Citywire montreux presentation final
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2011 – The year for developed markets
Cazenove Pan Europe FundSteve Cordell
For professional advisers only
- 1 -
Source: Lipper, from 2 January 2003 to 31 March 2011.
A diversified risk approach to beating the European Equity market
•“Right blend of attributes to suit long term investors.”
• Manager’s record since inception
-8
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12
• Relative performance (Ann)
Tracking error (Ann)
Median tracking
error of 5.07
Median return
of -2.34
Information
ratio of 0.5x
Lipper Offshore Funds – European
Cazenove Pan European B Dis EUR
Information Ratio
No permanent
style bias
Highly
rated
AAA
Manager’s record
Diversified up to 90 large/mid cap
stocks
Strong risk adjusted
record
Ideal core holding
within portfolio
construction
Pragmatic approach to
sector/stock selection
- 2 -
Absolute 3 year record of European Fund Sector Vs Market Risk
Lipper UK Offshore European Sector 3 Year Performance and Beta
-15
-10
-5
0
5
10
15
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Beta
Absolute Perform
ance (Ann)
Lipper Offshore - European
Cazenove Pan Europe B Dis EUR
FTSE Europe TR EUR
Source: Lipper. 31st March 2011
- 3 -
Risk assets have rewarded investors
Cazenove Pan Europe Performance relative to FTSE Europe and Fund Beta
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
Apr-0
6
May-06
Jun-06
Jul-0
6
Aug-06
Sep-06
Oct-0
6
Nov-06
Dec-06
Jan-07
Feb-07
Mar-0
7
Apr-0
7
May-07
Jun-07
Jul-0
7
Aug-07
Sep-07
Oct-0
7
Nov-07
Dec-07
Jan-08
Feb-08
Mar-0
8
Apr-0
8
May-08
Jun-08
Jul-0
8
Aug-08
Sep-08
Oct-0
8
Nov-08
Dec-08
Jan-09
Feb-09
Mar-0
9
Apr-0
9
May-09
Jun-09
Jul-0
9
Aug-09
Sep-09
Oct-0
9
Nov-09
Dec-09
Jan-10
Feb-10
Mar-1
0
Apr-1
0
May-10
Jun-10
Jul-1
0
Aug-10
Sep-10
Oct-1
0
Nov-10
Dec-10
Jan-11
Feb-11
Mar-1
1
Rel Perf (%)
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
Beta
Cazenove Pan Europe Beta
Source: Lipper. 31st March 2011
- 4 -
• Analyse sensitivity of companies’ earnings streams to business cycle
• Use leading indicators to assess where we are in the business cycle
• The beta of the portfolio should therefore change through the different phases of the cycle
• Stock selection will usually be the key driver of return except at turning points in the cycle
• Stock returns will be dominated by Beta or Alpha factors throughout the cycle
Business cycle – A pragmatic approach
GDP trend growth
Beta dominates
Beta dominates
Beta dominates
Alpha
dom
inat
es
Alpha dominates
Recovery Expansion Slowdown Recession
- 5 -
Business cycle approach
• Stocks in market sector are not homogenous. They do not necessarily help us determine the behaviour of these stocks within the cycle.
• Assess the correlation and drivers of stocks and allocate them to seven style groupings:
• Pragmatic approach combining top-down macro view with earnings based security selection
• Avoid permanent style / size bias
• Demand for products and services changes throughout the business cycle
• Operational gearing of companies impacts profitability of companies
“Designed to deliver consistent performance”
Commodity Cyclicals Growth Financials Growth Defensives
Consumer Cyclicals Value Defensives
Industrial Cyclicals
HIGH BETA LOW BETA
- 6 -
Riding the business cycle
• Style grouping exposure driven by business cycle strategy
• Avoidance of permanent style bias is key
Industrial
Cyclicals
Growth
Defensives
Value
Defensives
Consumer
Cyclicals
Commodity
Cyclicals
Financials
Growth
Style
Groupings
Recession
αααα ββββRecoveryExpansion
Slowdown
GDP
Growth
- 7 -
11/4/11
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
0
50
100
150
200
250
300
Nestle relative to FTSE Europe Thyssenkrupp relative to FTSE Europe
Source: Thomson Datastream
Business Cycles Matter
Source: Datastream 11 April 2011
Stock: NestléSector: FoodStyle: Value Defensive
Stock: ThyssenkruppSector: SteelStyle: Industrial Cyclical
- 8 -
60
70
80
90
100
110
120
130
140
2006 2007 2008 2009 2010 2011
Weakening earnings revisions favour compounding growth
Source: Thomson Datastream. 30th April 2011
Novartis – Relative performance Campari – Relative performance
Publicis – Relative performance Bayer – Relative performance
80
90
100
110
120
130
140
150
160
170
180
2006 2007 2008 2009 2010 2011
60
70
80
90
100
110
120
130
140
150
160
2006 2007 2008 2009 2010 2011
80
100
120
140
160
180
200
220
2006 2007 2008 2009 2010 2011
- 9 -
10
20
30
40
50
60
70
2001 2003 2005 2007 2009 2011
Headline Index New Orders
20
25
30
35
40
45
50
55
60
65
70
1996 1999 2002 2005 2008 2011
Headline Index New Orders
30
35
40
45
50
55
60
65
70
1992 1995 1998 2001 2004 2007 2010
Headline Index New Orders
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2005 2010
Manufacturing PMI New Orders
How we determine turning points (1)
UK Markit Manufacturing PMI
Source: Markit & Thomson Datastream. 30th April 2011
US ISM Manufacturing PMI
Japan Markit Manufacturing PMIGermany Markit Manufacturing PMI
- 10 -
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1973 1978 1983 1988 1993 1998 2003 2008
Trend annual growth rate (real): 3.4%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1973 1978 1983 1988 1993 1998 2003 2008
