SKAGEN Global Opportunities in Global Markets · Lev & Gu (2016), Man Institute, SKAGEN 22 Annual...
Transcript of SKAGEN Global Opportunities in Global Markets · Lev & Gu (2016), Man Institute, SKAGEN 22 Annual...
SKAGEN Global
Opportunities in Global MarketsJanuary 2020
2
Source: blog.usejournal.com
Sisyphus
3
2010 – 2019
Let's review the past 10 years
4
TBD
2010. Greece debt crisis
Source: fearlessprediction.blogspot.com
5
2011. US loses AAA credit-rating
Source: CBS News
6
Source: positivemoney.edu
2012. Eurozone breakup crisis
7
2013. The Fragile Five
Source: cnbc.com, The Civil Joint
8
2014. Oil price collapse
Source: priceofoil.org
9
2015. China stock market crash
Source: fifthperson.com
10
2016. Donald Trump elected
Source: cnn.com
11
2017. Euphoria
Source: marketwatch.comNote: MSCI AC World +25% TSR (USD) in 2017 (Bloomberg)
12
2018. Nasdaq falls 20% in Q4
Source: www.reuters.com
13
Source: washingtonpost.com
2019. Recession fears
14
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Total Return (%)
USD DKK NOK SEK
Global equities 10-yr total return
Source: Bloomberg, SKAGEN
146%
215%221%
273%
MSCI AC World (2010 - 2019)
15
2020 – 2029Source: aljanh.net
Navigating the next 10 years
16
1. Intangible assets
2. Index mis-classifications
3. ESG transitions
Opportunity for active investors
Areas where active managers can thrive among passive competitors
17
Source: Morningstar as at 31 Oct 2019, SKAGEN
Passive larger than active (US)
0 %
25 %
50 %
75 %
100 %
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
US Equity Fund Assets: % in Active vs. Passive*
Passive Active
US active equity funds AUM = 4.34 trillion
(49.3%)
(50.7%)
US passive equity funds AUM = 4.46 trillion
* SKAGEN best estimate from Morningstar graphs
50%
18
SKAGEN Global
Intangible Assets
19
Source: Ocean Tomo, muawia.com, networkworld.com
2. Capex going digital, not physical (“E” in P/E )
1. Intangible assets becoming main source of value creation (“B” in P/B less relevant)
3. Market efficiency to identify broken business models rapidly accelerating
Tomorrow's value investing will likely require more dynamic thinking
Traditional multiples obsolete?
20
Intangible Assets
Network effects
Brand equity
R&D
Sanctioned oligopoly
Patents
Culture
Intangibles to shape the 2020s
21
The rise of intangible assets
4%
6%
8%
10%
12%
14%
16%
Investment in Intangible Assets vs. Tangible Assets(US private sector investments by type relative to gross value added)
Tangible investment rate Intangible investment rateSource: Carol Corrado, Charles Hulten, and Daniel Sichel, Lev & Gu (2016), Man Institute, SKAGEN
22
Annual spend on brand building: €7 bn
Intangible assets on B/S: €7 bn*Total R&D spend over 10 years: $3.5 bn
Intangible assets on B/S: $1.5 bn*
Total R&D spend over 10 years: $99 bn
Intangible assets on B/S: $1.5 bn* Intangible assets on B/S: $3 bn*Total R&D spend over 20 years: $60+ bn
Source: Bloomberg, company 10k, marketingweek.com
* = ex-goodwill for FY2018 or most recently completed accounting period
Accounting not reflecting reality
23
Source: nike.com, interbrand.com, Bloomberg as per 2019 H1
Accounting Value(2019 Annual Report)
Interbrand’s Value(2019 Best Global Brands Report)
$283 million? $32 billion?Market cap: ~$130 billion
Forward P/B: 12.8x(2019 H1)
Case study: NIKE
24
2019200919991990**
1.2.
3.
4.
5.
6.
7.
8.
9.
10.
1.2.
3.
4.
5.
6.
7.
8.
9.
10.
1.2.
3.
4.
5.
6.
7.
8.
9.
10.
1.2.
3.
4.
5.
6.
7.
8.
9.
