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Threadneedle investments
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  • 1. Citywire Berlin ConferenceStock-picking and Quantitative EasingFor investment professionals onlyStephen Moore 7-9 November 2012
  • 2. Stock-picking and Quantitative EasingAgenda1. A supportive environment for US equities2. The key to developing conviction3. Fundamental opportunities abound4. One strategy, two funds5. Threadneedle American Extended Alpha Fund6. Threadneedle American Absolute Alpha Fund7. Conclusion 2
  • 3. 01A supportive environment for US equities
  • 4. The case for US equitiesBenefiting from under-appreciated characteristics Positive demographic trends Most dynamic & innovative in the global economy Strong legal framework Stable regulatory framework Good corporate governance An aggressive central bank US dollar remains the reserve currency An increased energy self-reliance An industrial renaissance America: the Saudi Arabia of agriculture Dealing (slowly) with the entitlement culture (Wisconsin recall; NJ) 4
  • 5. Investing in a zero interest world (lesson from Japan)Change in inflation drives the business cycleThe best equity returns have come in the wake of disinflation / deflation 80% -4% 60% -3% 40% -2% 20% -1% 0% 0% -20% 1% -40% 2% -60% 3% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Nikkei Index (yoy, LHS) Japans CPI (inverted, adv. 6m RHS)Source: Wolfe Trahan, October 2012. 5
  • 6. Low inflation expectations are spurring central bank actionInflation expectations1 have declined (in %) 5 1000000 Inflation scare QEII ends, Twist begins 4 800000 QEII works 3 600000 QEI falls short 2 400000 Twist fails Deflation scare 1 200000 QEII 0 0 QE∞ begins Quantitative -1 tightening -200000 QEI -2 -400000 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 .INFLAT U Index (LHS) .TRSLAG Index (RHS)Source: Bloomberg, 25 October 2012.(1) Inflation time series shown is the average of the 2 year breakeven rates 2 year forward and global CPI. TRSLAG Index is the 1 year change in the FederalReserve’s US treasury Securities held outright 6
  • 7. The Fed and ECB are expanding their balance sheets, supporting equity markets1 year change in Treasury securities held outright S&P 500 Fed ECBSource: Bloomberg, Federal Reserve as at 25 October 2012Orange line is the S&P500 Index; Yellow line are the assets held by the European Central Bank; the Green line is the 1-year change in the US Treasury held outrightby the Federal Reserve. 7
  • 8. US homebuilder sentiment points to an increase in housing activity 2500 90 80 2000 70 60 1500 50 40 1000 30 20 500 10 0 0 Oct-92 Oct-94 Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 LEI BP Index (LHS) US.HMSURV NAHB Index (RHS)Source: Bloomberg, 23 October 2012The yellow line represents building permits; The grey line represents the National Association of Homebuilder s Housing Market Survey; . 8
  • 9. The wildcard of the 2013 fiscal cliff remainsPercentage points of potential GDP 4.5 2013 Fiscal Cliff Fiscal Restraint (+) (% of GDP ) 3.0 Expiration of Current Law unemployment -0.2% benefits 1.5 Automatic spending cuts -0.8% (sequestration) 0.0 Expiration of -0.8% payroll tax cuts -1.5 Expiration of Bush -0.8% tax cuts -3.0 Fiscal Stimulus (-) C.-3.0% -4.5 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Fiscal yearSource: Morgan Stanley, April 2012 9
  • 10. 02The key to developing conviction