Trend earnings growth rate (real): 3.3%
How we determine turning points (2)
Source: Thomson Datastream. 4th May 2011
UK Non-financial Trend Earnings (real) Eurozone Non-financial Trend Earnings (real)
US Non-financial Trend Earnings (real) Japan Non-financial Trend Earnings (real)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Trend annual growth rate (real): 2.2%
0.00
0.05
0.10
0.15
0.20
0.25
1973 1978 1983 1988 1993 1998 2003 2008
Trend annual growth rate (real): 1.8%
- 11 -
Why the ISM matters to the market
European sector correlation with ISMCyclicals have moved in line with the ISM new orders index…
Source: Thomson Reuters Credit Suisse research
- 12 -
Q1 2011 – Two Business Cycles
• Manufacturing surveys have peaked in Q1, following a post Jackson Hole reacceleration.
• The contrast between the booming global manufacturing cycle and the limping, credit constrained Western consumer is astonishing.
• The global manufacturing cycle has classic late cycle characteristics while Western domestic demand is badly lagging.
Booming global manufacturing Constrained domestic consumption
Source: Morgan Stanley
- 13 -
Q1 2011 – Two Profit Cycles
• Those sectors operationally levered to global growth have seen a super-fast recovery back to pre-crisis profitability. Valuations have
expanded but not as quickly as profits.
• Meanwhile sectors geared to domestic growth have seen little recovery in profitability, which in turn has hindered valuation
recovery from depressed levels.
• Looking forward we expect the profit momentum of the former to slow sharply over the coming 6 months as the growth-inflation
trade-off continues to worsen.
Profit cycle and long-term trend P/E of Global Growth
Sectors in Europe Profit cycle and long-term trend P/E of Domestic value
sectors in Europe
Source: Cheuvreux
- 14 -
Q1 2011 – Margin cycles
Source: Cheuvreux, Morgan Stanley
All-time high margins Productivity peaked
World consumer price inflation
• There has been a massive transfer of earnings from labour to commodities and capital. 100% of the national income improvement
in the US in the first year of recovery accrued to companies.
• The loss of earnings momentum in the winners of 2009-10 is simple economics. The large output gap created in 2008 meant
inflation in 2009/10 was “good”.
• All the evidence now indicates that this inflation is now leading to a deteriorating terms of trade for corporates, not just
households. 2011 inflation is “bad”.
Margin pressure – The difference in net revisions for
sales and earnings growth in Europe & US.
- 15 -
Outlook the end of QE2?
• An important rule in economics is to be wary of spurious correlations. Did QE cause the rally in the S&P? Did it even cause the
recovery in payrolls? It is not clear since all of the Fed’s bigger balance sheet is sitting in bank excess reserves.
• If QE2 was a $600bn placebo, should we fear a withdrawal?
• The market will fret about the withdrawal of extreme policy in Q2.
• End of momentum trade for risk assets?
So QE did it…… ….or did it?
Source: Morgan Stanley
- 16 -
A final word or two on the Euro crisis
• Global reflation and caja reform in Spain has drawn a line in the sand and ensured the PIG moniker is singular, not plural.
• A key test for the market’s new found confidence on Spain will come if private capital can be persuaded to recapitalise the caja
sector instead of the full burden falling on the FROB.
• Given the extremely low valuations in the periphery, the secular bear market is over for this cycle.
10 year spreads Banks relative to Stoxx 600
Source: Thomson Datastream. 4th May 2011
0
2
4
6
8
10
12
14
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11
%
Greece Ireland Portugal Spain
70
75
80
85
90
95
100
105
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11
- 17 -
This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitute
an offer to enter into any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein.
This document is solely for the use of professional intermediaries and is not for general public distribution.
The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable
law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove
Capital or connected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or any
recommendations expressed herein which, moreover, are subject to change without notice.
This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view. Unless
otherwise stated all views are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission of
Cazenove Capital Management and to the extent that it is passed on, care must be taken to ensure this is in the form which accurately reflects the
information given here. Unless otherwise indicated, the source for all data is Cazenove Capital.
Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as
well as up and an investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates.
Cazenove Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove
Investment Fund Management Limited (registered No. 2134680) each authorised and regulated by the Financial Services Authority and of 12
Moorgate London EC2R 6DA provide investment products and services.
Regulatory information and risk warnings