The case for Global Equity Income
William Davies – Head of Global Equity
For institutional investors

Any mention of Funds...
Agenda

1.

The market environment, and why income strategies will continue to attract investors

2.

How to approach inco...
Threadneedle Global Equity team
William Davies
Head of Global Equity
27 years’ experience
19 years at Threadneedle

Esther...
Threadneedle – experienced equity income management

Stephen Thornber

Nick Davis

George Gosden

UK Income

US Income

Pa...
The market environment

1
Global economic outlook

2014 GDP growth forecast (%)
Developed Markets

Threadneedle

Consensus

US

2.5

2.7

UK

2.3

J...
The taper caper
US 10 year treasury yield (%)
Fed Chairman Ben Bernanke:
3.00

“the winding-down process due to start this...
Interest rates and inflation
10 year breakeven inflation expectations1

Yield on US 10 year treasury bonds
%

6

%

5.0
4....
Performance profile
MSCI AC World – Quintile one dividend yield annualised outperformance since 1995

14
12
10

(%)

8
6
4...
Demographic changes
Proportion of global population 60 years or older
25%
21%
20%

15%
10%
10%

8%

5%

0%
1950

2000

205...
Yield choices
10

5-10% annual income growth1

9
8

Zero income growth

7

%

6

5.3

5.0
5

4.4

5.7

5.5

3.9

5.9

5.6
...
How to approach income investing

2
Dividend paying stocks have outperformed
Cumulative performance since 1995
1200

1000

Index

800

600

400

200

0
Dec 94...
Global Equity Income philosophy



We believe dividends are an underappreciated
signal of investment quality



Our focu...
Investment process

Focused idea generation

Research and debate

Global team and regional
equity teams

Typical character...
Balancing the portfolio
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jun 07

Dec 07

Jun 08

Sources of income
Compounders
...
Global Equity Income Fund
Portfolio Style SkylineTM

A significant dividend tilt and a mild growth bias
Source: Style Rese...
Global Equity Income Fund

Historic net distribution yield1

Portfolio dividend yield versus benchmark

8%

8%

7%

7%

6%...
Global Equity Income Fund
Performance versus benchmark (USD)

22.0%
18.4%

18.1%
14.9%

13.8%

10.8%

11.9%
8.3%
4.8%
2.0%...
Global Equity Income Fund
Performance versus peers since inception (30 June 2007)



Top quartile returns



Relatively ...
The advantages of a global approach

3
Dividend growth
MSCI regions and markets – Dividend CAGR since 2000

35

DPS CAGR since 2000 (%)

30
25
20
15
10
5
0
Russi...
A wide opportunity set of high dividend stocks

World
All companies, Market Cap > $1 billion and dividend yield > 4%

1304...
Global themes
Themes

Portfolio strategy

Emerging market consumer





Defensive growth





US shale energy revolu...
Emerging market consumer
Household debt as percentage of GDP (%)1

Robust growth in retail sales2

350

80%

300

60%

250...
Summary and conclusion

4
Summary



Global equity income strategies are likely to
continue to rise in popularity



A consistently successful app...
Appendix

7
Valuation of high dividend companies
PE ratio progression
20
18

16
14

12
10

8
6
Oct-08

Apr-09

Oct-09

Apr-10

Oct-10
...
Valuation of high dividend companies

Forward PE ratios
14.1
12.7
11.7

11.1

14.4
13.4

11.2

10.3

Europe

Asia Pacific
...
How are MSCI High Dividend Yield Indices constructed?
The MSCI High Dividend Yield Indices:



