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Pictet hds final version citywire jan 2012

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  • Good Morning Everyone. My name is Emma Stenzel. In this session we are going to be looking at an Equity based Investment Strategy which we first launched back in 2005 to provide a steady yield from a portfolio with below average volitility.
  • Over the course of the next 20 minutes or so we will look at why we feel this approach is such a good fit for current market conditions. We will see how the fund is managed and look at the portfolio construction. And then after wrapping up we will have time for any questions you may have and for some open discussion.
  • In this economic climate it has become increasingly difficult to find a decent level of income for clients without exposing them to undue risk and volatility. As we will see many of the assets which once we would have looked to now either pay historically low yields or have become riskier than would have seemed possible just a few years ago – such as Greek sovereign debt for example. These two charts show the leading economic growth indicators for the Eurozone and the UK for the last 2 years. This data is calculated by taking 15 separate economic factors into account, and is a system which is proprietary to Pictet. It was during a similarly low yield environment in Japan 2005 that we first created this strategy. The idea was to invest in a Global Portfolio of companies with Defensive Business models which paid above average Dividends. The fund was initially sold only to Retail investors and at the depths of their Lost Decade had reached $12bn in size and was owned by one in five of the Japanese population! Since then we have launched a fund which enables UK Investors to access this strategy.
  • The High Dividend Selection Fund’s aim is to outperform the MSCI World over the long term with lower volitility. The strategy we developed back in ’05 was very simply to invest in lower volatility stocks which importantly have a predictable and stable cash flow and an above average yield. The fund is Globally invested and is benchmark unaware and run to a stock picking, bottom up process. We have 5 managers running the fund – which at an amc of just 1.2% gives you very good value for money! And the fund pays out a steady level of income each month.
  • One of the most fundamental factors when considering a stock for inclusion in the portfolio is that it must pay an above average dividend of 3% or above. You will no doubt have come across research supporting the case for investing in Higher Yielding stocks to provide superior investment returns with lower volitility. The next few slides illustrate this clearly. Firstly here we can see that over the last 83 years High Yielding stocks in the US market provided an annual return of 11.2% against just 8.4% for non-yielding stocks.
  • Here we have another lengthy time period. This time the data is taken from 21 countries over a 110 year period. The zero yielding stocks – shown here in brown – show a much higher Standard Deviation than the Higher Yielding shown in red. And looking at the Sharpe Ratio is equally compelling – here we see that for each one unit of risk taken the Higher yielding stocks gave a significantly higher return than the non-yielding stocks.
  • Here we see a comparison of yield levels for many of the areas we have traditionally looked to for income seeking clients. The red bar shows the level of yield for our portfolio which at 5.3% per annum is higher even than that for the MSCI World High Dividend Index.
  • These two charts show the level of yield and cash flow volitility of the various different MSCI World High Dividend Yield sectors. The top chart shows the level of vol on this axis and the level of yield on this one. The green triangle here shows the position of the average of all the various High Dividend Yield stocks for all of these sectors. To get the best risk return characteristics you would of course need to be in this top left area here. Our porfolio invests most heavily in sectors such as telecoms and utilities which fall in this top left quadrant, no it is unsurprising that our portfolio also sits in this area of the chart which is exactly where you would want it to be. The second chart shows the same but on a stock rather than a sector level. As you can see the portfolio shows again a lower vol and higher yield than the average.
  • These are the 5 Investment Managers who run our High Dividend Selection Portfolio. Between them they have over 70 years of investment experience.
  • As you would expect from a company with Pictet’s Global Reach and resources we have a wealth of internal analytical and research resources which feed into the fund team as you can see here.
  • The first step in the investment process for our HDS fund is to create a database fo all stocks with a market cap. Over $500m and an above average Div yield of 3% and above. Of the 700 or so stocks that result we filter those further selecting only those with below median Cash flow vol. It is on this remaining 340 or so stocks that we run our various Quantitative Screens and Qualitative scoring to come up with ideas for investment. Those stocks are selected finally on a purely bottom-up, non bench-mark aware basis.
  • An example of this process in action can be seen here. Altria is a tobacco company. Each stock up for inclusion is given a starting weight of 3% after Quant Screening this was discounted by 1.5% in this instance giving a new initial weight of 1.5%. After Qualitative scoring factors were considered this added 1% to the weight, and as there weren’t any macro factors to be taken into account in this instance the portfolio weight reached was 2.5%.
