Invesco PerpetualGlobal smaller companies: an attractive assetclass for active investorsCitywireMay 2013Erik EsselinkThis presentation is for Professional Clientsonly and is not for consumer use.Fund Manager, European Equities
Contents2Why global smaller companies?Why have global smaller companies outperformed?Invesco Perpetual Global Smaller Companies FundAppendix
Why global smaller companies?Key reasons Fertile hunting ground for active managers Strong long-term performance Lower volatility than regional small cap equities andcomparable volatility to global large cap equities Diversification potential against bonds and large cap equities4
Why global smaller companies?They provide a fertile hunting ground5Source: Bloomberg as at 31 March 2013.MSCI World index1608 membersUS$31.38 trillion market cap.MSCI World Mid Cap index879 membersUS$5.64 trillion market cap.MSCI ACWI Small Cap index6016 membersUS$6.38 trillion market cap.MSCIEmergingMarketsindex823membersUS$7.73trillionmarketcap. MSCIFrontierEmergingMarketsindex185membersUS$0.82trillionmarketcap.Economic growthEmergingDevelopedCorporategrowthCapitalisationBy capitalisationBy number ofcompanies75%13%12%25%13%62%Large capMid capSmall cap
Why global smaller companies?They have a history of outperformance6Source: Choi et al & Howard University, Journal of Business & Economics Research, October 2010Over the long-term…Smaller companies haveoutperformed bonds and largercompanies10-year performance 1926 to 2007 (%)
Why global smaller companies?They are not as volatile as you might think…7Past performance is not a guide to future performanceSource: Bloomberg as at 31 March 2013. Performance figures are in GBP and represented by the respective MSCI indices.024681012140 5 10 15 20 25 30 35AnnualisedreturnAnnualised riskGlobal small capsGlobal large capsSingapore small capsCanada small capsAustralia small capsEAFE large capsEmerging markets large capsUS small capsUK small capsEAFE small caps Japan small capsHong Kong small capsGerman small capsReturn to risk (standard deviation) – small versus large companies15 years to 31 March 2013
Why global smaller companies?They offer diversification potential8Source: Choi et al & Howard University, Journal of Business & Economics Research, October 2010. Bottom chart source: Bloomberg as at 31 March 2013024681012141618-0.10 -0.05 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00Stoxx 600 Stoxx 50Stock correlation: European smaller & larger companiesLower correlation Higher correlation5 year correlation(1926 to 2007)Treasury bills IntermediategovernmentbondsLonggovernmentbondsLongcorporatebondsLarge capequitiesIntermediategovernment bonds0.85Long governmentbonds0.68 0.93Long corporate bonds 0.70 0.95 0.98Large cap equities -0.03 0.03 0.13 0.13Small cap equities -0.37 -0.28 -0.19 -0.17 0.63Over the long-term…Smaller companieshave demonstrateddiversification potentialagainst bonds andlarger companies
Why have global smaller companies outperformed?Overview Smaller companies are less well researched Smaller companies demonstrate greater alignment of interest throughmanagement/family/employee ownership Investing in smaller companies helps to avoid investing in valuationbubbles Smaller companies have attractive growth potential Smaller companies have made quicker recoveries from market crises10
Why have global smaller companies outperformed?Smaller companies are under researched11Source: Bloomberg as at 31 March 2013.05101520253035Decile1Decile2Decile3Decile4Decile5Decile6Decile7Decile8Decile9Decile10MSCI World Small Cap MSCI WorldResearch – coverage by number of analysts Smaller companies are less wellcovered by sell side analysts Smaller companies require more in-house research by fund managers The result is a less efficient market
Why have global smaller companies outperformed?Ownership and the alignment of interests is greater12Source: Bloomberg as at 30 June 2012.05101520253035404550World North America Europe Asia Pacific EmergingMarketsSmall cap companies Large & mid cap companiesOwnership – management/founders/employees% of ownership shares outstanding The alignment between shareholderinterests and the management riseswith insider ownership Insider ownership is a positiveinternal control mechanism ondecision-making State ownership tends to be higheramongst larger companies
