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  • 1. For professional use only – Not for Public distributionEurope: Finding value on our doorstepMay 2012Ben Ritchie CFA, Senior Investment ManagerAberdeen Asset Management
  • 2. Aberdeen equity structure Chief Investment Officer Anne Richards Head of Equities Hugh Young Global UK/Europe US GEM Pacific Basin Japan Stephen Docherty Jeremy Whitley Paul Atkinson Devan Kaloo Hugh Young Kwok Chem Yeh Andrew McMenigall Ben Ritchie Douglas Burtnick London Adrian Lim Keita Kubota Ann Dewar Bertie Thomson Francis Radano Andy Brown Andrew Gillan Sandy Lim Bruce Stout Charles Luke Hughes McLean Catriona Edmond Chou Chong Yuki Meyer Cindy Rose Edward Beal Jason Kotik Gabriel Sacks Christopher Wong Ella-Kara Brown Ian Hewett Joe McFadden Fiona Manning Mark Gordon-James Fionna Ross James Laing Qie Zhang Joanne Irvine Flavia Cheong Gail McCullie Jonathan Allison Ralph Bassett Mubashira Bukhari James Thom Jamie Cumming Kurt Cruickshank Robert Mattson Osamu Yamagata Kristy Fong Jamie Govan Laurent Ingelbert Michael Sayers Stephen Parr Louis Lu Jill Sneddon Louise Kernohan Peter Hand Susan McDonald Pruksa Iamthongthong Martin Connaghan Philip Webster William Scholes Gan Ai Mee Samantha Fitzpatrick Rodney Wells Peter Taylor Thomas Reeves Stewart Methven Romney Fox David Smith Victoria MacLean Samantha Brownlee São Paulo Sanjeet Mangat Brunella Isper Andrew Preston Yoojeong Oh Nick Robinson Camille Simeon Eduardo Figueiredo Chhai Ung Mark Daniels + Michelle Lopez Natalie Tam Pacific Basin Robert Penaloza in Singapore Adithep Vanabriksha Thailand Orsen Karnburisudthi Malaysia Ratanawan Saengkitikomol Hong Kong Bharat Joshi Gerald Ambrose Jalil Rasheed Andrew San Mohd Najman Md Isa Jolynn Kek Evan Cheah Frank Tian Kathy Xu Nicholas Chui Nicholas YeoSource: Aberdeen Asset Management, 31 Mar 12 1
  • 3. Investment process Company visit note Risk controls Step 1 Step 2 Step 3 Quality Aberdeen Price Portfolio universe construction • Use models • Filter for mandate • Refine weightings Pass or fail? Cheap or Model c35 - 74 • Compliance checks expensive? stocks Potential Watchlist/ Monitor revisit review 2
  • 4. An intensive programme of company meetings Year No meetings 2011 734 2010 725 2009 720 2008 854 2007 917 2006 984 2005 884 2004 845 2003 700 2002 364 A typical equity manager spends much of their time visiting companies …Source: Aberdeen Asset Management 3
  • 5. Why Aberdeen?• Disciplined and robust investment process• Stable and experienced team with culture of sharing and challenging ideas• Proprietary research/visit note conducted by the Fund Manager• High conviction portfolios; c35 – 50 holdings• We don’t own companies we don’t like, regardless of benchmark weight• Invest for the long term; accept periods of short term underperformance Buy-and-hold approach, with low turnover, we are true company stakeholders 4
  • 6. UK Equity Income
  • 7. Dividends – a key component of returns• Dividends and their reinvestment represent a significant proportion of total returns• A touchstone that indicates the strength of a company• They encourage a disciplined and long-term approach 6Original Artist - Reproduction rights obtained from www.CartoonStock.com
  • 8. Quality is key to a sustainable and growing dividendDividend and company analysis are intertwinedShareholder distributions are the output of a business modelKey issues:• Attractiveness of the industry over the long term Business Prospects• Can the company maintain or improve its competitive position• Cyclicality – peak to trough profitability• Operational leverage – translation of changes in sales to profits Financing• Cash flow dynamics – working capital cycle/capital requirements• Strength of the balance sheet• Management’s attitude towards distribution to shareholders Management/Governance• Other stakeholders’ interests Good quality companies can sustain and grow their dividends over the long term 7
  • 9. Relative attractiveness of dividend prospects• A combination of quality and valuation analysis• The absolute/relative level and sustainability of the initial yield• The long term prospects for sustainable growth in the dividend Long Term Total Initial Yield + Dividend Growth = Income Return Sustainability and growth are critical but often overlooked 8
  • 10. The significance of reinvesting dividendsSource: Triumph of theOptimists, Elroy Index value (start -1900 = 1.0; log scale) US: total return 10.1% pa UK: total return 10.1% pa US: capital gain 5.4% pa UK: capital gain 5.1% paDimson, Paul Marsh and 100,000Mike Stauton, PrincetonUniversity Press, 2002, 16,797p.145 as referenced in 10,000 16,160“The High Dividend YieldReturn Advantage: AnExamination of Empirical 1,000Data Associating 198Investment in High 149Dividend Yield Securities 100with Attractive ReturnsOver Long Measurement 10Periods”, Tweedy, Browne Fund Inc 1 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Start of the year • Reinvested dividends have been the dominant contributor to long term returns • High initial yields seem attractive but are they sustainable? • What are the long term prospects for dividend growth? “Those who understand compound interest are destined to collect it. Those who don’t are doomed to pay it” Albert Einstein 9