  • The proof of the pudding being in the eating you’ll no doubt be interested to see what this investment process has achieved since it’s inception in 2005. As you can see the strategy has outperformed the MSCI World index since it’s launch in 2005. On an annualised basis it has returned 5.9% p.a vs a return of just 1.7% for the MSCI World. While the risk in the portfolio was lower than that measured in the MSCI. Question What is the best performance contribution from inside or outside the utility universe? Our sector outperformance is driven by sector allocation and stock picking. By sector allocation we mean investing in infrastructure outside of the traditional MSCI utilities scope. What happened in 2008 (fund under-performed)? 2008 was an extremely difficult year and adjusting the portfolio to the reality took a little bit longer than expected.
  • As I mentioned at the start this strategy was initially created in answer to the low yield environment Japanese investors found themselves in and so for the first few years was only available as a Japanese Unit Trust. We opened the fund up to Global investors in 2010 with the launch of this Luxembourg domiciled portion of assets. You can see that over this time period too the strategy has outperformed the MSCI World.
  • The fund invests in a wide selection of sectors across global markets, focusing in on wherever companies can be found which have a defensive business model, low cash flow vol and an above average and steady level of dividend. We have no exposure to small caps and the majority of the fund is invested in large cap stocks. With a utility exposure of 82% , a telecom exposure of 15% and a 3% investment in energy stocks the fund ‘s exposure to the economic cycle is low. The currency exposure is well balances between EUR, USD, GBP and the rest of the world. We aim to build our emerging market exposure up to five percent. Currently we are at 2%.
  • With a utility exposure of 82% , a telecom exposure of 15% and a 3% investment in energy stocks the fund ‘s exposure to the economic cycle is low. The currency exposure is well balances between EUR, USD, GBP and the rest of the world. We aim to build our emerging market exposure up to five percent. Currently we are at 2%.
  • With a utility exposure of 82% , a telecom exposure of 15% and a 3% investment in energy stocks the fund ‘s exposure to the economic cycle is low. The currency exposure is well balances between EUR, USD, GBP and the rest of the world. We aim to build our emerging market exposure up to five percent. Currently we are at 2%.
  • Questions: Is the capital vs income gain performance calculated in real or nominal term? Nominal What happened in 2005 as utilities dropped? Mean reversion after an exceptional 2004… Why did you only back-test on utilities and not the other HY infrastructure? It’s the most important part of our universe and we have more historic on it (also see fund track record – 3% TE with MSCI Utilities) Why do you limit your investments to infrastructure? Business model gives stability and visibility to guarantee a high dividend also the regulated nature of the biz enables revenue increases in inflationary periods What happens in a deflationary period? Is the fund mainly regulated or deregulated? See slide 17 Are you going buy a stock you don’t like just because of its high liquidity and yield? No, a position can be brought to 0 by a negative business franchise, management score, or valuation. What is the leverage of these companies? Typically 50/50 with the telecoms having relatively less debt while MLPs a little bit more. The world equities are at c. 30% debt. How is the dividend treated tax wise? We do our best to optimise within the Luxembourg’s regulatory framework (no details, differs country by country, etc). Is there a dividend reinvested plan? Yes FX hedging? No but we do control the FX exposure by using fix ranges by major FX groups
  • Transcript

    • 1. Pictet-High Dividend Selection Emma Stenzel Fund Distribution and Marketing For Professional Investors only January 2012
    • 2. Agenda
      • Investment case
      • Investment team and process
      • Portfolio review
      • Conclusions
      • Technicals
      • Appendices
    • 3. Investment case 1
    • 4. Low yield environment
      • Europe and the UK are sliding towards recession
        • Eurozone woes will weigh heavy on the UK
        • Political unity in Europe is unlikely in the short term
        • Policy response is weak so far
        • Significant stress in the European banking system
        • Cash injections from Central banks will help
      • Traditional sources of income are diminished
        • Bond yields at all time lows
        • Government policy will favour lower yields
        • Higher yields will carry higher risks – Greece ??