  • 11. Our approach: Assessing upside/downside risks, stock by stock Developing a clear view of the opportunity and the risk  Ideally buying $3 of upside, for $1 of downside Financial Holding differentiated, substantiated views model Considering the macroeconomic environment Business model Valuation Management What is it worth? Upside / Downside analysis  Explicit risk / reward assessment  Up / down price targets 11
  • 12. Leveraging deep resources Cormac Weldon Head of US Equities Health Care Diane Sobin Stephen Moore William Warren Materials, Energy Telecoms Technology Investment Team Brad Colton Paul Gannon Olivia Miller1 Nafis Chowdhury Financials Consumer Discretionary Consumer Staples Industrials Stéphane Jeannin Gary Young Other Investment Specialist Dedicated Dealer Other equity (including G & RI2) Property Fixed income and managed funds 21 professionals 36 professionals Additional 48 professionals resources Equity dealers Investment risk 6 professionals 9 professionals Overseeing $12.4bn in US equitiesSource: Threadneedle as at 30 June 2012.1 Junior Analyst2 Governance and Responsible Investment 12
  • 13. 03Fundamental opportunities abound
  • 14. The US Consumer is no longer over-extendedU.S. Consumers debt levels and debt servicepayments as a share of disposable income All commercial banks year-over-year changes in1980 through Q1 20121 consumer loans 2005 through Late-August 2012 14.5 130 15 14.0 120 10 13.5 110 13.0 Debt Service (%) 100 Debt Level (%) 5 12.5 % 90 12.0 0 80 11.5 70 11.0 (5) 10.5 60 10.0 50 (10) 80 83 86 89 92 95 98 01 04 07 10 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Debt Debt ServiceSource: Federal Reserve Board, Empirical Research Partners Analysis, September 2012. 14
  • 15. US banks are historically cheaply valued against consumer playsLarge-capitalization consumer lenders relative-to-core consumer cyclicals ratio of price-to-book ratios11972 through mid September 2012 1.4 Consumer Lenders 1.2 Have Higher Ratios 1.0 0.8 x 0.6 0.4 Consumer Lenders Have Lower Ratios 0.2 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12Source: Corporate Reports, Empirical Research Partners Analysis, October 2012.1 Equally-weighted data. 15
  • 16. US banks are liquid, deposits-funded and have deleveraged Reserves / NPA Loans / Assets / US P/B P/TBV PE12 PE13 NPLs / loans loans coverage deposits equityJP Morgan 0.8 1.0 8.3 6.7 3.8% 1.5% 250% 64% 12Bank of America ML 0.4 0.6 11.7 7.4 3.6% 3.0% 122% 90% 9Citigroup 0.4 0.5 6.7 5.8 4.5% 1.7% 255% 75% 10Wells Fargo 1.3 1.7 9.8 8.7 2.5% 3.4% 75% 84% 9PNC 0.9 1.4 9.4 8.7 2.7% 2.6% 105% 85% 7USB 1.9 2.6 11.2 10.3 2.3% 1.8% 126% 91% 10 Europe BNP Paribas 0.5 0.6 4.6 5.1 4.0% 6.3% 64% 127% 23 Credit Agricole 0.2 0.4 5.1 3.1 4.0% 6.0% 66% 79% 35 Societe Generale 0.3 0.4 4.9 3.7 4.1% 5.8% 70% 122% 23 UniCredit 0.1 0.1 2.2 1.7 5.9% 13.3% 45% 166% 17 Intesa Sanpaolo 0.3 0.5 5.4 4.5 5.9% 11.1% 53% 205% 13 Santander 0.6 0.9 6.6 5.4 2.5% 4.3% 59% 133% 15 BBVA 0.7 0.7 9.6 5.7 2.2% 4.3% 51% 128% 15 Deutsche Bank 0.5 0.7 5.7 5.6 1.0% 2.6% 39% 69% 40 Commerzbank 0.3 0.3 4.9 3.9 2.8% 6.5% 44% 120% 27Source: Company data, July 2012.The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have beenacted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to changewithout notice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. 16
