Hermes

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Hermes

  1. 1. For professional investors onlyHermes Japan Equity FundMay 2012
  2. 2. Hermes Fund ManagersIntroduction Global institutional asset manager – Independent of any broader financial services group – Expertise across multiple investment strategies with AUM of €31.7bn* Client alignment and focus – Owned by the BT Pension Scheme (BTPS) – Established institutional heritage and fiduciary culture – Focus on long-term performance over short-term profitability Responsible Asset Managers – A leader on corporate governance and responsible investing – Transparency and the highest professional standards core to Hermes – Open and interactive relationships with clients Multi-boutique structure – Series of dedicated specialist investment boutiques – Co-investment from managers in strategies managed – Remuneration aligned to long-term investment performance*Please note the total AUM figure for Hermes Fund Managers Limited (“HFM”) includes €4.6bn of assets that are managed by Hermes GPE LLP (“HGPE”), which is a jointventure between HFM and GPE Partner Limited. HGPE is an independent entity and not part of the Hermes groupSource: Hermes as at 31 December 2011 Hermes Fund Managers I 11Q4 | 2
  3. 3. Hermes Fund Managers Institutional asset managerEstablished 1983 Breakdown by asset type (%)Owner BT Pension Scheme (BTPS) Fixed Income 40.8Head Office London Equities 14.2 Commodities 3.6Other Offices Boston, New York, Sydney Hedge Funds 5.5No. of Boutiques 14 Private Equity 14.3 Real Estate 18.7Assets under Management €31.7bn* Cash 2.8Assets under Stewardship €107bn AUMNo. of Investment Professionals 137 by client type (%) Third party 34.6 BT Pension Scheme 65.4*Please note the total AUM figure for Hermes Fund Managers Limited (“HFM”) includes €4.6bn ofassets that are managed by Hermes GPE LLP (“HGPE”), which is a joint venture between HFMand GPE Partner Limited. HGPE is an independent entity and not part of the Hermes groupSource: Hermes as at 31 December 2011 Hermes Fund Managers I 11Q4 | 3
  4. 4. Hermes Fund Managers Investment boutiques Hermes Fund Managers Hermes Investment Office Responsible Investment Equities Fixed Income Alternatives Services Hermes Hermes Hermes Hermes Hermes Hermes Hermes Global Global Sourcecap Hermes BPK Partners Real Estate Equity Small & Mid Government Equities (European Credit (Hedge Fund Investment Ownership Cap Equities & Inflation Advisors Equities) Solutions) Management Services Bonds Hermes Hermes Hermes Hermes Hermes GPEQuantitative Emerging Japanese Commodities (Private Equities Markets Equities Equity)*Hermes Focus Asset Management (Activist Equities) *Hermes GPE LLP (“HGPE”) is a joint venture between Hermes Fund Managers Limited and GPE Partner Limited Source: Hermes as at 31 March 2012. Note: The chart does not represent legal structure of investment boutiques Hermes Fund Managers I 11Q4 | 4
  5. 5. Introduction to Hermes Japanese Equities Established: Fund inception 18 January 2010 Offering: Mid to large capitalisation portfolios Team: Two investment professionals with over 20 years investment experience each Assets under management: €194m* Philosophy: The most consistent way to outperform is to buy quality companies when they are out of favour Investment process: – Only invest in companies with stable and dependable returns over their cycle – Buy when price deviates significantly from fair value – Concentrated portfolios Track record: – The present Hermes Japan Equities Fund has outperformed the Topix benchmark by 5.5% on an annualised basis since inception* – The fund is currently ranked in the 3rd percentile since inception*** Source Hermes as at 31 March 2012. Performance shown in sterling and gross of all fees. **Lipper Survey as at 31 March 2012 Hermes Japan Equity | 5
  6. 6. Portfolio Manager track record Annualised Geometric Relative Returns Dillon, Read SG Asset Management Longview Partners Hermes Fund Managers June 88 - August 1996 March 98 - August 03 March 06 to September 09 18 January 10 (Inception) to 31 March 2012 10% 9.2% 9.4% 9% 8% 7% 6.1% 6% 5.5% 5% 4% 3% 2% 1% 0%Source: Hermes; Dillon, Read – Frank Russell; SG Asset & Longview – Lipper. Data refers to previously managed fund (when Principal). Please note that there can be noguarantee that the performance of the fund will in any way achieve similar future results. Performance shown in sterling and gross of fees. Past performance is not a reliableindicator of future results Hermes Japan Equity | 6