050100150200250300010203040506097 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Marketcap(€bn)Shareprice(€)Share price Market capNokia - 1997 to present0100200300400500600700800010020030040050060070002 03 04 05 06 07 08 09 10 11 12Marketcap(US$bn)Shareprice(US$)Share price Market capApple Inc. -2002 to presentWhy have global smaller companies outperformed?They are better positioned to avoid valuation bubbles13Source: Bloomberg as at 31 March 2013. When smaller company share pricesrise significantly, there is a natural‘sanity check’. They become largecompanies - smaller companyinvestors need to sell When large company share pricesrise significantly, there is no ‘sanitycheck’ – they become a largerweight in the index and moredifficult for active investors toignore. In April 2000, Nokia comprisedcirca 3.6% of the MSCI Europeindex In September 2012, Apple Inc.accounted for 4.9% of the S&P 500index For smaller companies, the largestindex weight is circa 0.20% -making it easier for active investorsto ignore 0246810020406080Mar 10 Mar 11 Mar 12 Mar 13Marketcap(US$bn)Shareprice(€)Share price Market capKabel Deutschland - 2000 to present‘Sanity check’ when smaller companies become larger
Why have global smaller companies outperformed?Smaller companies have attractive growth potential140510152025Energy Materials Industrials Cons Disc. Cons StaplesHealth Care Financials IT Telecoms UtilitiesMSCI World Small Cap MSCI WorldMSCI long-term EPS growth rates (%)Source: Bloomberg as at 31 December 2012. Estimated long-term growth EPS aggregated.
Why have global smaller companies outperformed?Global smaller companies have recovered more quickly15Source: Bloomberg as at 31 March 2013. Based on price data. Return multiple = price only basis returns.188.8.131.52.8184.108.40.206.81 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748ReturnmultipleMonthsMSCI World Small Cap (2003 to 2007)Russell 2000 (1982 to 1986)Russell 2000 (1990 to 1994)MSCI World Small Cap (2009 to today)S&P 500 (1982 to 1986)S&P 500 (1990 to 1994)MSCI World (2003 to 2007)MSCI World (2009 to today)Market set-backs: post recession and correction (return multiples)
Invesco PerpetualGlobal Smaller Companies Fund
Invesco Perpetual Global Smaller Companies FundOverview Long-term focused, valuation driven and fundamental investors Expert asset allocation combined with regional led, research driven,fundamental stock selection Experienced and stable investment team (average of 24 years industryexperience and 13 years tenure) Regional expertise provides deep research capabilities, supported by regionalequity investment teams A dual fund manager/analyst role which provides ownership and accountabilityfor each investment decision. Demonstrable long-term track record with a consistent investment approach.17Source: Invesco Perpetual as at 31 March 2013.
Invesco Perpetual Global Smaller Companies GroupDeep research capabilities and expert regional allocation18Invesco Perpetual as at 31 March 2013Specialist regional fund managersCompany research and sub-portfolio constructionName Role Years’ experienceErik Esselink Europe ex UK - regional specialist 13Juliet Ellis North America – regional specialist 32Jonathan Brown UK – regional specialist 15Ian Hargreaves Asia Pacific – regional specialist 19Paul Chesson Japan – regional specialist 22Dean Newman Emerging Markets ex Asia – regional specialist 28ManagementAsset allocationNick Mustoe Chief Investment Officer, Invesco Perpetual 28Strategy oversight and implementationMartin Weiss Investment Strategist 22Arwel Green Product Manager, Global Equities & Multi-Asset 12Regional expertise provides deep research capabilities
