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Polar capital

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  • 1. North American FundMay 2012This presentation is for one-on-one use with non-US professional investors onlywww.polarcapital.co.uk
  • 2. Investment Team ProfileAndrew Holliman, Lead Fund Manager• 15 years investment experience, previously at Threadneedle and Baillie Gifford. Managed AA rated OBSR and S&P rated $2.5bn Threadneedle American Fund and prior to that the award winning Baillie Gifford American Fund• 10 year record of consistent strong outperformance in all market conditions (c.4% p.a. gross outperformance) and amongst best in class risk adjusted returns. Has outperformed the UK IMA North American peer group in every calendar year as a fund manager. Trustnet Alpha rated fund manager, recognising long-term consistency• Also managed the Threadneedle Global Focus Fund and the Threadneedle and Columbia Global Extended Alpha Funds. All funds significantly outperformed their benchmarks and delivered at least top quartile performance versus their respective peer groups during tenureRichard Wilson, Co-Fund Manager• 13 years investment experience, previously at Threadneedle and Merrill Lynch Asset Management• Managed over $4.5bn of institutional American Equities at Threadneedle. Consistent record of outperformance versus the benchmark and delivered top quartile returns versus peer group• Richard has worked with Andrew for over 8 years and was deputy fund manager of the Threadneedle American FundSource: StatPro and Threadneedle. Past Performance is not indicative or a guarantee of future returns.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 2
  • 3. Track Record – Andrew Holliman• Baillie Gifford American Fund, official tenure from 31 August 2000 – 31 July 2003 – During tenure the Fund returned -27.8% vs. -38.3% for the S&P 500 Index1 – -10.56% p.a. for the Fund vs. -15.27% p.a. for the S&P 500 Index1• Threadneedle American Fund, official tenure from 31 March 2004 to 31 May 2011 – Fund returned 93.88% vs. 53.39% for the S&P 500 Index1 – 9.56% p.a. for the Fund vs. 6.08% p.a. for the S&P 500 Index despite low relative risk mandate1 – 4 out 54 funds (6th percentile) in UK IMA universe during tenure Threadneedle American Fund performance relative to the S&P 500 Composite Index 130% 125% 120% 115% Change 110% 105% 100% 95% 90% Mar 04 Sep 04 Mar 05 Sep 05 Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11Source: Threadneedle. Date: 31 March 2011. Relative returns are the same for all currencies. Fund performance is shown gross of management fees. Performance relative to S&P 500 Composite Index. Fund data isquoted on a bid to bid basis with income re-invested at bid. Gross performance from 31 March 2010 is based on daily cash flows and valuations. Prior to this Global Close prices. Prior to January 2008 based on 12pmprices. Index data provided by Thomson Financial DataStream. Past Performance is not indicative or a guarantee of future returns.Andrew Holliman joined Polar Capital on 15 August 2011. He was the lead manager of the Threadneedle American Fund from 31 March 2004 to 31 May 2011.1: Performance figures are quoted gross of fees and in GBP.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 3
  • 4. Fund Proposition• A focused all-cap North American long-only equity product• Aiming to significantly outperform the benchmark (>5% p.a.) through an investment cycle• Managed by fund managers with a long-term track record of consistently generating alpha• In a performance driven organisation with a culture aligned to the interests of clients• Pragmatic and simple investment philosophy and process focusing on quality and value• That takes advantage of entrenched behavioural inefficiencies in North American marketsFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 4
  • 5. Polar Capital• Specialist investment management boutique focused solely on fund management• Fund managers interests aligned with clients – Commitment to close funds before size detrimentally impacts performance – Fund managers invested alongside clients – Incentivisation promotes performance over asset gathering• Structure and entrepreneurial culture results in fund manager longevity• Robust infrastructure allows fund managers to focus on investing• Best in class sector and geographic expertise and a culture of collaborationFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 5
  • 6. Polar Capital North American Team• Entirely focused on long only equity investing• Generalists with specialist areas of expertise• Backed by best in class sector and geographic teams Andrew Holliman Richard Wilson Lead Fund Manager Co-Fund Manager Technology team Healthcare team Financials team 5 Investment 3 Investment 6 Investment professionals professionals professionals Emerging Japan European UK Markets team team team teamFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 6
