Finding Value: From Vegas to Macau, and Everywhere in Between John D. Hock, CFA Chief Investment...
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Transcript of Finding Value: From Vegas to Macau, and Everywhere in Between John D. Hock, CFA Chief Investment...
Finding Value: From Vegas to Macau, and Everywhere in Between
John D. Hock, CFAChief Investment OfficerAltrinsic Global Advisors
2
• Global equity boutique with offices in Greenwich, London, Sydney and Toronto
• Disciplined bottom-up fundamental intrinsic value process
• All-cap, all market, unconstrained in pursuit of investments
Ideas typically fall into two categories:Type 1: Undervalued higher-quality companies with more sustainable return on capital profilesType 2: Undervalued businesses in which profitability levels are depressed and/or are likely to improve
1As of 06/30/14; Based upon a representative fully discretionary account with the global mandate; data are presented as supplemental information to a full disclosure presentation found in the appendix.
25
50
75
Aug-00
Jun-03
Mar-0
6
Dec-0
8
Sep-11
Jun-14
Global Equity % Exposure to "Type 1 vs. Type 2 Stocks"1
Type 1
Type 2
Introduction to Altrinsic Global Advisors
0
2
4
Jul-
06
Nov
-07
Mar
-09
Jun
-10
Oct
-11
Feb
-13
Jun
-14
($T)
Fed Balance Sheet & Underlying Composition
Other Treasuries MBS
As of 06/30/14; Source: The Federal Reserve
Investment landscape
Aggressive monetary policies continue to be the primary driver of what has been a synchronized rise in risky assets.
3
Investment landscape
Rates near all-time low based upon any historical measure, including the Dutch 10-year bond yields going back to 1517.
Netherlands 10-yr Government Bond Yields
Source: Deutsche Bank, GFD 4
Investment landscape
• Share prices being led by the most speculative “theme” stocks in social media
• Bond markets being led by junk bonds and peripheral European sovereign debt
• Real estate is led by markets already in elevated territory• Contemporary art auctions are producing towering values
The $58 million Balloon Dog
Source: Christie’s/AP5
6
Source: Bloomberg and Sandler O’Neill
Note: 2014E represents actual YTD through 05/30/14 annualized.Source: Bloomberg and Sandler O’Neill + Partners
An increased focus on shareholder value creation and an acceleration of mergers and acquisition (M&A) activity are unlocking value as part of a theme that will likely persist.
Health care, financials, energy, technology and consumer/media holdings are best positioned to benefit.
Investment landscape
7
As of 06/30/14Source: Bloomberg
Post TechBubble Average
2.18
1.0
2.0
3.0
4.0
Jan-95
No
v-97
Aug-00
May-0
3
Feb-06
No
v-08
Sep-11
Jun-14
MSCI World Price to Book Ratio
2.7
2.2
1.5 1.5
1.2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
S&P500 MSCI World MSCI EM EuroStoxx Topix
Regional Price to Book Ratio
+10% +4% -17% -6% -9%Premium/Discount to long term average:
World equities
Close to long-term average but with big regional sector differences
8As of 06/30/14Source: Robert Shiller, http://www.econ.yale.edu/~shiller/data.htm
0
9
18
27
36
45
1881.0
1
1889.0
5
1897.0
9
1906.0
1
1914.0
5
1922.0
9
1931.0
1
1939.0
5
1947.0
9
1956.0
1
1964.0
5
1972.0
9
1981.0
1
1989.0
5
1997.0
9
2006.0
1
2014.0
5
U.S. Stock Market Cyclically Adjusted PE
CAPE Average Ave. (Period Adjusted)
Pre First World War Second World War, mid-century Post Berlin Wall
A longer-term perspective
An “Absolute Value” focus
QUALITY(i.e. ROE, ROIC sustainability)
VALU
EHIGH
LOW
LOW HIGH
Type 2 Companies Type 1 CompaniesUndervalued businesses in which profitability levels are depressed and/or are likely to improve.
Undervalued higher quality companies with more sustainable return on capital profiles.
“Efficient Frontier”
High-quality
blue-chip franchises
Diverse range of holdings across
industries
Japanese
holdings
Current positioning
9
OR?
Abenomics
10
11As of 08/31/14Source: Nomura, FactSet
Japan has had seven prime ministers in six years. Confidence in leadership has been rare in Japan, and Abe’s influence should not be underestimated. Abe’s average approval ratings are now the highest of any prime minister in 30 years.
0.5
1.0
1.5
2.0
2.5
3.0
Dec-9
4
Ap
r-96
Sep-9
7
Feb-9
9
Jul-0
0
Dec-0
1
May-0
3
Oct-0
4
Mar-0
6
Aug-0
7
Dec-0
8
May-1
0
Oct-1
1
Mar-1
3
Aug-1
4
Japan Topix Price-to-Book Ratio
Abe
No
da
Kan
Hato
yam
a
Aso
Fukud
a
Abe
Ko
izum
i
Mo
ri
Obuch
i
Hash
imoto
Mura
yam
a
Japan – can Abenomics work?