  • 17. Capital One Financial  New regulations impacting the industry resulting in pricing disciplinePerformance 2-year total return  2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act brings discipline 160  Acquisition underpinning profits growth 150  ING Direct in the US (deposits)  c.$30bn of HSBC credit card loans (for c. $2.6bn) 140  Acquisitions mitigate the pressure to grow loans Rebased = 100 130  Improving credit cycle 120  c. 30/40% of loans replaced every year  Business predominantly written since the financial crisis 110 of ’08  Chargedßoffs to remain below normal for longer period 100 of time 90  Strong cash generation  On track to reach 8% capital ratio bz 2013 80  Cash increasingly used to boost shareholder returns Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Absolute Relative to S&P 500 Index  Shares attractively valued on c.8x ’13 earningsSource: Datastream as at 30 September 2012, in USD.Past performance is not a guide to future performance. The mention of any specific shares or bonds should not be taken as a recommendation to deal. ThreadneedleInvestments does not give any investment advice. If you are in doubt about the suitability of any investment, you should speak to your financial adviser. 17
  • 18. Shale gas now accounts for 25% of production, vs. 5% in 2006Natural gas dry production - Natural gas for next day delivery at Henry HubBillion cubic feet per day1 (US benchmark) - $ per MMBtu268 16 1464 1260 1056 8 652 448 244 0 90 92 94 96 98 00 02 04 06 08 10 12 04 05 06 07 08 09 10 11Source: Bloomberg. 1 As at July 2012. 2 As at 10 September 2012.Past performance is not a guide to future performance. The mention of any specific shares or bonds should not be taken as a recommendation to deal. ThreadneedleInvestments does not give any investment advice. If you are in doubt about the suitability of any investment, you should speak to your financial adviser. 18
  • 19. US chemicals are low cost globallyEthylene cash production costs, (US$/tonne) February 2003 & 2012 1,500 1,250 1,000 Asia Europe low cost 750 Europe typical 500 250 US Weighted US Ethane Average 0 Ethane Ethane C2/C3 Ethane Weighted Condensate Propane Naphtha Low cost Typical High cost Naphtha KSA Iran KSA US US KSA KSA US W Eur W Eur W Eur Asia Cash Cost 2003 Cash Cost 2012Source: CMAI as at February 2012.Past performance is not a guide to future performance. The mention of any specific shares or bonds should not be taken as a recommendation to deal. ThreadneedleInvestments does not give any investment advice. If you are in doubt about the suitability of any investment, you should speak to your financial adviser. 19
  • 20. Higher-yielding equities are expensively valuedUS Large-capitalisation stocks (1)Highest quintile of dividend yield stocks relative trailing-P/E ratios (x) 1.4 Higher Multiples 1.2 1.0 Average 0.8 0.6 0.4 0.2 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11 RecessionsSource: Corporate Reports, National Bureau of Economic Research, Empirical Research Partners Analysis, August 2012. Based on capitalisation-weighted data.(1) Based on 1500 US largest capitalisations 20
  • 21. Yield relationships convey disbeliefEquity free cash flow yields as a ratio to Baa corporate bond yields1 1953 through early-January 2012 1.4 1.2 1.0 0.8 0.6 0.4 Average 0.2 0.0 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 RecessionsSource: Federal Reserve Board, Bloomberg, LP, Corporate Reports, Empirical Research Partners Analysis1 Large-capitalisation stocks excluding financials and utilities; capitalisation weighted data, February 2012 Past performance is not a guide to future performance. Themention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle Investments does not give any investment advice. If you arein doubt about the suitability of any investment, you should speak to your financial adviser.. 21