  • 7. Polar Capital North American FundKey characteristics• Focused portfolio of 40–60 investments Dublin listed UCITS product• Active money – only invest in what we deem attractive Performance target1 >5% p.a. relative to MSCI North America Index• Bottom-up driven portfolio construction over rolling 5 years Number of positions 40–60• Risk framework underpinned by common sense Market cap focus2 > $750m – Fundamental risk control Typical position size 1–3% relative (Maximum position – Systematic risk control size of 5%) – Diversification Min number of sectors 6 Max sector position 30% Sector over weight limit3 15% Max cash position 20%1: Gross of fees.2: This is a guideline. From time to time stocks could be held with a lower market capitalisation.3: This is a guideline.An S&P Fund Management Rating represents an opinion only and should not be relied on when making an investment decision. “S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc.Copyright © 2011 Standard & Poors Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 7
  • 8. Investment PhilosophyTaking advantage of entrenched behavioural inefficiencies We believe... • The value of a business follows its fundamentals over the long-term Long-term – The market is myopic and extrapolates short-term trends • We are investing in shares of businesses Fundamental – The market is speculative and distracted by noise, themes, gyrations and stories Quality • Businesses with sound balance sheets, able management and sustainably high or improving cash returns on capital, are best placed to grow business value and Value – The market is fixated with revenue growth • Buying into such businesses at a discount to their intrinsic worth is key to driving above average shareholder returns and provides a margin of safety – The market consistently over pays for growthFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 8
  • 9. Investment ProcessWhat we look for in an investment High• Quality and value – ‘good companies at fair prices and fair companies at good prices’• Businesses we understand• Long-term shareholder value creation Low High• Invest at discount to intrinsic worth – provides Valuation further upside potential and ‘margin of safety’ Fundamental quality• Portfolio construction and style tilt driven by stock selection Low Stocks we care aboutSource: Polar Capital.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 9
  • 10. Investment ProcessHow we find our investments Quantitative screening Qualitative screening • Valuation based • Multiple sources • Supported by quality measures • Focused on quality and value Preliminary fundamental analysis • Qualitative checklist In depth fundamental analysis Followed list • Deep dive into company fundamentals • Assessment of intrinsic worth and comparison with market value • Return analysis including downside assessment Portfolio construction • Discussion and debate • Position sizingFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 10
  • 11. Investment ProcessQualitative checklist• Industry 1. Understandable business? 2. Supportive for growth? 3. Capital cycle supportive of returns?• Competition 4. Evidence of pricing power/competitive strength 5. Left field risks/threat of obsolescence?• Financial strength 6. Are the accounts understandable and consistent? 7. Does the company have financial strength and can it finance future growth?• Management 8. Able, honest and operate in the interests of shareholders?• Value creation and valuation 9. Can the business deliver attractive returns for shareholders? 10. Does the stock offer genuine good value?For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 11
  • 12. Investment ProcessHow we appraise investments Industry Competitive Financial model Management dynamics position & strength Assessment of long-term value creation of business to shareholder Long-term valuation and return assessment • Emphasis on normalised cash earnings – “Buffetts owner earnings” • Supported by other valuation measures • Consideration of downside risk• Research aligned with investment philosophy• Objective analysis minimises bias• Rigorous assessment of long-term business fundamentals• Long-term valuation assessment aids portfolio construction and bolsters sell disciplineFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 12
  • 13. Investment ProcessRisk management• Fundamental and stock specific – Rigorous fundamental analysis – Disciplined investment process – Valuation analysis focused on downside as well as upside – Appropriate diversification• Systematic – Focus on systematic measures generated from proprietary systems and Bloomberg – Diversification rules – Experience – Performance attribution• Independent risk control process managed by the Chief Risk Officer – Quantitative controls used to ensure risk is managed to a level consistent with clients’ investment objectives – Risk profile discussed at monthly Risk Management Committee – In depth quarterly portfolio reviewFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 13