      • Equity dividends can be an alternative source of income
      Source: Pictet, -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Leading index growth %m/m -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Leading index growth %m/m Eurozone sequential leading (Pictet) growth M/M The UK is not insulated from the Eurozone
    • 5. Key characteristics
      • Focus on lower volatility stocks with:
        • Predictable and stable cash flows
        • An above average yield
      • Wide investment universe:
        • All sectors of the MSCI World
        • Developed and emerging markets
      • Experienced investment team:
        • Proven track record in high yield equity investing
        • Unique and disciplined benchmark unaware investment process
      • Monthly Distribution of dividend*:
        • Dividend policy reviewed annually (September)**
      Aim is to deliver equity returns with lower volatility and higher dividend yields *For monthly distributing share classes (P dm USD, R dm EUR, R dm USD, I dm GBP, P dm GBP,I dm, GBP). **Current payout level for annual dividend distribution is €4.00 and €0.33 for monthly distribution.
    • 6. Higher yielding stocks outperform over the long term Insert here your graphs and tables Source: Professor Kenneth French, Tuck School of Business, Dartmouth (website). Logarithmic scale. Stocks were divided in quartiles. The High yield had an annualised total return of 11.2%, the Medium yield had an annualised total return of 10.3%, the Low yield had an annualised total return of 9.1% and the Zero yield had an annualised total return of 8.4%. Returns on US stocks by yield, 1927-2010
    • 7. … and enhance risk-return Source: Elroy Dimson, Paul Marsh and Mike Staunton analysis using style data from Professor Ken French, Tuck School of Business, Dartmouth, Dimensional Fund Advisors, MSCI, Thomson Reuters, Credit Suisse Research and London Business School Higher yield: top 50% yielding companies Lower yield: bottom 50% yielding companies Risk and return from alternative yield strategies, 1900–2010
    • 8. Attractive dividend yield makes for a timely investment World Government Bond: Citigroup World Government Bond Index, World Equities: MSCI World Index, US Government Bond: Citigroup US Government Bond Index, US A Corporate Bond: Citigroup US A Corporate Bond Index, German Government Bond: Citigroup German Government Bond Index Source: Factset, as of 30/12/2011 Yield level of the Pictet-High Dividend Selection Portfolio and various asset classes
    • 9. Enhancing the cash flow (CF) volatility and dividend yield
      • Sector level:
      • We look at all sectors
      • Company level:
      • We select companies that enhance the portfolio’s cash flow volatility and dividend yield characteristics
      • We create a non cyclical growth portfolio with an attractive dividend yield profile
      Cash flow (CF) volatility: standard deviation of annual operating CF growth rate Source: Credit Suisse Holt database FY2006~ FY2010 MSCI World High Dividend Yield Companies: CF Volatility and Dividend Yield (5 year average) MSCI World High Dividend Yield Sectors : CF Volatility and Dividend Yield - 5 yr average
    • 10. Investment team & process 2
    • 11. Experienced investment team Bachelor's degree in International Business from University of Warwick (UK). Passed all three levels of CFA examinations. Economics degree & postgraduate Sorbonne & business degree from Institut d'Etudes Politiques (Paris) Master's degree in Business Administration from Laval University (Quebec city, Canada) Master's degree in Financial Policies and Investment Sciences from EHSAL (Brussels) Master’s degree in Economics from the University of Bern Education SG - 1994-1996 ING Aurel-Leven - 1996-1999 Puilaetco Dewaay Ixis AM - 1999-2004 Pictet & Cie - 1998-2005 Robeco - 2002-2007 UBS Brinson - 1992-1997 PAM - 2008 to date PAM - 2004 to date PAM - 2005 to date PAM - 2007 to date PAM - 1997 to date History 3.3 years experience 18 years experience 14 years experience 15 years experience 20 years experience Junior Investment Manager Senior Investment Manager Senior Investment Manager Senior Investment Manager Senior Investment Manager Piotr Stopinski Karen Kharmandarian Louis Veilleux , MBA, CFA Bruno Lippens Hans-Peter Portner , CFA Manager