  7. 7. Fund performance since inception Cumulative relative performance against Topix Quarterly relative performance against Topix 14 6 5.46 5 4.19 12 4 3.34 2.81 10 3 1.78 2 1.43Return (%) 8 0.87 Return (%) 1 0.66 0.05 6 0 -1 4 -2 -3 2 -4 -3.16 0 Since inception* Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Jul 2010 Jul 2011 Oct 2010 Apr 2011 Oct 2011 Jan 2011 Jan 2012 Dec 2009 Mar 2010 Hermes Japan Equity Fund 3rd percentile against peers since inception** Source: Hermes. As at 31 March 2012. *Annualised. **As at 31 March 2012. Fund inception 18 January 2010. All figures are shown in sterling and gross of all fees. Benchmark Topix Hermes Japan Equity | 7
  8. 8. Fund risk characteristics HermesRelative Return 5.5%*Information Ratio 1.3xTracking error (ex post) 4.8%Beta (relative to benchmark) 1.1* Since inception annualised, all other figures 1 year to 31 March 2012. All figures are shown in sterling and gross of all fees.Source: Underlying Returns from SC6/Northern Trust. Risk values calculated manually to incorporate since inception annual returns. As at 31 March 2012 Hermes Japan Equity | 8
  9. 9. Investment philosophy“We believe that long-term investment in quality companies, bought significantlybelow fair value, produces the best risk adjusted returns for clients.” Target valuation and price set at time of purchase FairStocks are valuebought for a re- Value:rating when Pricetheir price is to Stock 4significantly book Stock 3below fair value Stock 1 Stock 2 Quality: Return on invested capital For illustrative purposes only Hermes Japan Equity | 9
  10. 10. Investment process Stage 4. Stage 1. Stage 2. Stage3. Portfolio and Quality screen Value screen Selection criteria risk management Stocks added to Investment universe 250 → 20 stocks 20 → c.7 stocks final portfolio of approx 30- 1500 → 250 Stocks 35 stocks• History of attractive • Price at large deviation • Price to book at extreme • 3.5% holdings returns from fair value low relative to history • 20% max sector weight• A leading company with • Price to book history • Reason for de-rating • Valuation targets set for a competitive advantage used as proxy for fair temporary all positions at time of in its sector value • Investor perception of purchase• Stable long-term • Reference also to fundamentals • Sell when valuation demand discount to free cash considerably worse than target reached, more flow, and dividend yield reality• Strong balance sheet attractive alternative analysis opportunity or fundamentals materially change Hermes Japan Equity | 10
  11. 11. Current positioning – StocksTop 5 Overweight Positions Weight (%)Name Sector Portfolio Benchmark ActiveTokyo Broadcasting System Holdings Media 4.01 0.06 3.95Nomura Research Institute IT Services 3.93 0.10 3.83Fuji Media Holdings Media 3.94 0.13 3.82Nippon Building Fund Real Estate Investment Trusts (REITs) 3.58 0.00 3.58Sumitomo Electric Electrical Equipment 3.89 0.36 3.53Top 5 Underweight Positions Weight (%)Name Sector Portfolio Benchmark ActiveHonda Motor Automobiles 0.00 2.28 -2.28Canon Office Electronics 0.00 2.08 -2.08Mizuho Financial Group Commercial Banks 0.00 1.47 -1.47Nippon Telegraph & Telephone Diversified Telecommunication Services 0.00 1.46 -1.46Fanuc Corp Machinery 0.00 1.31 -1.31Source: Barra, Weights exclude cash holdings as at 31 March 2012 Hermes Japan Equity | 11
  12. 12. Current positioning – Sectors Top 5 Over and Under Weights (%)12 10.2810 7.69 8 6 5.25 4.99 4.24 4 2 0 -2 -4 -4.75 -4.82 -6 -5.81 -6.07 -8 -7.75-10 Media Transportation Software & Insurance Retailing Pharmaceuticals, Automobiles & Technology Capital Goods Automobiles & Services Biotechnology & Components Hardware & Components Life Sciences Equipment Source: Hermes as at 31 March 2012 Hermes Japan Equity | 12
  13. 13. Style Tilt™ -3.0 -1.0 -2.0 0.0 1.0 3.0 4.0 2.0 Book to Price 2.8 Dividend Yield -0.4 Earnings Yld -2.5 Style Analysis Source: Style Research as at 31 March 2012 FCF Yield -1.6 Sales to Price 0.9 EBITDA to Price -1.5 Rtn on Equity -2.4 Earnings Growth -2.3 Income/Sales -0.2 Sales Growth -0.7 Style Factors IBES 12Mth Gr 1.3 Portfolio Style Skyline™ IBES 1Yr Rev -0.2 Market Cap -1.1 Market Beta 1.1 Momentum ST 1.3 Momentum MT 0.1 Debt/Equity -0.7 Foreign Sales -2.6 Social Resp 0.3 Corporate Gov RM -0.1Hermes Japan Equity | 13
  14. 14. Summary – why Hermes Japanese Equities? Team highly experienced in investing in Japan A repeatable, effective and proven investment process Long-term track record of outperformancePlease note past performance is not a guide to future performance and investments can go up or down Hermes Japan Equity | 14
  15. 15. Appendix
  16. 16. Stock example – East Japan Railway (9020)  Japan’s largest railway operator Price/Book  Revenues very stable 4  Highly profitable office development business 3  Sales hit by earthquake, but now picking up % 2  Trades at only 1x book value - fair value is 1.25x. Upside of 25% 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Return on capital Book Value / Share 8.0% 5,000 7.0% 4,500 4,000 6.0% 3,500 5.0% 3,000 ¥ 4.0% 2,500 3.0% 2,000 2.0% 1,500 1.0% 1,000 500 0.0% 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 16