10.* Measured by market cap (USD) in MSCI AC World as per November each calendar year** S&P 500 Source: Bloomberg
10 largest global public firms*
2029
1.2.
3.
4.
5.
6.
7.
8.
9.
10.
?
25
This trend looks set to continue
0 %
20 %
40 %
60 %
80 %
100 %
1980 1985 1990 1995 2000 2005 2010 2015
Distribution of R&D Spend by Sector in the US(1980-2015)
Source: Credit Suisse, SKAGEN
Telecom
Information Technology
Healthcare
Consumer StaplesConsumer DiscretionaryIndustrialsMaterialsEnergy
26
SKAGEN Global
Index mis-classifications
Sou
rce:
cla
ssia
rius.
net
27
S&P 500 index: then vs. now1957 1976 2001 2016 2019
28
Source: Siegel “The Long Term Returns on the Original S&P 500 Firms,” (with Jeremy Schwartz), Financial Analysts Journal, v. 61 (1), January/February 2006. pp. 18-31, WSJ (September 2016), Bloomberg, SKAGEN
S&P 500 index: then vs. now
5
10
85
Rails
Utilities
Industrials
2
6
7
86
Transporation
Financials
Utilities
Industrials
3
3
6
6
8
11
13
14
18
18
Materials
Utilities
Telecom
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
Health care
Financials
InformationTechnology
3
3
3
3
7
10
10
13
13
15
21
Telecom
Materials
Real Estate
Utilities
Energy
Industrials
ConsumerStaples
ConsumerDiscretionary
Financials
Health Care
InformationTechnology
3
3
3
4
7
9
10
10
13
14
23
Materials
Real Estate
Utilities
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
CommunicationServices
Financials
Health Care
InformationTechnology
1957(% index weight)
1976(% index weight)
2001(% index weight)
2016(% index weight)
2019(% index weight)
29
Source: Siegel “The Long Term Returns on the Original S&P 500 Firms,” (with Jeremy Schwartz), Financial Analysts Journal, v. 61 (1), January/February 2006. pp. 18-31, WSJ (September 2016), Bloomberg, SKAGEN
S&P 500 index: then vs. now
2
6
7
86
Transporation
Financials
Utilities
Industrials
3
3
6
6
8
11
13
14
18
18
Materials
Utilities
Telecom
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
Health care
Financials
InformationTechnology
3
3
3
3
7
10
10
13
13
15
21
Telecom
Materials
Real Estate
Utilities
Energy
Industrials
ConsumerStaples
ConsumerDiscretionary
Financials
Health Care
InformationTechnology
3
3
3
4
7
9
10
10
13
14
23
Materials
Real Estate
Utilities
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
CommunicationServices
Financials
Health Care
InformationTechnology
5
10
85
Rails
Utilities
Industrials
1957 1976 2001 2016 2019
30
Source: Siegel “The Long Term Returns on the Original S&P 500 Firms,” (with Jeremy Schwartz), Financial Analysts Journal, v. 61 (1), January/February 2006. pp. 18-31, WSJ (September 2016), Bloomberg, SKAGEN
S&P 500 index: then vs. now
5
10
85
Rails
Utilities
Industrials
2
6
7
86
Transporation
Financials
Utilities
Industrials
3
3
6
6
8
11
13
14
18
18
Materials
Utilities
Telecom
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
Health care
Financials
InformationTechnology
3
3
3
3
7
10
10
13
13
15
21
Telecom
Materials
Real Estate
Utilities
Energy
Industrials
ConsumerStaples
ConsumerDiscretionary
Financials
Health Care
InformationTechnology
3
3
3
4
7
9
10
10
13
14
23
Materials
Real Estate
Utilities
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
CommunicationServices
Financials
Health Care
InformationTechnology
1957(% index weight)
1976(% index weight)
2001(% index weight)
2016(% index weight)
2019(% index weight)
31
Source: Siegel “The Long Term Returns on the Original S&P 500 Firms,” (with Jeremy Schwartz), Financial Analysts Journal, v. 61 (1), January/February 2006. pp. 18-31, WSJ (September 2016), Bloomberg, SKAGEN
S&P 500 index: then vs. now
5
10
85
Rails
Utilities
Industrials
2
6
7
86
Transporation
Financials
Utilities
Industrials
3
3
6
6
8
11
13
14
18
18
Materials
Utilities
Telecom
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