    • 12. Investment team & resources Karen Kharmandarian Senior Investment Manager Financials European & Emerging Markets Utilities INVESTMENT MANAGERS Hans-Peter Portner , CFA Senior Investment Manager Head of Sector Theme & Funds Louis Veilleux , MBA, CFA Senior Investment Manager Energy, Industrials & Materials North American Utilities Bruno Lippens Senior Investment Manager Telecom Services, IT & Healthcare Piotr Stopinski Junior Investment Manager Consumer Goods PAM EQUITY RESEARCH CREDIT RESEARCH EMERGING MARKETS DEVELOPED MARKETS SMALL CAP TEAM PAM STRATEGY UNIT RISK MANAGEMENT
    • 13. Summary of investment process INVESTABLE UNIVERSE: HIGH DIVIDEND DEFENSIVE EQUITIES GLOBAL EQUITIES DATABASE HIGH DIVIDEND EQUITIES
      • Cash flow volatility:
      • Selecting stocks with below High Dividend Equities median cash flow volatility
      Proprietary quantitative screening: Level of dividend yield Liquidity Stock volatility Cash flow volatility In-depth qualitative analyses of potential of dividend (scoring): Business franchise Management Valuation Industry dynamics Risk control: Currency and sector allocation c.700 companies USD 10tn market cap c.340 companies USD 5.7tn market cap c.60-100 companies PICTET-HIGH DIVIDEND SELECTION Higher than average dividend yield relative to global equities database Market cap >$ 500m Quantitative: Price momentum tool Holt screening Earnings revision monitoring Qualitative: Management meetings Pictet research Input other investment teams Sell side research Industry contacts Idea Generation Portfolio weight
    • 14. Investment process example: Altria Portfolio construction (Screening) No adjustment for dividend yield and liquidity. Slight adjustment for stock volatility while 1.2% adjustment for CF volatility (~ 22% above investable universe median of 18%). Company (Scoring) 1% due to positive business franchise (score +0.6), strong management score (score +1.6) and positive valuation score (+1.0). Company score = +0.6*40% +1.6*20% + 1.0*40% = +1.0% Industry factor No particular discount on FX, margin and financial leverage Source: Pictet Asset Management, as of 30/12/2011 Quantitative Screening 2.5% 0% 1.0% 1.5% -1.5% 3.0% 0 1 2 3 4 5 % Starting weight Initial weight* Qualitative analysis (Scoring) Industry factor Portfolio weight * Liquidity, volatility, yield and CF volatility are calibrated. The sum of initial weights is calibrated to 50% on a pro rata basis and is a function of the sustainable fund size and the structure of the investable universe. Investment process example
    • 15. Portfolio review 3
    • 16. Successful high yield investor since 2005 Established track record in a high yield equities fund developed for Japanese market Source: Pictet, Net of fees performance, as at 31/05/2010. Rebased to 100. Source: Pictet, Net of fees performance, as of 31/12/2010 Portfolio Net performance (March 2005 - May 2010) in EUR 15.3% 13.1% 13.8% Risk 1.7% 4.7% 5.9% Annualized return *Inception March 2005 8.7% 1.4% 3.3% 2010 28.8% 5.6% 13.4% 2009 -38.9% -27.1% -30.1% 2008 -1.9% 9.6% 10.1% 2007 7.4% 21.5% 23.6% 2006 21.0% 23.2% 21.5% 2005* MSCI World MSCI World Utilities Portfolio
    • 17. Review of performance as of December 30, 2011 Source: Pictet, data as at 30/12/2011 in EUR, net of fees -1.4% -3.1% 0.2% 11.2% 3.6% -3.1% MSCI World Composite* 3.3% -0.1% 1.5% 4.5% 1.7% -0.1% Pictet-High Dividend Selection-P EUR Since inception 1 year 6 months 3 months 1 month YTD   Performance of Pictet-High Dividend Selection in EUR since inception (May 2010)
    • 18. Sector and market cap breakdown Source: MSCI, Pictet Asset Management, as of 30/12 /2011 Sector breakdown Market cap breakdown
    • 19. Region and currency breakdown Source: MSCI, Pictet Asset Management, as of 30/12 /2011 Rest of the World: SEK, CAD, BRL, HKD, JPY, AUD, CKZ, ZAR, IDR & SGD. Emerging markets amount to 8.3% of total. Region breakdown Currency breakdown
    • 20. Credit quality Source: MSCI, Pictet Asset Management, as of 30/12 /2011 83% INVESTMENT GRADE Outstanding credit quality Credit rating
    • 21. Conclusions 4
    • 22. Conclusions
        • Aims to provide equity returns with lower volatility and higher dividend yields:
          • Strong and predictable cash flows lead to more attractive dividend income
          • High and growing dividend is a source of stable investment returns
        • Global investment universe
        • Benchmark unaware
        • Market and economic uncertainties require a defensive investment approach and a focus on recurring income
        • Substantially higher dividend yield versus other traditional yielding asset classes
        • Experienced management team with a proven track record in High Dividend Yield equities
        • Unique investment process developed over many years
      Why invest in Global High Dividend Yield equities? Why now? Why Pictet?