  • 11. FY 2012 forecast top 20 income producers Forecast revenue Forecast revenue % % Vodafone 9.5 BP 3.8 Centrica 6.6 Tesco 3.7 Royal Dutch Shell 6.6 BHP Billiton 3.1 GlaxoSmithKline 6.4 Prudential 2.9 British American Tobacco 6.3 Pearson 2.6 AstraZeneca 5.6 Wm Morrison 2.1 HSBC 5.1 Dunedin Smaller Companies 2.1 Unilever 4.3 Standard Chartered 1.9 National Grid 4.2 Compass 1.4 Aviva 3.9 Provident Financial 1.4 Total 58.5 Total 83.5• Confident that our holdings can fulfil their dividend commitments• We also employ a limited option writing programme, with options typically between 5 - 10% out of the money with a 1 - 2 month duration to generate a small additional diversified income streamSource: Equities only, Aberdeen Asset Managers, Apr 12. The above securities have been included for illustrative purposes only 10
  • 12. Ten largest portfolio investments and revenue split Investment Assets UK Europe US Rest of the world % % % % % Royal Dutch Shell 5.7 10 27 21 52 British American Tobacco 5.7 2 35 5 59 Centrica 5.5 71 3 26 0 Vodafone 5.0 8 40 28 24 Unilever 4.8 6 21 21 42 GlaxoSmithKline 4.8 7 26 36 31 HSBC 4.7 15 33 18 34 BHP Billiton 4.2 3 16 11 71 Prudential 3.8 26 0 48 26 BP 3.6 22 23 34 21• A diversified mix of well-known, good quality companies• Portfolio provides access to attractive growth opportunities overseas with experienced management teams and strong corporate governance within a first-class legal frameworkSource: latest full year available data, Bloomberg and Aberdeen Asset Managers, Apr 12. The above securities have been included for illustrative purposes only 11
  • 13. Relative to bonds UK equities look cheap Gilt Yield % Number of FTSE 100 Stocks Yielding Dividend Yield More than UK Bond Yields 20 90 18 80 16 70 14 60 12 50 10 40 8 30 6 20 4 2 10 0 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1982 1986 1990 1994 1998 2002 2006 2010Source: Citigroup, Apr 12 12
  • 14. Market expectations for dividend growth remain progressive UK dividend growth % 2009 - Div Growth 2010 - Div Growth 2011 - Div Growth 2012 - Div Growth 2013 - Div Growth 20 15 10 5 0 -5 -10 -15 -20 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12Source: Citigroup, Apr 12 13
  • 15. Payout ratios are low UK payout ratio UK Payout Ratio 90 80 70 60 50 40 30 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010Source: Citigroup, Mar 12 14
  • 16. Company balance sheets are strong UK – Net Debt to EBITDA (x) Mega Caps Large ex Mega Mid Caps 4.5 4.0 Forecasts 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Citigroup, Feb 12 15
  • 17. The attractions of investing in Continental Europe
  • 18. ECB support reduced bond yields in Spain and Italy but the underlyingproblems persist Euro Crisis – Spanish and Italian 10y spreads, 2009 - now Italy spreads vs bunds (bps) Spain spreads vs bunds (bps) 600 500 400 300 200 100 0 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12• Can over-indebted sovereigns complete fiscal rebalancing?• Policies resulting in subdued growth• With risk of further recession … and a bigger debt problem• Against this the ECB role remains uncertainSource: Datastream, CIRA, Citi, 12 Apr 12 17
  • 19. Continental European equity markets are attractive• A highly liquid market with a very wide range of potential investments• Well-known larger companies with strong global franchises• World-class mid-sized companies with excellent prospects for growth 18
  • 20. European companies have many competitive advantages• Intellectual property – highly developed in Europe due to early industrialisation. Often protected by internationally recognised patents and strong brands• Experience of operating abroad – a legacy of empire and a small landmass that forced companies to be international from the outset.• Skilled human capital – a function of developed education systems and specialist knowledge• Strong corporate governance – companies operate within boundaries that protect the rights of shareholders• Robust legal frameworks – ownership of physical and intellectual property is respected and maintained as a result of sophisticated and independent legal systems Our companies enjoy market-leading positions with strong competitive advantages 19
  • 21. Corporate balance sheets in good shape European Net Debt/Equity (ex-financials) 80% 70% 60% 50% 40% 30% 2004 2005 2006 2007 2008 2009 2010 2011 2012E • Downside protection • Underpins valuations • Gives optionality – expansion / M&A / dividendsSource: UBS European Market Map, aggregation with 475 stocks, as at 1 Nov 11 20