  • 22. US companies have underinvested since the financial crisisThe S&P 5001Capital spending as a share of gross cash flow2 – 1976 through Q4 2011E 110 100 90 80 % 70 60 50 Latest 40 Q3 2009 30 1 8 15 22 29 36 43 50 57 64 71 78 85 92 99 Percentile Rank (100 = lowest capital spending as a share of gross cash flow)Source: Corporate Reports, Empirical Research Partners Analysis, January 2012.1 Excludes financials2 Measured quarterly 22
  • 23. The demise of the equity cultureUS Equities - Mutual fund net flows (m) 40,000 30,000 20,000 10,000 0 -10,000 -20,000 -30,000 -40,000 -50,000 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Source: ICI Goldman Sachs Research as at 29 May 2012 23
  • 24. 04One strategy, two funds
  • 25. Threadneedle US equities strategies Strategy Fund manager(s) Threadneedle American Fund Core Cormac Weldon Threadneedle (Lux) American Fund Core Cormac Weldon Threadneedle US Equity Income Fund Income Diane Sobin Threadneedle American Select Fund High alpha Cormac Weldon Threadneedle (Lux) – American Select Fund High alpha Cormac Weldon Cormac Weldon Threadneedle American Smaller Companies Fund Small cap & Diane Sobin Threadneedle (Lux) American Absolute Alpha Absolute Returns Stephen Moore Threadneedle American Extended Alpha Fund Long/short S&P500 benchmarked Stephen MooreSource: Threadneedle 25
  • 26. One strategy, two funds  Bottom-up fundamental analysis with macroeconomic inputs Threadneedle  Stock-level conviction, long and short  Risk management embedded in our processThreadneedle (Lux) American Absolute Alpha Fund Threadneedle American Extended Alpha Fund■ Target return of 8-10% with high single digit volatility1 ■ Targets 1st quartile performance over rolling 3 years■ Focus on stock selection (alpha), not market-derived ■ Enhances market-derived returns (beta) via stock returns (beta) selection (alpha)Characteristics CharacteristicsLaunch date June 2010 Launch date October 2007Liquidity Daily Liquidity DailyAssets $158m Assets $723mGross exposure Max. 200% Gross exposure Max. 200%Net exposure Typically -25% to +35% Net exposure Typically +90% to +110%Instruments Cash equity and equity swap Instruments Cash equity and equity swap1 Investors should note that the fund does not offer any form of guarantee with respect to investment performance and no form of capital protection will applySource: Threadneedle; as at 30 September 2012 26
  • 27. 05Threadneedle American Extended Alpha Fund
  • 28. Threadneedle American Extended Alpha FundCharacteristics and risk framework US equity fund broadly diversified by market size and sector Current fund size $723 million Target 1st quartile over rolling 3-year periods Benchmark - primary S&P 500 Composite Benchmark - secondary UK IMA – US equities Typical tracking error range 4%–8% c.30–80 longs Typical number of stocks c.30–80 shorts Maximum typical gross exposure 150% long, 50% short Typical net exposure range 90%–110% Typical maximum stock load difference1 +8% Typical maximum sector2 load difference1 +15% Austria, Belgium, France, Germany, Netherlands, Luxembourg, Spain, Chile, Registration Switzerland, Portugal, Denmark, Singapore and Italy.Source: Threadneedle as at 30 September 2012.1 Against primary benchmark2 Using the S&P GICS sectors 28
