) stop loss situations (15% absolute loss and/or relative underperformance vs. benchmark)
Liquidity risk: Minimum liquidity requirement with positions not to exceed a third of their average daily trading volumes
Monthly fund review meetings: Review by MD and CIO of risk adjusted performance, active positioning, drawdown situations & liquidity risk
DISCLAIMER – OFFSHORE ISLANDS
Ashburton (Jersey) Limited and Ashburton Fund Managers Limited are referred to in this context as ‘Ashburton’. This document does not constitute an offer or solicitation to any person in any jurisdiction in which Ashburton is not authorised or permitted to communicate with potential investors, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this document, and should be satisfied in doing so that there is no breach of local legislation or regulation. The information is intended solely for use by Ashburton clients or prospective clients, and should not be reproduced or distributed except via original recipients acting as professional intermediaries. This document is not for distribution in the United States.
Prospective investors should inform themselves and if need be take appropriate advice regarding applicable legal, taxation and exchange control regulations in countries of their citizenship, residence or domicile which may be relevant to the acquisition, holding, transfer, redemption or disposal of any investments herein solicited.
Any opinions expressed herein are those at the date this material is issued. Data, models and other statistics are sourced from our own records, unless otherwise stated herein. Ashburton believes that the information contained is from reliable sources, but we do not guarantee the relevance, accuracy or completeness thereof. Unless otherwise provided under Jersey law, Ashburton does not accept liability for irrelevant, inaccurate or incomplete information contained, or for the correctness of opinions expressed.
We caution that the value of investments and the income derived, may fluctuate and it is possible that an investor may incur losses, including a loss of the principal invested. Past performance is not generally indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.
Ashburton (Jersey) Limited (Company Registration No. 26087) and Ashburton Fund Managers Limited (Company Registration No. 48200) are regulated by the Jersey Financial Services Commission and have their registered offices at 17 Hilary Street, St
Helier, Jersey JE4 8SJ.