  17. 17. Stock example – Kamigumi (9364)  Japan’s largest and most profitable port harbour operator Price/Book 2  Stable revenue  Expect major distribution expansion 1.5  Strong balance sheet - 17% of market capitalisation in % cash. Free cash flow yield of 13% 1  Trades well below book value – fair value 1.0x. 29% 0.5 upside 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Return on capital Book Value / Share 14.0% ¥1,200 12.0% ¥1,000 10.0% 8.0% ¥800 6.0% ¥600 4.0% ¥400 2.0% ¥200 0.0% ¥0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 17
  18. 18. Stock example – NTT DATA (9613)  NTT Data is Japan’s largest IT services provider. Price/Book  Historically affiliated with NTT but now boasting a wide- 9 ranging client base in Japan and overseas as it is actively promoting expansion into global markets. 6  The domestic IT market suffered an unprecedented three- % year recession to March 2011, but there are increasing signs that the industry may be entering a new period of 3 growth.  Despite strong margins and rising FCF, the shares have been de-rated over the past decade. A price/book close to 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1.0x provides an opportunity to buy at historically low valuations. ROIC Book Value / Share 250,00025.0%20.0% 200,00015.0% 150,000 ¥10.0% 100,000 5.0% 50,000 0.0% 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 18
  19. 19. Stock example – Sumitomo Electric Industries (5802) Price/Book SEI is one of Japan’s oldest electronic cable companies 3 Traditional electric power and telecom demand is being 2.5 replaced with growth in the automotive sector 2 They seek to have the top global share in auto wire harnessing % 1.5 by 2015 having already tripled their share in the past 20 years 1 Global economic concerns and potential cartel issues caused 0.5 the share price to fall below fair value, providing an opportunity to buy a Company with a strong track record in raising 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 shareholder value ROIC Book Value / Share16.0% ¥1,40014.0% ¥1,20012.0% ¥1,00010.0% ¥800 8.0% ¥600 6.0% ¥400 4.0% 2.0% ¥200 0.0% ¥0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 19
  20. 20. Stock example – Sankyo (6417)  Major manufacturer of pin ball machines for pachinko Price/Book 3 industry  High barriers to entry allow superior returns 2.5  Profit cycle driven by product development 2  % Net cash 75% of market capitalisation. Free cash flow 1.5 yield of 10% 1  Trades well below book value – fair value 1.1x. 50% 0.5 upside 0 2000 2001 2001 2002 2003 2003 2004 2004 2005 2005 2006 2007 2007 2008 2008 2009 2010 2010 2011 2011 Return on capital Book Value / Share 160.0% ¥5,000 140.0% ¥4,500 120.0% ¥4,000 100.0% ¥3,500 ¥3,000 80.0% ¥2,500 60.0% ¥2,000 40.0% ¥1,500 20.0% ¥1,000 ¥500 0.0% ¥0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 20
  21. 21. Stock example – Inpex (1605)  Japan’s largest independent oil exploration and production Return on capital 250.0% company 200.0%  Significant growth potential from large projects in Indonesia and Australia 150.0%  Mishandled early financing caused investors to dump 100.0% holdings in late 2010 50.0%  BOUGHT at large discount to fair value of 0.75x price to 0.0% book value. SOLD at a target fair value of 1.1x price to book 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012  +31% relative return Relative price performance Closure of valuation gap 1100 6 October 10 1000 13 May 11 Fair value 900 1.10 800Price tobook 700value 600 0.75 500 400 Return on invested capital 20% Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jan 07 Apr 07 Oct 07 Jan 08 Apr 08 Oct 08 Jan 09 Apr 09 Oct 09 Jan 10 Apr 10 Oct 10 Jan 11 Apr 11 Oct 11 Jan 12 Apr 12Source: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 21
  22. 22. Stock example – KDDI (9433)  Japan’s second largest mobile telephone network operator Return on capital 25.0%  Aggressive restructuring in early 2000s enabled high returns 20.0% on capital 15.0%  Investors sector rival Softbank and shares de-rated 10.0%  High profits from smart phones restored market confidence 5.0%  BOUGHT at large discount of 0.9x price to book value and 0.0% SOLD at a target fair value of 1.2x book value 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012  + 61% relative return Closure of valuation gap Relative price performance 900 6 May10 850 24 October 11 800 Fair value 750 1.20 700 Price to 650 book value 600 0.90 550 500 450 17% 400 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Return on invested capitalSource: Hermes, Bloomberg as at 2 May 2012 Hermes Japan Equity | 22

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