Henderson

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Henderson

  1. 1. Henderson European Capability John Bennett Director of European Equities October 2011 This document is solely for the use of professionals and is not for general public distribution
  2. 2. What we do <ul><li>Continental European long only (core) </li></ul><ul><li>Henderson European Selected Opportunities Fund </li></ul><ul><li>Continental European long only (focused) </li></ul><ul><li>Henderson European Focus Fund </li></ul><ul><li>Pan European long/short equity </li></ul><ul><li>Henderson European Absolute Return Fund </li></ul>
  3. 3. Investment philosophy <ul><li>Sector themes blended with stock specifics </li></ul><ul><ul><li>Sector trends travel </li></ul></ul><ul><ul><li>These can be global or intra-European </li></ul></ul><ul><li>We are mean reversionists </li></ul><ul><ul><li>Supernormal returns are competed away over time </li></ul></ul><ul><ul><li>Out of favour stocks similarly mean revert </li></ul></ul><ul><ul><li>Market behaviour breeds overreactions – “secular” stories versus cyclical reality </li></ul></ul><ul><ul><li>Rarely good (or bad) forever </li></ul></ul><ul><li>Benchmark aware, not benchmark driven </li></ul><ul><ul><li>Awareness of benchmarks provides risk management </li></ul></ul><ul><ul><li>Meaningful deviations at stock and sector level target alpha generation </li></ul></ul><ul><li>Investors in change </li></ul><ul><ul><li>Seek to anticipate change and inflection points – at stock and sector level </li></ul></ul><ul><ul><li>Being on the right side of surprise </li></ul></ul><ul><li>Capital deployment drives corporate returns </li></ul><ul><ul><li>Cash flow return on capital - numerator or denominator? </li></ul></ul>
  4. 4. Investment process <ul><li>Daily sell side conveyor belt of ideas </li></ul><ul><ul><li>A daily discipline to filter ideas through numerous broker relationships </li></ul></ul><ul><ul><li>Analyst/broker meetings to identify top recommendations and dissect research </li></ul></ul><ul><ul><li>TMSG: an unbiased system to receive conviction ideas </li></ul></ul><ul><li>Company management meetings </li></ul><ul><ul><li>Daily meetings with senior company management to identify opportunities, research new ideas and test existing holdings </li></ul></ul><ul><li>Screening </li></ul><ul><ul><li>Tailored screens through Quest on valuation, momentum and quality </li></ul></ul><ul><ul><li>Screens consistently run to suit any change in the environment: FCF, leverage, popularity etc </li></ul></ul><ul><ul><li>Mirabaud Trend PER: stock and sector valuation relative to history </li></ul></ul><ul><ul><li>RSI screens: run as a sense check for areas that are overbought and oversold </li></ul></ul><ul><ul><li>Sentiment/consensus screens based on analyst recommendations and fund manager positioning </li></ul></ul><ul><li>Henderson network </li></ul><ul><ul><li>An exchange of ideas and views across a strong buyside network </li></ul></ul><ul><ul><li>Joint company and analyst meetings to complement this </li></ul></ul><ul><li>Media subscriptions </li></ul><ul><ul><li>FT, Economist, strategist pieces etc </li></ul></ul><ul><ul><li>Always on the look out for ideas… </li></ul></ul>
  5. 5. How we think <ul><li>Mean reversion applies to: </li></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Profitability </li></ul></ul><ul><ul><li>Human behaviour </li></ul></ul><ul><ul><li>GDP (despite “authorities”) </li></ul></ul>“ Economic policy in the developed world over the past 25 years has followed one overriding principle: the avoidance of recession at all costs…the bill has come due” The Economist, 30 July 2011
  6. 6. The importance of patience <ul><li>“ Undervaluations caused by neglect or prejudice may persist for an inconveniently long time and the same applies to inflated prices caused by over-enthusiasm or artificial stimulus.” </li></ul><ul><li>Ben Graham </li></ul>
  7. 7. Mean reversion in action Richemont: trend P/E, 1990-2011 Source: Mirabaud Securities LLP, at 28 February 2011
  8. 8. Mean reversion in action Source: MainFirst Bank AG, at 28 February 2011 China bubble? Tech bubble Japan’s bubble LVMH share price World Datastream Market Index Using luxury stocks to spot bubbles Relative