  • 14. Stock Example – Time Warner• Diversified media business• Strong content franchises with pricing power and international growth potential• Mid-high single digit annual revenue and operating profit growth achievable over 3-5 years• Return on capital employed likely to improve• High free cash flow conversion - transparent cash return strategy a key driver of returns• 9% normalised 2012 FCF yield• Mid teens business value creation with valuation supportSource: Polar Capital/Bloomberg. Date: 31 March 2012. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities mentioned in this document.A list of all recommendations made within the immediately preceding period is available upon request.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 14
  • 15. Stock Example – Advance Auto Parts• Retailer of auto parts and accessories• Stable business gaining market share• New management implemented sales and margins initiatives• High return on capital (25%) should increase further• Excellent free cash generator – cash being returned to shareholders (12% cash return last year!)• Earnings and FCF/share expected to grow 15%+ p.a. over the next 3-5 years• 14x 2012e P/E and 7% normalised FCF yield – rerating potential and downside supportSource: Polar Capital/Bloomberg. Date: 31 March 2012. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities mentioned in this document.A list of all recommendations made within the immediately preceding period is available upon request.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 15
  • 16. Stock Example – Capital One• Consumer and commercial lending institution with strong competitive advantage in credit cards• Best value quartile price/book and price/earnings• Quality of business highlighted during downturn - only bank of their size that did not require TARP!• Steady growth, market share gains and credit normalisation should result in improving returns• Recent acquisitions held back earnings in short-term - significant upside to normalised earnings power• Mid teens per annum business value creation over next 3-5 years• 7.5x 2012 eps and c.5x 2015 normalised earnings at purchase priceSource: Polar Capital/Bloomberg. Date: 31 March 2012. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities mentioned in this document.A list of all recommendations made within the immediately preceding period is available upon request.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 16
  • 17. Why North America?• Choice: c.2000 companies to choose from, unrivalled diversity• Management: greater number of well managed companies than any other country• Cash generation: and increasing cash return, an important driver of returns• Balance sheet strength: strongest in a generation• Innovative, conducive business environment, abundant resources, relatively favourable demographics “The US may no longer be a glamorous growth stock, but it is still a blue chip” Greg Ip The Little Book of EconomicsFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 17
  • 18. Why North America? Part 2Portfolio snapshot• Attractive valuation: 13.8x current year P/E, 7% Top 10 active positions Fund (%) Active (%) past 12 months FCF yield, 8% next 12 months CBS 3.1% 3.0% FCF yield Advance Auto Parts 2.9% 2.8%• Returning cash: >4% capital return over last Time Warner 3.0% 2.7% 12 months Google 3.8% 2.7% JP Morgan Chase & Co 3.6% 2.4%• Above average quality: Solid franchises, high Covidien 2.5% 2.3% cash generation and pricing power Tyco International 2.5% 2.3%• Improving returns: upside to return on Roper Industries 2.3% 2.3% capital on a 3-5 year view even in difficult McKesson Corp. 2.3% 2.2% economic environment Capital One 2.3% 2.1%Source: Polar Capital. Date: 30 March 2012.It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities mentioned in this document. A list of all recommendations will be available upon request.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 18
  • 19. Polar Capital North American FundOur edge• Investment managers with a long-term record of consistent alpha generation• Backed by best in class resources• Fund and organisational culture aligned with clients interests• Focused, high conviction portfolio of 40-60 stock• Disciplined investment philosophy and process focusing on value and quality• That takes advantage of entrenched behavioural market inefficiencies and has empirical backingAn S&P Fund Management Rating represents an opinion only and should not be relied on when making an investment decision. “S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc.Copyright © 2011 Standard & Poors Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 19
  • 20. AppendicesFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 20
  • 21. US Economic Overview• Deleveraging will act as a headwind for years – fiscal deficit still to be tackled• Policy is reflationary• Signs of a manufacturing renaissance and a path to rebalancing – rebalancing is not all bad!• Current economic momentum is decent• Many areas of economy are still below trend – construction, autos, business investmentDate: 31 March 2012.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 21