  • 22. Valuations are cheap on a historical basis MSCI Europe – FY12E Price to earnings (latest = 10.3) X N12M PE Average 30 25 20 15 10 5 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Source: MSCI, IBES, Morgan Stanley Research, 5 Apr 12 21
  • 23. Valuations low relative to other regions P/E 2012E by region P/B 2012E by region PE 2012 P/B 2012 Emerging World Emerging World Japan USA USA AC World AC World UK UK Europe ex UK Europe ex UK Japan 0 5 10 15 20 0.0 0.5 1.0 1.5 2.0 2.5 3.0Source: Factset, 19 April 2012 Source: Factset, 19 April 2012 22
  • 24. Dividends are attractive as well Geographic dividend yields DY 2012E USA Japan AC World LatAm Asia Pac ex Jap UK Eur ex UK 0 1 2 3 4 5 6Source: Citigroup, Feb 12 23
  • 25. Outlook• Stock markets have rallied strongly at the start of 2012 Central bank interventions have averted a systemic collapse of the European banking system• New governments across the Eurozone have shown willingness to embark on austerity and consider structural supply side reforms• The United States economy has (once again) begun to show signs of life and employment and housing data has been improvingBUT• Western world faces years of deleveraging at both a government and consumer level• Political and social implications remain highly uncertain• Long term impact of ultra low interest rates and aggressive currency management as yet unknown• Emerging market economies offer higher growth but also face economic management challenges• Earnings upgrades yet to follow the market rise 24
  • 26. Conclusion• The global economy will remain sluggish at best• Prospect for dividend growth better than for earnings• Structural growth will remain at a premium• Good value available on a selective basis• Companies with strong business models, pricing power and robust balance sheets to prosper• Cash returns to shareholders likely to remain a key yardstick of value• Equity markets to remain challengingEconomic uncertainty has created opportunities for selective long term investors 25
  • 27. Appendix
  • 28. UK/Europe equity team Team members Role Based Years in industry Years at Aberdeen* Jeremy Whitley Head of UK & European Equities Edinburgh 24 16 James Laing Deputy Head of UK & European Equities Edinburgh/London 18 11 Charles Luke Senior Investment Manager London 14 12 Ed Beal Senior Investment Manager Edinburgh 11 11 Ben Ritchie Senior Investment Manager Edinburgh 9 9 Bertie Thomson Senior Investment Manager London 9 9 Philip Webster Investment Manager London 14 8 Romney Fox Investment Manager London 6 6 Rodney Wells Investment Manager London 13 12 Louise Kernohan Investment Manager London 7 7 Jonathan Allison Investment Manager Edinburgh 9 7 Yoojeong Oh Investment Manager London 8 6 Sanjeet Mangat Assistant Investment Manager London 4 4 Ian Hewett Assistant Investment Manager London 4 4 Kurt Cruickshank Assistant Investment Manager Edinburgh 3 3 Samantha Brownlee Investment Analyst London 3 3 Laurent Inglebert Investment Analyst Paris 9 4* Or acquired companySource: Aberdeen Asset Management, 31 Mar 12 27
  • 29. Performance summary EUR Annualised (%) 31 Mar 12 3 months 1 year 3 years 5 years European Equity Fund 8.65 -4.05 17.49 0.45 FTSE World – Europe (ex UK) 9.84 -11.38 12.31 0.09 Outperformance -1.19 +7.33 +5.18 +0.36 Quartile 4 1 1 3 GBP Annualised (%) 31 Mar 12 3 months 1 year 3 years 5 years UK Equity Income Fund 4.36 6.21 23.59 2.29 FTSE All-Share 6.11 1.39 18.83 1.82 Outperformance -1.75 +4.82 +4.76 +0.47 Quartile 4 2 1 2Total return, gross of fees, EUR/GBPSource: Aberdeen Asset Management 28
  • 30. For professional use onlyNot for public distributionInvestors should be aware that past performance is not a guide to future returns, thevalue of investments and the income from them can fall as well as rise and investors mayget back less than the amount investedThe views expressed in this presentation should not be construed as advice on how toconstruct a portfolio or whether to buy, retain or sell a particular investment. Theinformation contained in the presentation is for exclusive use by professionalcustomers/eligible counterparties (ECPs) and not the general public. The information isbeing given only to those persons who have received this document directly fromAberdeen Asset Management (AAM) and must not be acted or relied upon by personsreceiving a copy of this document other than directly from AAM. No part of this documentmay be copied or duplicated in any form or by any means or redistributed without thewritten consent of AAMThe information contained herein including any expressions of opinion or forecast havebeen obtained from or is based upon sources believed by us to be reliable but is notguaranteed as to the accuracy or completenessIssued by Aberdeen Asset Managers Limited which is authorised and regulated by theFinancial Services Authority in the United Kingdom 29