  9. 9. Mean reversion – a tale of two sectors
  10. 10. European Capital Goods vs DJ Stoxx 600 Sector near all-time relative high 2004-mid 2008: record sales growth and margin expansion 1995-2000: margins drift, tech bubble 1992-1995: margin expansion Source: JP Morgan, at June 2011
  11. 11. Source: Mirabaud Securities LLP , at 28 February 2011 General Industrials Mean reversion in action
  12. 12. Mean reversion in action Pharmaceuticals and Biotechnology Source: Mirabaud Securities LLP, at 2 June 2011 Trend PE Rel Average +1 sd -1 sd
  13. 13. Why we like…Pharmaceuticals <ul><li>Challenging business models </li></ul><ul><ul><li>But they can do something about it </li></ul></ul><ul><ul><li>No longer in denial </li></ul></ul><ul><li>Boardroom debate </li></ul><ul><ul><li>Cut costs? </li></ul></ul><ul><ul><li>R&D commitment? </li></ul></ul><ul><ul><li>Why are we on 8x PER when FMCG is on 13-15x? </li></ul></ul><ul><li>Value </li></ul><ul><ul><li>Trend analysis confirms multi-year de-rating </li></ul></ul><ul><li>Momentum </li></ul><ul><ul><li>Relative to the recently popular (capital goods, chemicals, etc) </li></ul></ul><ul><ul><li>In absolute terms too…upgrades have begun </li></ul></ul>
  14. 14. Why we like…Pharmaceuticals <ul><li>Growth expectations for cyclicals near record highs relative to expectations for defensives (30 August 2011) </li></ul><ul><li>Healthcare growth expectations are not aggressive </li></ul><ul><li>Companies exhibit healthy balance sheets across the sector </li></ul><ul><li>We feel this is an important attribute in the current environment </li></ul>Source: Credit Suisse Models, at August 2011 No Debt Crisis in European Healthcare Consensus growth expectations by sector Source: IBES, Datastream, Morgan Stanley Research, at August 2011
  15. 15. Why we like…Pharmaceuticals <ul><li>Attractive dividends yields are supported by FCF </li></ul><ul><li>In conjunction with an average P/E 2012 valuation of 9.1x the sector looks appealing </li></ul><ul><li>Levels of FCF in the sector permit accretive share repurchases </li></ul><ul><li>Unallocated FCF could permit further material share buybacks to deliver higher earnings growth </li></ul><ul><li>Levels of R&D spend could also be adjusted in the face of austerity </li></ul><ul><li>This is clearly a very different scenario to other sectors such as utilities </li></ul>Source: Credit Suisse, at 22 August 2011 Source: Liberum Models, at 1 September 2011 Further Potential Accretion from FCF Dividend and FCF yield % 2012 E Dividend R&D (adj for tax) Share repurchase Acquisitions Unallocated FCF
  16. 16. Why we don’t like…Telecoms Source: Financial Times, at August 2011 <ul><li>WhatsApp Messenger ranked 1st as the most bought App in Apple Store (Aug 2011) - Highlighted by KPN as one of the root causes of its domestic issues </li></ul><ul><li>Microsoft acquires Skype </li></ul><ul><li>Skype acquires start-up messenger app GroupMe (multi-person chat rooms only accessible by Skype) </li></ul><ul><li>Facebook introduces Messenger service </li></ul><ul><li>Google introduces Huddle messenger service </li></ul><ul><li>80% of mobile messages sent via BBM for the UK Youth (Mobile Youth Consultancy) </li></ul>Technology: rising cannibalisation of text messaging revenues triggered by rising data consumption <ul><li>SMS is highly profitable - typically 15-20% of a wireless operator’s revenues but 30-40% of profits </li></ul><ul><li>SMS is being threatened with commoditisation by competing free services available on smartphones </li></ul><ul><li>Could this trend to mobile messaging platforms continue further? </li></ul>