  • 22. US Market Overview• Equity returns are not correlated to economic growth!• Profit cycle slowing• But…plenty of growth/return opportunities – Capital return – Market share – Niche industries – International growth – Uncorrelated cycles• Balance sheets and cash generation robust• Focusing on pricing power and sustainability of return on capital is key• Market valuation very reasonable – 2012 P/E of c.13-14x, FCF yield of c.6.0-7.0%, total return yield of 3-4%• Equities provide inflation protection, real growth and income generationDate: 31 March 2012.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 22
  • 23. Sector Positioning Sector weights (%) Fund (%) Benchmark (%) Active (%) Information Technology 21.8% 18.6% 3.2% Consumer Discretionary 18.7% 11.0% 7.7% Industrials 16.6% 9.9% 6.7% Financials 17.5% 16.0% 1.5% Healthcare 10.8% 10.5% 0.3% Consumer Staples 7.5% 10.1% -2.6% Energy 2.0% 12.8% -10.8% Materials 0.0% 4.9% -4.9% Telecommunication Services 0.0% 2.9% -2.9% Utilities 0.0% 3.2% -3.2%Source: Polar Capital. Date: 30 April 2012.It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities mentioned in this document. A list of all recommendations will be available upon request.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 23
  • 24. Top 10 Holdings Top 10 positions (%) Top 10 active positions Fund (%) Benchmark (%) Active (%) Apple 4.9% CBS 3.0% 0.1% 2.9% Google 3.6% Advance Auto Parts 2.9% 0.0% 2.9% Microsoft 3.5% Time Warner 2.9% 0.3% 2.7% CBS 3.0% Google 3.6% 1.1% 2.5% Time Warner 2.9% Tyco International 2.4% 0.2% 2.2% Advance Auto Parts 2.9% McKesson Corp. 2.4% 0.2% 2.2% IBM 2.7% MacDonald Dettwiler & 2.2% 0.0% 2.2% Assoc. Tyco International 2.4% Capital One 2.2% 0.2% 2.0% JP Morgan Chase 2.4% Roper Industries 2.1% 0.1% 2.0% Mckesson Corp. 2.4% Covidien 2.2% 0.2% 2.0%Source: Polar Capital. Date: 30 April 2012.It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities mentioned in this document. A list of all recommendations will be available upon request.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 24
  • 25. Investment ProcessHow we construct portfolios – sizing a position Contribution of Individual Expected return stock risk to overall stock risk portfolio risk • Constant analysis of fundamentals and valuation • Ongoing consideration of return and risk • Continuous weighing up of competing ideas and competition for capitalFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 25
  • 26. Sell DisciplineWe would review a stock and consider selling if:• The discount to intrinsic worth closes/valuation is no longer attractive• Fundamental change/impairment of original investment case• Competing investment opportunities identified• Risk factors change (stock or systematic/portfolio level)For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 26
  • 27. Company Analysis Example Overview and Description: Balance Sheet: Net debt at the recent q was $500m, up from $150m in the year ago quarter (worth keeping an eye on) as buybacks have exceeded cashflow. As a Advance Auto Parts is a retailer of auto parts and accessories. The company operates 3300 stores, primarily in the Mid-West and Eastern United States. Sales to result debt/equity has increased from 28% to 74%, net debt/ebitda from 0.21 to 0.64x . Int coverage has remained the same over the last 12 months at 23x though diy customers represented 71% of sales in 2009 with 29% of sales going to commercial customers. fixed charge cover is only c.3x. The co owns 20% of the stores with the remainder leased. Capitalising leases at 8x gives net debt of $2.8bn, net debt/equity of 266% and net debt/ebitdar of 2.6x. The co targets net debt inc leases/ebitdar of less than 2.5x (assuming 6x capitalised rent) so further gearing is unlikely. S&P and Business and Financial fundamentals: Moodys have recently upgraded the debt. Industry (understandable business?, supportive for growth?, capital cycle? Economic sensitivity?) : Simple business. The industry exhibits fairly stable growth. Secular drivers include ageing car fleet and increased complexity of cars offset slightly by the improved reliability of cars. Commercial sales in the industry Management and Corporate governance (operational record, integrity, alignment with shareholders and capital allocation): CEO was former BBY CFO. grows faster than diy sales given the trend towards out-sourcing to mechanics. Economic cyclicality is limited- there may be mild trading down on discretionary He refreshed a number of exec positions bringing in BBY and TGT execs. Evidence so far suggests that the turnaround/improved execution is working. Recent items but this is more than offset by the propensity for the fleet to age more in difficult economic times (more cars out of dealership guarantees and less reliability). capital allocation is also promising (i was prev concerned given BBYs historic reluctance to grow old gracefully). Share based comp = 7% of net income- high for a Capital cycle is reasonably stable. Overall, an industry that grows in line with US gdp. mature retailer despite the turnaround. Competition (pricing power/competitive moat?, leftfield risks, threat of obsolescence): Not a high barrier to entry business and the industry is fragmented. Recent operational results: q1 