Invesco Perpetual Global Smaller Companies FundInvestment process overview19A portfolio of circa400 names Stock driven investmentapproach Expert, valuation-ledregional asset allocationIncremental, valuation-led asset allocation Medium to long termstrategic asset allocation(not dynamic) Conviction based assetallocation Macro and micro inputsboth factor into the finaldecisionAsset allocationStock ideas generatedfrom the investmentuniverses of eachspecialist regionalinvestment teamStocks attractive given: Fundamentals Valuation Timeliness Outlook RisksStock candidatesAutonomously managedby specialist regionalportfolio manager Conviction weightedportfolios Medium to long terminvestment horizon Portfolio reflects macroconditions, idea generationand confidenceSell discipline Investment thesis no longervalid Price target reached More attractiveopportunities elsewhereRegional sub-portfolio PortfolioRigorous security selection meets valuation-led asset allocation
Invesco Perpetual Global Smaller Companies FundStock example - C&C Group20Source: Invesco Perpetual/Bloomberg as at 30 April 2013. Irish drinks group focused onIrish cider and Scottish beer Strong, defendable marketshares in Ireland and the UK Growth opportunities in US andAustralia could be gamechanging Focused on profitable organicgrowth and smart M&A Net cash (10% of market cap) PER 13.1x 2012 14.5% ROCE (sustainable)0.50.60.70.80.911.122.533.544.555.56Jan12Feb12Mar12Apr12May12Jun12Jul12Aug12Sep12Oct12Nov12Dec12Jan13Feb13Mar13Apr13C&C Group share price (EUR) Relative to HSBC Smaller Companies ex UK (EUR)C&C Group
Invesco Perpetual Global Smaller Companies FundStock example – Fondiaria-Sai21Source: Invesco Perpetual/Bloomberg as at 30 April 2013. Italy’s largest motor insurer,created via merger of 4 smallercompanies in August 2012 Uncertainty was high duringthe merger period We felt that the market wasoverly fearful and that the riskwas lower In our view, the valuation wascompelling while industryfundamentals were (and are)improving At the time of purchase, thestock traded at an extremelylow price to book ratio, relativeto an improving ROE-0.10.10.30.220.127.116.11.30123456Jan12Feb12Mar12Apr12May12Jun12Jul12Aug12Sep12Oct12Nov12Dec12Jan13Feb13Mar13Apr13Fondiaria-Sai share price (EUR) Relative to HSBC Smaller Companies ex UK (EUR)Fondiaria-Sai
Invesco Perpetual Global Smaller Companies FundStock example - Nutreco22Source: Invesco Perpetual/Bloomberg as at 30 April 2013. A Dutch animal nutrition andfish feed company Has a long history of goodreturn on capital andconsistent shareholder focus(good dividend growth) We believe that management’snew five year plan isachievable and that the marketdoes not yet recognise thepotential Dividend yield has consistentlygrown over last 10 years and iscurrently 3% PER is 10.5x 2013 earnings In our view, this is anattractive operational businesswith strong barriers to entryand disciplined capitalallocation.44.555.566.577.582022242628303234363840Jan12Feb12Mar12Apr12May12Jun12Jul12Aug12Sep12Oct12Nov12Dec12Jan13Feb13Mar13Apr13Nutreco share price (EUR) Relative to HSBC Smaller Companies ex UK (EUR)Nutreco
Invesco Perpetual Global Smaller Companies FundRegional allocation23Source: Invesco Perpetual as at 31 March 2013. *Emerging Europe, Middle East and Africa.Asset allocation decisions(Q1, 2013)March Trim Europe Add AsiaFebruary Trim Japan Add to US Add to AsiaJanuary No change30.5021.079.3016.0012.941.823.65 4.0555.7911.047.2510.27 9.273.161.93 1.270102030405060Invesco Perpetual Global Smaller CompaniesFundMSCI ACWI Small Cap indexPortfolio breakdown (%)
Invesco Perpetual Global Smaller Companies FundAn attractive risk/return profile24Past performance is not a guide to future performanceSource: Bloomberg as at 31 March 2013. Performance figures are provided for the Acc share class of the Invesco Perpetual Global Smaller Companies Fund andare shown in GBP on a mid-to-mid basis, inclusive of net reinvested income and net of the annual management charge and all other fund expenses.The figures do not reflect the entry charge paid by individual investors. Other data points represented by the respective MSCI indices.024681012140 5 10 15 20 25 30 35AnnualisedreturnAnnualised riskIP Global SmallerCompanies Fund (GBP)Global small capsGlobal large capsSingapore small capsCanada small capsAustralia small capsEAFE large capsEmerging markets large capsUS small capsUK small capsEAFE small caps Japan small capsHong Kong small capsGerman small capsReturn to risk (standard deviation) – small versus large companies15 years to 31 March 2013