  17. 17. Why we don’t like…Telecoms <ul><li>Telecoms growth has slowed as Europe reaches saturation and now emerging markets are seeing slower growth (witnessed by Telefonica in Latam) </li></ul><ul><li>Increasing competition: </li></ul><ul><ul><li>New wireless operators as governments auction new spectrum and wireless licences, cable/satellite operators convergence, free VOIP services (Skype) </li></ul></ul><ul><li>Commoditisation: </li></ul><ul><ul><li>In the face of consolidation and network sharing there is little to differentiate except marketing and price </li></ul></ul><ul><ul><li>In conjunction with increased competition will this lead to price pressure? (recent Telefonica 40% cut in DSL prices) </li></ul></ul><ul><li>Competition from handset manufacturers </li></ul><ul><ul><li>Handset manufacturers increasingly competing with telcos by selling direct to subscribers (eg apps) and claiming a share of operator’s revenue (eg iPhone) </li></ul></ul><ul><ul><li>Many customers select an operator based on the handset available not the service of the operator </li></ul></ul><ul><li>Tough regulatory environment </li></ul><ul><ul><li>EU regulation has pushed down wireless interconnect, roaming and termination fees </li></ul></ul><ul><ul><li>Regulation is lowering barriers to entry by encouraging competition </li></ul></ul>Negative structural trend from a change in revenue mix <ul><li>The sector is suffering from a change in revenue mix away from high margin/low capex voice to low margin/high capex data </li></ul><ul><li>This results in pricing pressure on the largest and most profitable revenue stream of mobile voice </li></ul><ul><li>Continual change in revenue mix will require further investment in capex given the high capacity utilisation of data </li></ul><ul><li>This has the potential to lower FCF with a potential impact on cash distribution in outer years </li></ul>Industry dynamics have become less attractive Source: SG Cross Asset Research, Ofcom – The International Communications Market 2008, at August 2011 European Telecoms Revenue Breakdown Fixed Broadband SMS Mobile voice Mobile voice represents c40% of industry revenues and a higher percentage of industry cash generation, due to low capital intensity
  18. 18. Why we don’t like…Banks <ul><li>Not just because they are warrants on EU Sovereign Crisis </li></ul><ul><li>They’ve never been particularly good businesses anyway </li></ul><ul><li>Why? </li></ul><ul><li>Paltry ROA </li></ul><ul><li>Leveraged (at times to the hilt)… </li></ul><ul><li>… to produce acceptable return to the shareholder (ROE) </li></ul><ul><li>Management </li></ul><ul><li>Accident prone </li></ul><ul><li>Management </li></ul><ul><li>Management </li></ul><ul><li>Management </li></ul>
  19. 19. Europe – where we really are Source: Mirabaud Securities LLP,  at 22 August 2011 European market: trend P/E, 1980-2011 7.9x trend
  20. 20. Europe – where we really are <ul><li>What we like </li></ul><ul><li>Sentiment towards (Western) equities is cautious, even fearful </li></ul><ul><li>Europe is out of favour </li></ul><ul><li>Blue chips are cheap </li></ul><ul><li>What we don’t like </li></ul><ul><li>The West is deleveraging </li></ul><ul><li>And will continue to do so </li></ul><ul><li>The battle between reflation and deflation </li></ul>
  21. 21. Strategy <ul><li>Remain wary of the indebted </li></ul><ul><li>Favour the cash rich </li></ul><ul><li>Pay close attention to valuation </li></ul><ul><li>Avoid the macro bet </li></ul><ul><li>Be careful when sentiment is one way – “buy the East, sell the West” </li></ul>
  22. 22. Where we are <ul><li>The tension between macro and micro </li></ul><ul><ul><li>Nowhere more so than in Europe </li></ul></ul><ul><li>The sustainability of profit margins </li></ul><ul><ul><li>Can they push on to new highs? – very unlikely </li></ul></ul><ul><ul><li>Certain sectors look vulnerable </li></ul></ul><ul><ul><ul><li>Chemicals </li></ul></ul></ul><ul><ul><ul><li>Capital goods </li></ul></ul></ul><ul><li>A year of inflection </li></ul><ul><ul><li>From “beta” to quality </li></ul></ul><ul><ul><li>From industrials to pharma </li></ul></ul><ul><ul><li>From small to large? </li></ul></ul>
  23. 23. Appendix
  24. 24. Henderson European Select Opportunities Fund Performance since 31 August 2006 Source: Henderson/Morningstar/Thomson Datastream, at 31 August 2011 Basis: Mid to mid, net income reinvested, net of fees, in Sterling The Fund performance based on 12:00 (noon GMT) valuation. Index performance based on close of business valuation (local time). Sector Average performance is based on valuation point of underlying funds in universe Source: Henderson/Morningstar/Thomson Datastream, at 31 August 2011 Index: FTSE World Europe ex UK Index (Total Return) Sector: Morningstar Europe ex UK Sector Average Inception date: 1 September 1984 All ratings, at 31 August 2011 <ul><li>+3,259.3% since inception </li></ul>% Performance 1 st 51.2 59.1 71.6 10y % 2 nd 5.0 3.4 6.9 1y % 1570.7 7.2 -11.8 Sector average 1 st - 3259.3 Inception % 11.6 -9.8 Index 1 st 1 st Quartile ranking 15.6 -9.6 Fund 5y % YTD %