Health care
Financials
InformationTechnology
3
3
3
3
7
10
10
13
13
15
21
Telecom
Materials
Real Estate
Utilities
Energy
Industrials
ConsumerStaples
ConsumerDiscretionary
Financials
Health Care
InformationTechnology
3
3
3
4
7
9
10
10
13
14
23
Materials
Real Estate
Utilities
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
CommunicationServices
Financials
Health Care
InformationTechnology
1957(% index weight)
1976(% index weight)
2001(% index weight)
2016(% index weight)
2019(% index weight)
32
Source: Siegel “The Long Term Returns on the Original S&P 500 Firms,” (with Jeremy Schwartz), Financial Analysts Journal, v. 61 (1), January/February 2006. pp. 18-31, WSJ (September 2016), Bloomberg, SKAGEN
S&P 500 index: then vs. now
5
10
85
Rails
Utilities
Industrials
2
6
7
86
Transporation
Financials
Utilities
Industrials
3
3
3
3
7
10
10
13
13
15
21
Telecom
Materials
Real Estate
Utilities
Energy
Industrials
ConsumerStaples
ConsumerDiscretionary
Financials
Health Care
InformationTechnology
1957(% index weight)
1976(% index weight)
2001(% index weight)
2016(% index weight)
2019(% index weight)
Real Estate
3
3
3
4
7
9
10
10
13
14
23
Materials
Real Estate
Utilities
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
CommunicationServices
Financials
Health Care
InformationTechnology
Real Estate
3
3
6
6
8
11
13
14
18
18
Materials
Utilities
Telecom
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
Health care
Financials
InformationTechnology
33
Source: Siegel “The Long Term Returns on the Original S&P 500 Firms,” (with Jeremy Schwartz), Financial Analysts Journal, v. 61 (1), January/February 2006. pp. 18-31, WSJ (September 2016), Bloomberg, SKAGEN
S&P 500 index: then vs. now
5
10
85
Rails
Utilities
Industrials
2
6
7
86
Transporation
Financials
Utilities
Industrials
3
3
3
3
7
10
10
13
13
15
21
Telecom
Materials
Real Estate
Utilities
Energy
Industrials
ConsumerStaples
ConsumerDiscretionary
Financials
Health Care
InformationTechnology
1957(% index weight)
1976(% index weight)
2001(% index weight)
2016(% index weight)
2019(% index weight)
Real Estate
3
3
3
4
7
9
10
10
13
14
23
Materials
Real Estate
Utilities
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
CommunicationServices
Financials
Health Care
InformationTechnology
Real Estate
Telecom3
3
6
6
8
11
13
14
18
18
Materials
Utilities
Telecom
Energy
ConsumerStaples
Industrials
ConsumerDiscretionary
Health care
Financials
InformationTechnology
Telecom
CommunicationServices
34
Case studySector Distribution (%)
Source: SKAGEN as of 30 Sep 2019
6
5
11
11
9
11
17
16
9
4
3
0
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Communication Services
Utilities
Real Estate
Cash
MSCI AC World (Index)
35
Case studySector Distribution (%)
Source: SKAGEN as of 30 Sep 2019
0
0
14
9
8
8
34
19
5
1
0
2
6
5
11
11
9
11
17
16
9
4
3
0
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Communication Services
Utilities
Real Estate
Cash
SKAGEN Global MSCI AC World (Index)
Professional Services
Exchange Operators
Insurance brokerage / Risk management /
Consulting
Credit-Rating Agency
36
SKAGEN Global
ESG Transitions(ESG = Environmental, Social and Governance)
Sour
ce: h
ttp://
dani
elle
dupe
rret.c
om
37
Themes can be deceptive
-150%
-100%
-50%
%
50%
100%
150%10-Year Total Shareholder Return by Index Type ($)
(2010 - 2019)
MVIS Global Coal (TR Net) Index S&P Global Clean Energy Index MSCI AC WorldSource: Bloomberg, SKAGEN
0
+146%
–56%–35%
38
Source: marketwatch.com, SGS, electrochem.org,
A pragmatic view of "transition"Transition
3-pillar strategy for identifying ESG transition stories
TechnologyCompany Society
SKAGEN Global's view on "ESG transition"
39
Source: SKAGEN Global
We look for rare combinations
ESG Transition(tangible impact)
Business model & Fundamentals