Are derived from country, ...
Biography
WILLIAM DAVIES
Head of Global Equities and Deputy Head of Equities
William Davies is Head of Global Equities and...
Biography
STEPHEN THORNBER
Fund Manager
Stephen Thornber has managed the Threaneedle Global Equity Income Fund since its i...
Global equities funds key risks
Any mention of Funds are purely for information only. The Funds mentioned are not register...
Important notes
For internal use and for Professional and/or Qualified Investors only (not to be used with or passed on to...
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  1. 1. The case for Global Equity Income William Davies – Head of Global Equity For institutional investors Any mention of Funds are purely for information only. The Funds mentioned are not registered for sale in the US. Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation S under the 1933 Act. June 2013 For investment professionals only, not for US investors October 2013
  2. 2. Agenda 1. The market environment, and why income strategies will continue to attract investors 2. How to approach income investing 3. The advantages of a global approach 4. Summary and conclusion 2
  3. 3. Threadneedle Global Equity team William Davies Head of Global Equity 27 years’ experience 19 years at Threadneedle Esther Perkins Fund Manager 14 years’ experience 5 years at Threadneedle Neil Robson Fund Manager Stephen Thornber Fund Manager 26 years’ experience 1 year at Threadneedle Pauline Grange Fund Manager 25 years’ experience 19 years at Threadneedle Jonathan Crown Fund Manager 12 years’ experience 6 years at Threadneedle Ashish Kochar Fund Manager 11 years’ experience 7 years at Threadneedle James Foreman Client Portfolio Analyst 7 years’ experience 4 years at Threadneedle 4 years’ experience 1 year at Threadneedle Over $6bn in global equity AUM Source: Threadneedle as at 30 September 2013. 3
  4. 4. Threadneedle – experienced equity income management Stephen Thornber Nick Davis George Gosden UK Income US Income Pan-European Income Asian Income 25 years’ experience Holdings Diane Sobin Global Income Benchmark Leigh Harrison 29 years’ experience 27 years’ experience 9 years’ experience 19 years’ experience MSCI AC World FTSE All Share S&P 500 MSCI Europe MSCI Asia (ex Japan) 75-95 45-60 50-70 30-50 50-60 Over $6 billion in equity income AUM Source: Threadneedle as at 30 September 2013.. 4
  5. 5. The market environment 1
  6. 6. Global economic outlook 2014 GDP growth forecast (%) Developed Markets Threadneedle Consensus US 2.5 2.7 UK 2.3 Japan Europe 2014 GDP growth forecast (%) Emerging Markets Threadneedle Consensus China 7.5 7.4 2.1 India1 5.5 5.9 1.5 1.7 Russia 2.8 3.3 0.7 0.9 Brazil 3.0 2.6  US – Improving housing and labour markets support growth, inflation remains benign, growth accelerates to 2.5% in 2014  Japan – Policy changes creating positive change, challenges in implementation ahead  Europe –Signs of a bottom appearing, a slow and protracted recovery ahead  Emerging markets – Strong growth but trajectory is downwards, BRIC’s each face major and different challenges Source: Threadneedle, as at 30 September 2013. These estimates and forecasts are as of the date provided and are subject to change without notice at any time based upon market and other factors. None of Threadneedle, its directors, officers or employees make any representation, warranty, guaranty or other assurance that any of these estimates or forecasts will prove to be accurate. 1 Fiscal year. 6
  7. 7. The taper caper US 10 year treasury yield (%) Fed Chairman Ben Bernanke: 3.00 “the winding-down process due to start this year” 2.75 2.50 2.25 2.00 1.75 1.50 Jan-13 Apr-13 Jul-13 Oct-13 Rising rates have put bond proxies under pressure Source: Bloomberg, September 2013. 7
  8. 8. Interest rates and inflation 10 year breakeven inflation expectations1 Yield on US 10 year treasury bonds % 6 % 5.0 4.5 5 4.0 3.5 Futures 4 3.0 3 2.5 Our view 2.0 2 1.5 1.0 1 0.5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.0 2003 2017 2004 2006 2008 2010 2012 2014 2016 2018 Rates are likely to stay low for longer Source: Bloomberg and Threadneedle Investments as at 30 September 2013. 1 Derived from Treasury Inflation Protected Securities market (TIPS). 8
  9. 9. Performance profile MSCI AC World – Quintile one dividend yield annualised outperformance since 1995 14 12 10 (%) 8 6 4 2 0 (2) (4) Expansion Downturn Slowdown Recovery High dividend investing has performed in most economic conditions Source: FactSet Alpha Tester, CLSA Asia-Pacific Markets March 2013. MSCI-weighted USD total return with monthly rebalancing. 9
  10. 10. Demographic changes Proportion of global population 60 years or older 25% 21% 20% 15% 10% 10% 8% 5% 0% 1950 2000 2050 Year People over 60 years old 2000 606 million 2050 2 billion Rising demand for income Source: UN, World Population Aging 1950-2050. Published September 2012. 10