12
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Japan Nikkei Index Dividend Yield Japan 5-year Bond Yield
Is it different this time?
Have we heard it all before?
Bottom line – valuations reflect another false start
As of 05/31/14Source: FactSet
Japan – valuations reflect another false start
13
Investors don’t believe in a Japanese recovery
-20%
0%
20%
40%
60%
80%
100%
120%
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
Jul-
02
Jan
-04
Jul-
05
Jan
-07
Jul-
08
Jan
-10
Jul-
11
Jan
-13
Jul-
14
Japan Discount to MSCI World
Price to Book Basis (LHS)
Fwd PE Basis (RHS)
Source: FactSet, Bank of Japan, Nikkei
Japan – rising sun or false dawn?
Don’t underestimate the benefits of confidence in leadership
Japan – rising sun or false dawn?
14
But Japanese corporations appear to…
-12%
-8%
-4%
0%
4%
8%
12%
16%
Dec-8
4
Mar-91
Jun-9
7
Sep-0
3
Dec-0
9
Japan Lending Growth
Total Business
Highly Deflationary
Near 25-year High
Jun-1
4
0
30
60
90
Jun-1
1
Sep-1
1
Dec-1
1
Mar-1
2
Jun-1
2
Sep-1
2
Dec-1
2
Mar-1
3
Jun-1
3
Sep-1
3
Dec-1
3
Mar-1
4
Jun-1
4
Survey of 100 Japanese Corporate PresidentsCapex Expanding or Showing Signs of Expanding
(%)
Source: FactSet, Bank of Japan, Nikkei
15Preliminary as of 08/31/14, Source: MSCI World (Net) Index. Regional portfolio weights, based upon a representative fully discretionary account with the global mandate, are presented as supplemental information to a full disclosure presentation found in the appendix. The securities identified above are not necessarily held by Altrinsic Global Advisors, LLC for all client portfolios, and should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will be, profitable.
0
10
20
Japan Austr/NZ Other
% o
f Assets
Geographic Exposure
Altrinsic Global Equity MSCI World (Net) Index
Mitsubishi CorporationBank of YokohamaSumitomo Mitsui Trust HoldingsSMC Suzuki MotorMS&AD Insurance GroupSompo Japan Nipponkoa NintendoInpex Kyowa Hakko KirinMitsubishi UFJ Financial GroupTokio Marine Japan DisplayHitachi
Golden Agri Resources
Genpact
Bangkok Bank Cheung
Kong
Hyundai MotorKB FinancialSamsung
Asia-Pacific
Overweight Japan – value emerging in developing markets
Preliminary as of 08/31/14, Source: MSCI World (Net) Index. Regional portfolio weights, based upon a representative fully discretionary account with the global mandate, are presented as supplemental information to a full disclosure presentation found in the appendix. The securities identified above are not necessarily held by Altrinsic Global Advisors, LLC for all client portfolios, and should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will be, profitable.
Deutsche BörseWillis Group AONStandard Chartered
UnumPrudential Financial AllstateBrown & BrownIntercontinental Exchange
0
6
12
% o
f Assets
North America
0
4
8
% o
f Assets
Europe
Differentiated positioning in financials
Our greatest relative risk
Aggregate exposure gives a “false read” of underlying risks.
0
12
24
% o
f A
ss
ets
Financial Sector Exposure
Altrinsic Global Equity MSCI World (Net) Index
Financial Exposure by Region
16
Our greatest relative risk
Differentiated positioning in financials
Preliminary as of 08/31/14, Source: MSCI World (Net) Index. Regional portfolio weights, based upon a representative fully discretionary account with the global mandate, are presented as supplemental information to a full disclosure presentation found in the appendix. The securities identified above are not necessarily held by Altrinsic Global Advisors, LLC for all client portfolios, and should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will be, profitable.
Financial Exposure by Region
Aggregate exposure gives a “false read” of underlying risks.
Bank of Yokohama MS&AD Insurance Group Sompo Japan Nipponkoa Tokio MarineSumitomo Mitsui Trust HoldingsMitsubishi UFJ Financial Group
Bangkok BankSberbankKB Financial
0
12
24
% o
f A
ss
ets
Financial Sector Exposure
Altrinsic Global Equity MSCI World (Net) Index
0
4
8
% o
f Assets
Japan
0
2
4
% o
f Assets
Other
17
4
8
12
16
Feb-
02
Mar-
04
Ap
r-06
May-
08
Jun-
10
Jul-1
2
Aug-
14
European Bank Price to Forward Earnings Expectations
18
Structural challenges in Europe co-exist with a fragile political environment.