slightly missed consensus on 1.4% comps, gms slightly above expecations but weak sg&a leverage. Q2 was the reverse, beating However, scale can bring distribution and purchasing advantages versus small competitors. A number of quoted businesses including Autozone, OReilly, Pep Boys expectations, still weakishcomps at 2.5% (total sales up 4.4%) but with slightly weaker gms than expected but better sg&a leverage. Some comments from the co and NAPA (Genuine Parts) as well as a number of mom and pop stores (who cede only mild market share over time). Competition from quoted cos is generally and analysts re price competition. worth following pu on this and balance sheet. rational and arguably has become more so with most companies adopting price optimisation programs (ie lifting prices on skus in geog areas if they can) in recent years- however recent commentary has suggested pricing has become a little more competitive again. The market share opportunity for the big 3 (AAP, AZO and ORLY) appears to be biggest in the commercial segment- the combined share of the top 3 in this segment was 9% in 2010, an increase from <6% in 2007. The Other : 2nd biggest shareholder is Ruane Cunniff (Sequoia Fund) market is more consoloidated for diy sales with the big 3 having 32% share in 2010 still up notably vs 24% in 2007. SO far seems to have had limited competition from WMT and the independent internet cos (though not sure why AMZN couldnt be a competitor). Speed to market is a key factor behind this for car mechanics (they are also not that price sensitive) though one would think there could poss be more internet comp for some consumables. Worth keeping an eye on. Long term value creation of business to shareholder and normalised owner earnings: this for car mechanics (they are also not that price sensitive) though one would think there could poss be more internet comp for some consumables. Worth keeping an eye on. Given mid single digit rev growth and a little margin expansion it is quite easy to get to 7-9% op income growth over the next 3-5 years. With a capital return of c.7- Revenue : Sales per sq ft has historically lagged its competitors. There is scope to improve performance by increasing revenues to both commercial and diy custs. 9% a total business return to shareholders independent of valuation change could easily be 14%+. Key risks to this could be lacklustre sales trends, pricing comp The former opp is the largest. Under new mngt the co has a lt target of 50:50 commercial/diy sales split and has invested significantly in disbn, sales support & and the recent building up of debt on the balance sheet curtailing cash return. systems over the last 2 yrs. The co considers its market share for commercial custs to be only 5% (defns of the mkt vary) and has been increasing comp sales in this area by dd for 12 of the last 14qs. So far most of this has come from existing custs, but with better systems capability and inventory assortment, they are now Valuation: better placed to serve new larger custs. DIY sales growth started to improve following years of under-performance vs peers though is still a bit of a mixed bag and Current Valuation : 12x 2011 earnings and likely an 9% fcf yield (though fcf conversion above long time normalised). Historic fcf yield at 8.4% is just outside the top has started to suffer again, partly as strores ar emore geared towards commercial customers. Significant investment including an: Improvement in check out systs, quartile (though 3 year average is top quartile) and both historic and expected current earnings mutliples are in the second quartile for value. div yield in mediocre at staff training , merchandise and a pick up in advertising should help sales. Ind growth, sq footage growth and the above initiatives should result in the company 0.4% but given buybacks, total return yield over last 12 months is c.10% placing it in the top quartile of US companies on this basis. achieving mid single digit (stable ) sales growth (assuming 2% inflation) for some years (5 year sales growth was 6.5% pa) Intrinsic worth and return analysis (including downside assessment): Seems to be little downside given cash generation, valuation and stability of the Returns (level, direction/sustainability?): Margins are another area where the co has lagged peers. 2010 op margin was 9.9% with 2011 likely fractionally better business. If the company falters on margin and revenue you could perhaps see a derating to 10x but this would only permit the company to return more cash back to vs AZO at >17%. There are some structural diff in margin between the 2 companies (stores leased vs bought and commercial/diy mix) which means AAP will shareholders as a % of market cap. Assuming a 5 year rev growth range of 4-6%, terminal op margins of 10.5-12% and ongoing buybacks(7-8% pa) a 2016 eps unlikely get close to AZOs margins but mngts lt target of 12% looks very realistic. Improvement should come from improved sales density (including leveraging off range of $8.3-11.0 is possible. Take a mid point and apply 90% fcf conversion and a 7% fcf yield and you come up with a 5 year worth of c.