  11. 11. Yield choices 10 5-10% annual income growth1 9 8 Zero income growth 7 % 6 5.3 5.0 5 4.4 5.7 5.5 3.9 5.9 5.6 4.7 4.6 4.1 3.6 4 3 6.6 6.4 4.7 4.0 3.5 3.5 3.5 2.6 2.7 1.8 2 0.7 1 Government Debt (10yr) Emerging Market Debt (USD 10yr) Investment Grade (10yr) Valid Solucoes NagaCorp Radiant Elec. DiGi.com BOC Hong Kong AT&T Blackstone Total S.A. GlaxoSmithKline Vodafone AT&T Blackstone Total S.A. GlaxoSmithKline Vodafone Russia Indonesia Brazil Mexico Japan Germany UK US 0 Equities (FY14) Equities continue to offer more attractive income Source: Bloomberg as at 30 September 2013. Equity dividend yields are consensus FY14. The mention of stocks is not a recommendation to deal. 1 Expected medium term dividend growth of a representative portfolio. 11
  12. 12. How to approach income investing 2
  13. 13. Dividend paying stocks have outperformed Cumulative performance since 1995 1200 1000 Index 800 600 400 200 0 Dec 94 May 96 Oct 97 Mar 99 Aug 00 Jan 02 First quintile dividend yield Jun 03 Nov 04 Apr 06 Sep 07 Second quintile dividend yield Feb 09 Jul 10 Dec 11 May 13 MSCI AC World The highest yielding quintile has performed best Source: CLSA, FactSet Alpha Tester as at 30 June 2013. Note: Backtest based on MSCI universe with more than 3 analyst coverage. MSCI weighted US-dollar total return with monthly rebalancing. 13
  14. 14. Global Equity Income philosophy  We believe dividends are an underappreciated signal of investment quality  Our focus is companies with a high dividend yield, growth, and a robust balance sheet  When dividend investing, a balanced and diversified portfolio is important to control risk Growth Income Portfol Quality Income io Sustainability High, growing, and sustainable dividends Note: Stock and portfolio characteristics may be subject to change over time and subject to prevailing market conditions. Actual investment parameters will be agreed and set out in the prospectus or formal investment management agreement. 14
  15. 15. Investment process Focused idea generation Research and debate Global team and regional equity teams Typical characteristics: Select stocks based on valuation and conviction  Dividend yield > 4% Company meetings Earnings growth >5%  Dividend growth >5%  Gearing <75%  Macro and themes Implementation Dividend cover >1.25x Manage risk though diversification and balance Detailed fundamental analysis Investable universe: 1300 stocks 400 stocks 75-95 stocks A robust and consistent process Note: Stock and portfolio characteristics may be subject to change over time and subject to prevailing market conditions. Actual investment parameters will be agreed and set out in the prospectus or formal investment management agreement. 15
  16. 16. Balancing the portfolio 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun 07 Dec 07 Jun 08 Sources of income Compounders Assets Secular growers Cyclicals Dec 08 Jun 09 Dec 09 Jun 10 Characteristics Dec 10 Jun 11 Dec 11 Examples Jun 12 Dec 12 Typical weighting Reliable growth, strong cash flow generation Kraft, AstraZeneca c.35% High levels of fixed or financial assets National Grid, HSBC c.25% Sustainable high growth potential Hugo Boss, AIMIA c.20% Most sensitive to economic conditions Rio Tinto, Total c.20% Source: Threadneedle Investments as at 30 June 2013. Analysis is adjusted for cash levels. 16 Jun 13
  17. 17. Global Equity Income Fund Portfolio Style SkylineTM A significant dividend tilt and a mild growth bias Source: Style Research as at 30 June 2013. Style Skylines™ created with, embodies and/or executes proprietary software and/or data under license from Style Research Ltd. © Style Research Ltd. All Rights Reserved. Must not be redistributed by third parties. Any mention of Funds are purely for information only. The Funds mentioned are not registered for sale in the US. Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation S under the 1933 Act. 17
  18. 18. Global Equity Income Fund Historic net distribution yield1 Portfolio dividend yield versus benchmark 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% 2008 2009 2010 2011 2012 2008 2009 2010 Portfolio 2011 2012 2013 MSCI AC World Delivering a high income stream Source: Threadneedle Investments as at 30 June 2013. 1 Based on institutional share class with income distributed Any mention of Funds are purely for information only. The Funds mentioned are not registered for sale in the US. Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation S under the 1933 Act. 18