    • 23. Technicals 5
    • 24. Technicals
      • Name: Pictet-High Dividend Selection
      • Law: Sicav part I of Luxembourg Law
      • Consolidation currency: EUR
      • Calculation: daily; settlement NAV + 3
      • Inception: 14 May 2010
      • Fund size: EUR 440mn, as per 31 December 2011
      • Dividend: Reinvested (I, P, R) or distributed (P dy, P dm)
      • Benchmark: MSCI World (net div reinvest)
      • Share classes:
      * I-Share: min investment EUR 1'000'000, or equivalent for USD, GBP and CHF share classes Source: Pictet, as at 30/09/2011 1.75% 0.30% 1.60% LU0503635202 P USD 1.78% 0.30% 1.60% Y LU0503636275 P dy CHF 1.72% 0.30% 1.60% Y LU0503635467 P dm USD 1.34% 0.30% 1.20% Y LU0503635970 P dm GBP 1.79% 0.30% 1.60% LU0503636358 P CHF 0.86% 0.30% 0.80% LU0503635111 I USD * 0.93% 0.30% 0.80% LU0503633769 I EUR * 0.63% 0.30% 0.60% Y LU0503635897 I dm GBP * 0.60% 2.30% 2.30% 2.30% 2.30% 1.60% 1.60% MF(%) LU0503635897 LU0503635541 LU0503634734 LU0503635624 LU0503635038 LU0503634577 LU0503634221 ISIN TER(%)** Admin/ Custody Dividend distribution Class 0.63% 0.30% Y I dm GBP * 1.76% 0.30% Y P dy EUR 2.44% 0.30% Y R dm USD 2.42% 0.30% R USD 2.44% 0.30% R EUR 2.43% 0.30% Y R dm EUR 1.71% 0.30% P  EUR
    • 25. Pictet Asset Management SA Route des Acacias 60, 1211 Geneva 73 Tel: +41 58 323 3333 Fax: +41 58 323 2040 Pictet Asset Management Limited Authorised and regulated by the Financial Services Authority Moor House, Level 11 120 London Wall London EC2Y 5ET Tel: +44 20 7847 5000 Fax: +44 20 7847 5300 Pictet Asset Management (“PAM”) definition: In this document, Pictet Asset Management includes all the operating subsidiaries and divisions of the Pictet group that carry out institutional asset management: Pictet Asset Management SA, a Swiss corporation registered with the Swiss Financial Market Supervisory Authority FINMA, Pictet Asset Management Limited, a UK company authorised and regulated by the Financial Services Authority, and Pictet Asset Management (Japan) Limited, a Japanese company regulated by the Financial Services Agency of Japan. This document is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. This document has been issued in Switzerland by Pictet Asset Management SA and/or Pictet & Cie and in the rest of the world by Pictet Asset Management Limited and may not be reproduced or distributed, either in part or in full, without their prior authorisation. For UK investors, the Pictet and Pictet Total Return umbrellas are domiciled in Luxembourg and are recognised collective investment schemes under section 264 of the Financial Services and Markets Act 2000. Swiss Pictet funds are only registered for distribution in Switzerland under the Swiss Fund Act, they are categorised in the United Kingdom as unregulated collective investment schemes. The Pictet group manages hedge funds, funds of hedge funds and funds of private equity funds which are not registered for public distribution within the European Union and are categorised in the United Kingdom as unregulated collective investment schemes. For US investors, the Shares of the funds managed by the Pictet Group are being offered to United States tax-exempt investors Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act. www.pictet.com For more information, please contact your Pictet client relationship manager

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