$123 with relatively little recently expensed investments), pricing optimisation program and supply chain efficiencies (e.g. global sourcing). Versus most hardline retailers- margins are higher dispersion versus the average stock than most but offset by lower turns given high number of skus having to be held (with some stores acting effectively as a regional distribution hub for commercial custs holding 25k skus with a further 20k skus in some larger disbn centres). Sales turns should increase given recent initiatives, though likely marginally. ROC of Investment Synopsis and conclusion: 26% and ROE of 29% are more likely to rise than fall on a 3-5 year view. A stable business (though with quite a leveraged balance sheet) undergoing a reasonably easy turnaround from new management in a fairly attractive segment of Normalised fcf and deployment: Good fcf generator. 5 yr av fcf conversion of 109% despite capex averaging 130% of depn to support 3% store growth and retail. Combination of steady top line growth, margin expansion and buybacks could easily deliver 15%+ pa eps and fcfps growth over the next 3-5 years even in a investment initiatives though option comp flatters this figure slightly. Inv turns have remained reasonably stable despite sig inventory investment to improve the fairly tough macro environment. Valuation reasonable especially on eps and fcf and the company probably ranks very well in terms of capital return to shareholders. commercial offering. With this behind them and better inventory management systems, there is scope to improve turns. They are also looking to improve account Valuation and capital return provides support should turnaround/sales disappoint and the eps growth and potential re-rating offers good long term upside. Stability of payables- AZO is industry leader and effectively manage to get account payables to pay for 100% of inventory. AAP is at 65%- going to 75% would improve cash the business and return potential merits supports a decent position. generation by $120m. i would expect >100% conversion for the next 2-3 years given working capital initiatives but a long term conversion fig of around 90% seems more realistic. All fcf has been returned to sholders in recent yrs through buybacks (s/0 down 12% yoy and 28% over 4 years) and miserly dividend (0.5%). The BUY 5 yr Intrinsic 123.00 Upside to 100.00% PA return to 14.9% buyback has exceeded fcf over the last 6 quarters but over 4 years debt has been stable. 12% total cap return is impressive but will prob revert to 7-8% sustainable worth intrinsic IW capital return based on 100% return of cash, 90% fcf conversion and current valn of stock. worthSource: Polar Capital. The example provided is a snapshot of the textual review section of a broader company analysis. It should not be assumed that recommendations made in future will be profitable or will equalperformance of the securities mentioned in this document. For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 27
  • 28. Empirical Backing• Cash generative business models outperform – from 1957-2003, firms with the lowest quintile of capital expenditure/sales delivered a 14.78% p.a. return versus 9.55% for those with the highest and 11.18% for the S&P 500 Index – (source: Jeremy Siegel/Compustat).• High cash yield works – Empirical Research Partners study (1950-2008) demonstrates that the cheapest quintile of large capitalisation US stocks measured by free cashflow yield to enterprise value outperformed the average stock by 4.1% p.a. and outperformed on a consistent basis. Cheapest quintile of stocks measured by PE outperformed by 3.5%; Price/book, 2.5%, Dividend Yield, 1.3%.• Quality enhances a value portfolio – Piotroski (University of Chicago, 2002) demonstrates that from 1976-1996, the mean return earned by a low Price/Book investor (i.e. value investor) can be increased by at least 7.5% annually through the selection of financially strong firms.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 28
  • 29. Free Cash Flow/Buffett’s Owner Earnings• From his 1986 report: Buffett stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, discounted by an appropriate interest rate. He defined owner earnings as follows:• “These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges ... less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume .... Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) must be a guess – and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes ... All of this points up the absurdity of the cash flow numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) – but do not subtract (c).”Source: Berkshire Hathaway 1986 annual report.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 29