As of 08/31/14; Source: FactSet
As of 08/31/14; Source: FactSet
Capital Tangible
Equity/Assets
Liquidity Loan/
Deposit
U.S. 8.5% 86%
Japan 5.2% 72%
Europe 4.2% 128%
• Banks still pose a significant risk and valuations are at lofty levels
• Private loan growth constrained
• 12% unemployment still very high
As of 03/31/14; Source: Deutsche Bank, Bank of America Merrill Lynch, Citigroup, FactSet
5
10
15
20
25
30
35
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Assets
/Eq
uity
Much More Deleveraging Necessary in EuropeLeverage Ratio of European & U.S. Financial Sector
Europe
U.S.
Europe and its banks – value or trap?
19
“Innovative” Lending Growth“Traditional” Lending Growth
Total Social Financing
Economic developments in China have far-reaching implications
• Accounts for 40% of the world’s base metal consumption, 23% of agricultural crop consumption, 20% of non-renewable energy consumption
• Imports are 30% of GDP, an important contributor to the global economy
As of 06/30/14; Source: Bloomberg, CEIC.
China’s economy has been supported by credit and financial “innovation” – an unstable foundation.
0%
10%
20%
30%
40%
2000
2001
2003
2005
2007
2008
2010
2012
2014
Chinese Banking System Annual Lending Growth
China
As of 08/31/14. Based upon a representative fully discretionary account with the global mandate and presented as supplemental information to full disclosure presentation found in the appendix. The securities identified above are not necessarily held by Altrinsic Global Advisors, LLC for all client portfolios, and should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will be, profitable.
QUALITY (i.e. ROE, ROIC sustainability)
VALU
E
HIGH
LOW
LOW HIGH
“Efficient Frontier”
New buys during 2014
20
Preliminary as of 08/31/14, Source: MSCI World (Net) Index. Sector and regional portfolio weights, based upon a representative fully discretionary account with the global mandate, are presented as supplemental information to a full disclosure presentation found in the appendix. 1Based upon a representative fully discretionary account with the global mandate and presented as supplemental information to full disclosure presentation found in the appendix.
0
30
60
North America Latin America
% o
f A
ssets
AmericasGeographic & Sector Exposure
0 6 12
Telecom Svcs
Materials
Industrials
Healthcare
Cons. Staples
Utilities
Energy
Info. Tech.
Financials
Cons. Disc.
% of Assets
Altrinsic Global Equity MSCI World (Net) Index
0
15
30
Europe ex-UK
UK Emerging EMEA
% o
f A
ssets
EMEAGeographic & Sector Exposure
0 6 12
Info. Tech.Utilities
MaterialsCons. Disc.
IndustrialsTelecom Svcs
EnergyFinancials
Cons. StaplesHealthcare
% of Assets
Altrinsic Global Equity MSCI World (Net) Index
0
10
20
Japan Pacific ex-Japan
Emerging Asia
% o
f Ass
ets
Asia-PacificGeographic & Sector Exposure
0 3 6 9
Cons. StaplesTelecom Svcs
UtilitiesMaterials
EnergyHealthcare
Cons. Disc.Info. Tech.IndustrialsFinancials
% of Assets
Altrinsic Global Equity MSCI World (Net) Index
Portfolio risk exposure
21
22
Equity markets are at all-time highs, interest rates are near historical lows, credit spreads are historically tight, and the correlation among many assets is at high levels. A high degree of confidence is being bestowed on policymakers.
• Not a time to be greedy • Essential to evaluate symmetry of upside vs. downside payoff for individual stocks• Margin of safety in stock selection is as important as ever in this environment
At the aggregate level, global equities reflect fair value with large regional and sector differences. At the stock level, we see a growing source of new ideas with idiosyncratic characteristics and drivers.
Summary
Summary
23
From a risk perspective, we believe that portfolio market risk has come down while company-specific risk factors have increased.
• Emphasizing concentration within portfolio – number of holdings at low end of historical range. • Differentiated positioning:
– Financials: significantly underweight European banks, overweight Japanese financials– Overweight Japan with a domestic focus– Overweight health care companies (valuation, renewed focus on shareholder value, and
underappreciated innovation)– Embedded balance sheet strength– Blue-chip consumer franchises
Increased M&A activity coupled with greater management focus on shareholders’ interests to further unlock value in the portfolio.
24
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®CI Investments, the CI Investments design, are registered trademarks of CI Investments Inc. This communication is published by CI as a general source of information and is not intended to provide personal legal, accounting, investment or tax advice. Facts and data provided by CI and other sources are believed to be reliable when posted; however, CI cannot guarantee that they are accurate or complete or that they will be current at all times. CI and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this presentation.
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