Invesco Perpetual Global Smaller Companies FundPerformance summary25Past performance is not a guide to future performanceSource: Invesco as at 31 March 2013. Fund performance figures are shown for the Acc share class, in GBP on a mid-to-mid basis, inclusive of reinvestedincome and gross and net respectively of the annual management charge and all other fund expenses. The figures do not reflect the entry charge paid byindividual investors. Benchmark source: Invesco, net return, in GBP.Annualised grossregional returns (%)3 years 5 yearsInvesco Perpetual GlobalSmaller Companies FundReturns versus regional MSCISmall Cap benchmarkNorth America +1.90 -2.03Europe ex UK +1.95 +3.59UK +0.67 -1.14Japan -6.94 +6.82Asia ex Japan +10.07 +9.02Latin America +10.10 +3.95Emerging Europe +6.57 +5.12Middle East & Africa - -3 to 5years70%30%Target contributionto excess returnSecurity selectionRegional asset allocationAnnualised gross returns (%) 3 years 5 yearsInvesco Perpetual Global SmallerCompanies Fund12.65 13.98MSCI ACWI index 10.54 12.02Out/Underperformance +2.11 +1.96Annualised net returns (%) 3 years 5 yearsInvesco Perpetual Global SmallerCompanies Fund10.77 12.08MSCI ACWI index 10.54 12.02Out/Underperformance +0.23 +0.06
Invesco Perpetual Global Smaller Companies FundSector weightings27Source: Invesco Perpetual as at 31 March 2013.Sector Fund (%) Active weight MSCI ACWI Small Capindex (%)Industrials 21.58 17.34IT 13.55 12.38Financials 22.98 22.28Telecoms 1.13 0.87Health Care 8.71 8.46Consumer Discr. 15.30 15.86Consumer Staples 3.71 4.55Energy 4.64 5.94Utilities 1.11 3.14Materials 6.78 18.104.22.168.700.260.25-0.56-0.84-1.30-2.03-2.39
Invesco Perpetual Global Smaller Companies FundTop ten holdings28Source: Invesco Perpetual as at 31 March 2013.Stocks Country Sector Fund (%)Suruga Bank Japan Financials 1.11Total Gabon France Energy 0.96Daphne International China Consumer Discretionary 0.83HAL Trust Netherlands Financials 0.83Resona Japan Financials 0.74Taiyo Yeden Japan Information Technology 0.66Hutchison Whampoa Hong Kong Industrials 0.65Lisi France Industrials 0.64Daiwa Securities Japan Financials 0.64Havas France Consumer Discretionary 0.64
Important informationThis presentation is for Professional Clients only and is notfor consumer use.Where Erik Esselink has expressed opinions, they arebased on current market conditions and are subject tochange without notice. These opinions may differ fromthose of other Invesco Perpetual investmentprofessionals.Past performance is not a guide to future returns.The value of investments and any income will fluctuate(this may partly be the result of exchange ratefluctuations) and investors may not get back the fullamount invested.Where securities are mentioned in this document they donot necessarily represent a specific portfolio holding anddo not constitute a recommendation to purchase or sell.Smaller company funds are higher risk than funds thatcan invest in larger company sizes. Market conditions,such as a decrease in market liquidity, may mean that itis not easy to buy or sell securities.The Invesco Perpetual Global Smaller Companies Fundmay use derivatives (complex instruments) in an attemptto reduce the overall risk of its investments, reduce thecosts of investing or generate additional capital orincome, although this may not be achieved. The use ofsuch complex instruments may result in greaterfluctuations of the value of the fund. The Manager,however, will ensure that the use of derivatives within thefund does not materially alter the overall risk profile ofthe fund.For more information on our funds, please refer to themost up to date relevant fund and share class-specificKey Investor Information Documents and theSupplementary Information Document. This information isavailable using the contact details shown.29Issued by:Invesco Fund Managers Limited.Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK.Authorised and regulated by the Financial Conduct Authority
A particular slide catching your eye?
Clipping is a handy way to collect important slides you want to go back to later.