  • 30. Polar Capital OverviewAs at 31 March 2012 Total assets underPolar Capital was Management management Strategies Fund managers AUMestablished in 2001 and Tim Woolley Technology Ben Rogoff 2 funds $5.1bn CEO/Co-Founder Nick Evans $1,480mhas $5.1bn AUM, with Tom Bartlam Japan James Salter $1,517m76 employees. Non-Executive Chairman Business infrastructure Gerard CawleyThe Firm was listed on John Mansell • Sales and Marketing UK Philip Hardy 2 funds Chief Operating Officerthe London Stock • Operational Support $282.3mExchange (AIM) in European Robert Gurner 2 funds Ownership • Risk Management $618.4mFebruary 2007. The Polar Capital • Compliance Healthcare Dan Mahony 2 fundsFirm offers managers a 45% Gareth Powell $347.5mlevel of infrastructure • Technology XL Financials John Yakas 4 fundsand corporate 10% • Finance Alec Foster $496.9mgovernance normally Caledonia Nick Brind 14%found in much larger Emerging William Calvert 2 funds Free Floatorganisations. 31% Market $148.6m Convertibles David Keetley $39.3m North American Andrew Holliman $137.4m Richard Wilson European MN Ton Tjia 2 funds $16.4mSource: Polar Capital.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 30
  • 31. Final words……..“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors andbusinessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and pricecontrols, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.But, surprise – none of these blockbuster events made the slightest dent in Ben Grahams investment principles. Nor didthey render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if wehad let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our bestpurchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend ofthe fundamentalist.”Warren E. Buffett1994 Berkshire Hathaway Shareholder LetterFor non-US professional client use only. Please refer to the Important Information at the end of this presentation. 31
  • 32. Important Information Polar Capital 4 Matthew Parker Street London SW1H 9NPHouse ViewThis document has been produced based on Polar Capital research and analysis and represents our house view. All sources are Polar Capital unless otherwise stated.Important Information - This document is a confidential new product proposal for one on one use with only.The information provided in this document is for the sole use of the intended recipient and it shall not and does not constitute an offer or solicitation of an offer to make an investment into any fund managed by PolarCapital. It may not be reproduced in any form without the express permission of Polar Capital and is not intended for private investors. This document is only made available to professional clients and eligiblecounterparties. Shares in the fund should only be purchased by professional investors. Any other person who receives this presentation should not rely upon it. The law restricts distribution of this document in certainjurisdictions, therefore, persons into whose possession this document comes should inform themselves about and observe any such restrictions. This document does not provide all information material to aninvestor’s decision to invest in the Polar Capital North American Fund, including, but not limited to, risk factors. For more information, please refer to the fund’s offer document and read it carefully before you invest.Statements/Opinions/ViewsAll opinions and estimates in this report constitute the best judgment of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. PolarCapital is not rendering legal or accounting advice through this material; readers should contact their legal and accounting professionals for such information.Third-party DataSome information contained herein has been obtained from other third party sources and has not been independently verified by Polar Capital. Polar Capital makes no representations as to the accuracy or thecompleteness of any of the information herein. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representationswith respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particularpurpose with respect to any of such data.HoldingsAny portfolio data provided are estimated data only and should not be relied upon as a complete or anticipated listing of the holdings of the fund. The holdings estimates may represent only a small percentage of theaggregate portfolio holdings, are subject to change without notice, and may not represent current or future portfolio composition. It should not be assumed that any of the securities transactions or holdings discussedwas or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Theinformation provided in this document should not be considered a recommendation to purchase or sell any particular security.BenchmarksMSCI North America Index and S&P 500 Composite Index are generally considered to be representative of the US equity universe and is/are a broad-based index which is used for comparative/illustrative purposesonly and has been selected as it is well known and easily recognizable by investors. For further information on MSCI North America Index please refer to www.msci.com and for S&P 500 Composite Index pleaserefer to http://www.standardandpoors.com/indices/main/en/us. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the fund. Forexample, investments made for the fund may differ significantly in terms of security holdings, industry weightings and asset allocation from those of the benchmark. Accordingly, investment results and volatility of thefund may differ from those of the benchmark. Also, the indices noted in this presentation are unmanaged, are not available for direct investment, and are not subject to management fees, transaction costs or othertypes of expenses that the fund may incur. In addition, the performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully considerthese limitations and differences when evaluating the comparative benchmark data performance. The information regarding the indices are included merely to show the general trends in the periods indicated and isnot intended to imply that the fund was similar to any of the indices in composition or risk.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 32