(cash-generative)
Valuation(reasonable)
"Lollapalooza effect"(outcome far bigger than sum of the parts)
40
0
50
100
150
200
250
300
350
2006 2008 2010 2012 2014 2016 2018
Share price(USD)
IPO
0
100
200
300
400
500
600
700
800
2010 2012 2014 2016 2018 2020
Case study
~ 2,900% total return(trough-to-peak)
Share price(DKK)
~ 8,000% total return
Source: Bloomberg
41
SKAGEN Global
Why we remain long-term optimists
Sour
ce: 2
4kcr
eativ
e.co
m
42
*1995-2019 median valueSource: Bloomberg, SKAGEN
02468
1012141618
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
(%) MSCI AC World Free Cash Flow Yield(1995-2019)
Valuation looks reasonable
1.3%Pre-financial crisis
17.1% Financial crisis peak
4.6%
43
What return can be expected?
Source: von.gov.ng
44
r
FCF1 = distributable cash flowr = required returng = expected constant growth rate in FCF
We prefer the FCFY metric
Price0 FCF1=– g
+
return = FCF yield + growth in FCF
Note: Formula assumes constant growth in free cash flow and no change in absolute FCF yield over the time period
45
Range of annualized returns (base case)
FCF yield + growth in FCF = return
4.0% + 3.0% = 7%
4.6% + 4.5% = 9%
Note: Formula assumes constant growth in free cash flow and no change in absolute FCF yield over the time period | Fgures are approximate based on MSCI AC World data in Bloomberg between 1995-2019 unless otherwise noted | Figures for illustrative purpose only, not investment advice
SKAGEN Global's medium-term view
Range of annualized return in basecase scenario for medium term
MSCI AC World Annualized Return(2010-2019)
14.1% 12.2% 12.3% 9.4%Source: Bloomberg
46
– Charles H. Duell, Commissioner of the US Patent Office 1898-1901
Source: patentlyo.com, wikpedia.org
“Everything that can be invented has been invented”
“In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold”
47
Great achievements to continue
Source: NASA
The moon landing 50 years ago (1969)
48
…into the next decadeachievements to continue
Source: NASA
• Digitization
• Gene therapy
• Robotics
• Renewables
• Artificial intelligence
• Blockchain
• …
49
Source: NYU Stern School of Business
$1
$10
$100
$1 000
$10 000
$100 000
$1 000 000
1928 1940 1953 1966 1979 1992 2005 2018
S&P 500
The power of compounding
* Historical data on S&P 500, including treatment of dividends, may differ by data provider for time series dating back to 1928. Dividends included in the graph above.
$382,850
World War II
Energy Crisis
Great Depression
Black Monday
Dot-com Bubble
Financial Crisis
Nominal value of $100 invested in 1928 in S&P 500 turned into $382,850 by 2018*
The Norwegian fund management company SKAGEN Funds (SKAGEN AS) is part of the Storebrand Group. Storebrand Asset Management AS acquired SKAGEN AS in 2017, and owns 100% of the company. Storebrand Asset Management AS is 100% owned by Storebrand ASA.
SKAGEN seeks to the best of its ability to ensure that all information given in this presentation is correct, however, makes reservations regarding possible errors and omissions. Statements in the presentation reflect the portfolio managers’ view at a given time, and this viewpoint may be changed without notice. This presentation should not be perceived as an offer or recommendation to buy or sell financial instruments. SKAGEN AS does not assume responsibility for direct or indirect loss or expenses incurred through the use or understanding of this presentation. Employees of SKAGEN AS may be owners of securities issued by companies that are either referred to in this article or are part of a fund's portfolio.
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments. You can find more detailed information in the funds’ Key Investor Information Documents (KIID) and prospectuses on www.skagenfunds.com.
Thank you