  19. 19. Global Equity Income Fund Performance versus benchmark (USD) 22.0% 18.4% 18.1% 14.9% 13.8% 10.8% 11.9% 8.3% 4.8% 2.0% YTD 1 year 3 years Threadneedle Global Equity Income Fund Outperformance1 +2.8% +3.0% +2.7% 5 years Since inception (30 June 2007) MSCI AC World +3.4% +2.7% Superior total return performance Source: FactSet as at 30 September 2013. Fund data is gross of fees. Gross fund returns gross of tax and TER for comparison with indices. Gross performance from 31 March 2010 onwards is based on daily cash flows and valuations, from 1 January 2008 to 31 March 2010 based on Global Close prices, and prior to January 2008 based on 12pm prices. Fund data is quoted on a bid to bid basis with income re-invested at bid. Index data provided by Thomson Financial DataStream. The relative returns shown are calculated on a geometric basis. All data is quoted in USD. Past performance is not a guide to future returns.1 Outperformance shown is calculated on a geometric basis, annualised against the MSCI AC World Index. Any mention of Funds are purely for information only. The Funds mentioned are not registered for sale in the US. Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation S under the 1933 Act. 19
  20. 20. Global Equity Income Fund Performance versus peers since inception (30 June 2007)  Top quartile returns  Relatively low tracking error  Top decile information ratio  Top decile consistency Consistent and superior risk adjusted returns Source: Mercer Investment Consulting as at 30 June 2013. Risk and return characteristics calculated monthly in USD versus the MSCI AC World Index. Bars show the positions in the universe of funds of the 95th percentile, upper quartile, median, lower quartile and 5th percentile. Any mention of Funds are purely for information only. The Funds mentioned are not registered for sale in the US. Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation S under the 1933 Act. 20
  21. 21. The advantages of a global approach 3
  22. 22. Dividend growth MSCI regions and markets – Dividend CAGR since 2000 35 DPS CAGR since 2000 (%) 30 25 20 15 10 5 0 Russia China Singapore Brazil South Africa EM Australia AxJ India Korea Taiwan Japan World DM Europe France USA UK Germany HK Global markets offer the potential for superior growth Source: FactSet, CLSA Asia-Pacific Markets, March 2013. 22
  23. 23. A wide opportunity set of high dividend stocks World All companies, Market Cap > $1 billion and dividend yield > 4% 1304 Sector breakdown: Financials 474 Energy 157 Utilities 131 Industrials 123 Consumer discretionary 111 Materials 91 Telecommunications 89 Technology 60 Consumer staples 56 Healthcare 12 Global income investors can diversify without compromise Source: Bloomberg as at 30 August 2013. Market cap measured in USD. 23
  24. 24. Global themes Themes Portfolio strategy Emerging market consumer    Defensive growth    US shale energy revolution De-leveraging Stocks Rising wages support increasing consumption New areas of expenditure Opportunities for global brands Ambev, Hugo Boss, Las Vegas Sands, NagaCorp Steady growers with large moats Predictable recurring revenues Improving cost bases and increasing dividends Imperial Tobacco, Kraft, GlaxoSmithKline, Sydney Airport  Growth of shale oil/gas volume in the US  Increased capex in energy industry  Low cost input for energy consumers    Banks need to down-size balance sheets Distressed sellers offer opportunities Well capitalised players take advantage LyondellBasell, HollyFrontier, Enterprise Products Blackstone, Intermediate Capital, Newcastle Investment Corp A go anywhere approach Source: Threadneedle Investments as at 30 September 2013. The mention of stocks is not a recommendation to deal. 24
  25. 25. Emerging market consumer Household debt as percentage of GDP (%)1 Robust growth in retail sales2 350 80% 300 60% 250 Index 400 100% Household debt 120% 40% 150 20% India Russia * Indonesia Turkey Brazil China Czech Republic Poland Hungary South Africa Thailand Taiwan Korea US 100 UK 0% 200 50 00 02 Brazil 04 China 06 08 Indonesia 1 Source: Haver Analytics, GS Global ECS Research, US Federal Reserve, Bank of England as at December 2010. *Consumer Loans and Individual Credit Cards as % of GDP (excluding other types of bank loans – mortgage loans etc.). **Bank loans (personal) to households as % of GDP. 2 Source: Haver as at 29 February 2012. The mention of stocks is not a recommendation to deal. 25 10 Russia
  26. 26. Summary and conclusion 4
  27. 27. Summary  Global equity income strategies are likely to continue to rise in popularity  A consistently successful approach emphasises: Growth Income Portfol Quality Income io   Sustainability  Sustainably high dividends and growth A balanced portfolio, trading defensiveness for upside A global approach offers superior growth, a large opportunity set A compelling proposition 27
  28. 28. Appendix 7
  29. 29. Valuation of high dividend companies PE ratio progression 20 18 16 14 12 10 8 6 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 MSCI World Index Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 MSCI World High Dividend Index High dividend stocks remain at a discount Source: Bloomberg as at 30 September 2013. Uses BEst (current annual) PE ratio. 29