  25. 25. Portfolio overview vs FTSE Europe ex UK Source: Factset, as at 31 August 2011 Index: FTSE World Europe ex UK Includes Cash & Unassigned Source: Factset, as at 31 August 2011 Index: FTSE World Europe ex UK Includes Cash & Unassigned Country allocation as at 31 August 2011 Sector allocation as at 31 August 2011 Telecommunications Technology Industrials Utilities Oil & Gas Financials Consumer Services Healthcare Basic Materials Consumer Goods Underweights % Overweights % -2.0 Active weight % +6.3 +1.7 +1.6 +0.3 +0.1 -0.2 -0.7 -1.1 -1.3 -1.8 -5.2
  26. 26. Henderson European Focus Fund Source: Henderson/Morningstar/Thomson Datastream, at 31 August 2011 Basis: Mid to mid, net income reinvested, net of fees, in Sterling Index: FTSE Europe ex UK Index (Total Return) Sector: Morningstar Europe ex UK sector average Inception date: 31 January 2001 Performance since 31 July 2006 % Source: Henderson/Morningstar/Thomson Datastream, at 31 August 2011 Basis: Mid to mid, net income reinvested, net of fees, in Sterling The Fund performance based on 12.00 (GMT) valuation. Index performance based on close of business valuation (local time). Sector Average performance is based on valuation point of underlying funds in universe Performance 2 nd -2.8 -2.8 -4.4 3y % 1 st 5.0 3.4 14.3 1y % 7.2 3.9 -11.8 Sector average 4 th 11.6 -2.4 5y % 3.2 -9.8 Index 1 st 1 st Quartile ranking 12.0 -7.9 Fund 2y % YTD %
  27. 27. Portfolio overview vs FTSE Europe ex UK Source: Henderson/Factset, as at 31 August 2011 Index: FTSE Europe ex UK Excludes Cash & Unassigned Source: Henderson/Factset, as at 31 August 2011 Index: FTSE Europe ex UK Excludes Cash & Unassigned Country allocation at 31 August 2011 Sector allocation at 31 August 2011 Oil & Gas Utilities Financials Basic Materials Telecommunications Consumer Services Consumer Staples Healthcare Industrials Underweights % Overweights % Technology +3.7 Active weight % -0.7 +0.3 +1.4 +0.5 +1.7 -0.5 +2.6 -4.7 -4.5 -6.2
  28. 28. Henderson European Absolute Return Fund Net cumulative returns – GBP Performance - since inception +7.6% Source: Henderson Global Investors at 31 August 2011 Basis: Net of performance & management fees, Sterling Inception date: 31 January 2009 For illustrative purposes only – no representation is being made that the fund is likely to achieve returns in the future similar to those shown
  29. 29. Biographies John Bennett – Director of European Equities John joined Henderson in 2011 as Director of European Equities. Prior to that, John was a Senior Investment Manager in the European Equity team at Gartmore. John has a 21-year track record of managing Continental and Pan European Equities and joined Gartmore in 2010 from GAM where he spent 17 years. At GAM John managed the GAM Star Continental European Equity Fund and the GAM Star European Equity Fund. Both funds were awarded a AAA rating by S&P and together received a total of 27 performance awards at the Lipper Fund Awards 2009. John qualified in 1986 as a Member of the Chartered Institute of Bankers in Scotland.
  30. 30. Henderson Global Investors 201 Bishopsgate, London EC2M 3AE Tel: 020 7818 1818 Fax: 020 7818 1819 Important Information This document is solely for the use of professionals and is not for general public distribution. This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Prospectus before investing. Issued in the UK by Henderson Global Investors.  Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE), Gartmore Investment Limited (reg. no. 1508030), Gartmore Fund Managers Limited (reg. no. 1137353), (each incorporated and registered in England and Wales with registered office 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Services Authority to provide investment products and services. Telephone calls may be recorded and monitored.
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