  • 33. Important Information cont. Polar Capital 4 Matthew Parker Street London SW1H 9NPRegulatory StatusThis document is Issued in the UK by Polar Capital.Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the Financial Services Authority. A list of members is open to inspection at the registered office, 4 Matthew ParkerStreet, London SW1H 9NPInvestment managers which are authorised and regulated by the FSA are expected to write to investors in funds they manage with details of any side letters they have entered into. The FSA considers a side letter tobe an arrangement known to the investment manager which can reasonably be expected to provide one investor with more favourable rights, which are material, than those afforded to other investors. These rightsmay, for example, include enhanced redemption rights, capacity commitments or the provision of portfolio transparency information which are not generally available. The Fund and the Investment Manager are notaware of, or party to, any such arrangement whereby an investor has any preferential redemption rights. However, in exceptional circumstances, such as where an investor seeds a new fund or expresses a wish toinvest in the Fund over time, certain investors have been or may be provided with portfolio transparency information and/or capacity commitments which are not generally available. Investors who have any questionsconcerning side letters or related arrangements should contact the Polar Capital Desk at the Administrator on (+353) 1 436 7200. The Fund is prepared to instruct the custodian of the Fund, upon request, to makeavailable to investors portfolio custody position balance reports monthly in arrears.Information Subject to ChangeThe information contained herein is subject to change, without notice, at the discretion of Polar Capital and Polar Capital does not undertake to revise or update this information in any way.ForecastsReferences to future returns are not promises or even estimates of actual returns Polar Capital may achieve, and should not be relied upon. The forecasts contained herein are for illustrative purposes only and arenot to be relied upon as advice or interpreted as a recommendation. In addition, the forecasts are based upon subjective estimates and assumptions about circumstances and events that may not yet have takenplace and may never do so.PerformancePerformance is shown net of fees and expenses and includes the reinvestment of dividends and capital gain distributions. Many factors affect fund performance including changes in market conditions and interestrates and in response to other economic, political, or financial developments. Investment return and principal value of your investment will fluctuate, so that when your investment is sold, the amount you receive couldbe less than what you originally invested. Past performance is not a guide to or indicative of future results. Future returns are not guaranteed and a loss of principal may occur. Investments are not insured by theFDIC (or any other state or federal agency), are not guaranteed by any bank, and may lose value.Investment Process – RiskNo investment process or strategy is free of risk and there is no guarantee that the investment process or strategy described herein will be profitable. Investors may lose all of their investments.AllocationsThe strategy allocation percentages set forth in this document are estimates and actual percentages may vary from time-to-time. The types of investments presented herein will not always have the same comparablerisks and returns. Please see the private placement memorandum for a description of the investment allocations as well as the risks associated therewith. Please note that the fund may elect to invest assets indifferent investment sectors from those depicted herein, which may entail additional and/or different risks. The actual performance of the fund will depend on the Investment Manager’s ability to identify and accessappropriate investments, and balance assets to maximize return to the fund while minimizing its risk. The actual investments in the fund may or may not be the same or in the same proportion as those shown herein.For non-US professional client use only. Please refer to the Important Information at the end of this presentation. 33

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