  30. 30. Valuation of high dividend companies Forward PE ratios 14.1 12.7 11.7 11.1 14.4 13.4 11.2 10.3 Europe Asia Pacific Japan High dividend index USA Regular Index Regional variations exist Source: MSCI index data as at 30 September 2013. 30
  31. 31. How are MSCI High Dividend Yield Indices constructed? The MSCI High Dividend Yield Indices:  Are derived from country, regional or composite level MSCI Equity indices (herein, “Parent Indices”)  Include only securities that offer a higher than average dividend yield relative to their respective Parent Index and pass dividend sustainability screens  Must have a dividend yield at least 30% higher than the Parent Index yield  Must have a reasonable pay-out and a non-negative 5y dividend per share growth rate  Offer broad market coverage  Are free float market capitalisation weighted A high dividend yield benchmark Source: MSCI High Dividend Yield Indices Methodology, May 2011. 31
  32. 32. Biography WILLIAM DAVIES Head of Global Equities and Deputy Head of Equities William Davies is Head of Global Equities and Deputy Head of Equities at Threadneedle Investments. He manages retail and institutional funds including the Threadneedle Global Select Fund. Prior to taking up his current roles William was Head of European Equities for 12 years (until 2011), during which time he oversaw a period of very strong performance and significant growth in assets. William joined Threadneedle at the company’s inception in 1994. Prior to this, he worked for Eagle Star Investments1. He has also worked for Hambros Bank as a European Investment Manager where he led the European equity team. William holds a BA (Hons) degree in Economics from Exeter University. Threadneedle start date: 1994 Industry start date: 1985 1 Eagle Star Investments became part of Threadneedle in 1994. 32
  33. 33. Biography STEPHEN THORNBER Fund Manager Stephen Thornber has managed the Threaneedle Global Equity Income Fund since its inception in 2007, and is responsible for several institutional funds. He heads the energy sector research team. Prior to joining the global equities team Stephen was a UK fund manager and spent five years managing the Threadneedle UK Monthly Income Fund. He has also worked as a fund manager for Eagle Star Investments 1 and for the Kuwait Investment Office. Stephen has an honours degree in Business and Finance from Plymouth Polytechnic and is an associate member of the UK Society of Investment Professionals. Threadneedle start date: 1994 Industry start date: 1987 1 Eagle Star Investments became part of Threadneedle in 1994. 33
  34. 34. Global equities funds key risks Any mention of Funds are purely for information only. The Funds mentioned are not registered for sale in the US. Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation S under the 1933 Act. Key Risks applying to all the funds: Market Risk: The value of investments can fall as well as rise and investors might not get back the sum originally invested. Currency Risk: Where investments are made in assets that are denominated in multiple currencies, changes in exchange rates may affect the value of the investments. Investor Currency Risk: Where investments in the fund are in currencies other than your own, changes in exchange rates may affect the value of your investments. Effect of portfolio concentration: The fund has a concentrated portfolio (holds a limited number of investments and/or takes large positions in a relatively small number of stocks) and if one or more of these investments declines or is otherwise affected, it may have a pronounced effect on the fund’s value. High Volatility Risk: The fund typically carries a risk of high volatility due to its portfolio composition or the portfolio management techniques used. This means that the fund’s value is likely to fall and rise more frequently and pronounced than with other funds 34
  35. 35. Important notes For internal use and for Professional and/or Qualified Investors only (not to be used with or passed on to retail clients) Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Threadneedle Specialist Investment Funds ICVC (“TSIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a UCITS scheme. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. This document is a marketing communication. The research and analysis included in this document have not been prepared in accordance with the legal requirements designed to promote its independence and have been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request. Issued in the US by Threadneedle International Limited (“TINTL”), a UK.-based investment management firm provides financial services to individual and institutional investors. TINTL is registered as an investment adviser with the U.S. Securities and Exchange Commission and is authorised and regulated in the conduct of its investment business in the UK by the UK Financial Conduct Authority. 35
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