  • 29. Threadneedle American Extended Alpha FundPerformance summary Volatility1 Since Annualised performance ($) 6 months 1 year 2 years 3 years (3 years p.a.) inception2 Threadneedle American Extended 4.2% 29.9% 18.0% 13.5% 15.6% 4.3% Alpha Fund – net Sector median 0.2% 25.3% 11.6% 10.2% - -0.7% Relative return +3.9% +3.7% +5.7% +3.0% - +5.0% Percentile ranking 1 11 3 15 - 2 Threadneedle American Extended 4.6% 33.0% 19.0% 14.6% 15.4% 5.4% Alpha Fund – gross S&P 500 Index 3.4% 30.2% 14.8% 13.2% - 0.8% Relative return +1.1% +2.2% +3.7% +1.2% - +4.6%Source: Morningstar / FactSet as at 30 September 2012. Data in $. Net performance on bid to bid basis with net income re-invested at bid. Sector median – Morningstar Offshore & InternationalUniverse. Morningstar changed its definition of the GIFS Offshore Universe as at February 2011. This resulted in this fund being removed from it. For the purposes of comparison, Threadneedlecontinues to use this Universe with its fund included. Gross performance on a bid to bid basis with income re-invested at bid. Gross performance from 31 March 2010 onwards is based on dailycash flows and valuations, from 1 January 2008 to 31 March 2010 based on Global Close prices, and prior to January 2008 based on 12pm prices. Relative returns calculated on a geometric basis.1 Based on monthly data2 Threadneedle American Extended Alpha Fund is since inception 31 October 2007. 29
  • 30. Threadneedle American Extended Alpha FundPortfolio composition Sector exposure relative to S&P5001 Active Top overweight and underweight Active Fund weightLargest 10 overweights Largest 10 positions sub-sectors (%) weight % weight % % Alliance Data Systems 3.2 Apple 5.6 Health Care 5.1 Pfizer 2.7 Pfizer 4.1 Financials 4.8 Tyco International 2.3 Alliance Data Systems 3.2 Materials 4.3 Capital One Financial 2.2 Exxon Mobil 3.1 Consumer Discretionary 2.3 Spansion 2.1 Wells Fargo & Co. 2.8 Telecoms -1.0 Discover Financial 2.1 Capital One Financial 2.5 Services Information Technology -2.4 Thermo Fisher Scientific 2.0 Tyco International 2.5 Energy -3.0 Wyndham Worldwide 1.9 Berkshire Hathaway 2.3 Industrials -3.3 Riverbed Technology 1.9 EMC 2.3 Utilities -4.0 Discover Financial Newmont Mining 1.9 2.3 Services Consumer Staples -7.6 -6 -4 -2 0 2 4Source: Threadneedle as at 30 September 2012.1 Excludes cash position of 4.7% 30
  • 31. 06Threadneedle American Absolute Alpha Fund
  • 32. Threadneedle (Lux) American Absolute Alpha FundTerm sheet Launch date 15 June 2010 Liquidity Daily Legal structure SICAV (Part 1) UCITS III designation Sophisticated Fund Fees 1.5% (retail), 0.75% (inst), 20% performance fee over 3mth LIBOR with high water mark Gross exposure guide Max. 200% (longs + shorts) Typical net exposure -25% to +35% (Longs – shorts) Instruments Long: cash equity / equity swap, short: equity swap Currency USD, EUR, GBP and EUR & GBP–hedged Domicile Luxembourg SWAP counterparty Bank of America Merrill Lynch Custodian RBC Dexia Investor Solutions Bank Auditor Ernst & Young Valuation point Global Close Registrations UK, France, Germany, Italy, Spain, Netherlands, Luxembourg, Switzerland, Portugal, Austria, Hong KongSource: Threadneedle 32
  • 33. Threadneedle (Lux) American Absolute Alpha FundPerformance since inception 2012 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Threadneedle (Lux) American Absolute 0.3% 1.2% 1.6% 1.0% -0.1% -0.3% 0.6% 0.2% 0.0% 4.4% Alpha Fund (net) S&P 500 Index2 4.5% 3.1% 3.3% -0.6% -6.0% 4.1% 1.4% 2.3% 2.6% 16.4% 2011 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Threadneedle (Lux) American Absolute 0.1% 1.1% 0.3% 1.1% 0.5% 0.2% 0.1% -1.1% 1.0% -0.1% 0.1% 0.5% 3.6% Alpha Fund (net) S&P 500 Index2 2.4% 3.4% 0.0% 3.0% -1.1% -1.7% -2.0% -5.4% -7.0% 10.9% -0.2% 1.0% 2.1% 2010 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 20101 Threadneedle (Lux) American Absolute - - - - - - -0.3% -2.0% 1.5% 1.0% 0.5% 0.9% 1.7% Alpha Fund (net) S&P 500 Index2 - - - - - - 7.0% -4.5% 8.9% 3.8% 0.0% 6.7% 23.3% 6 months 1 year Since inception1 Threadneedle (Lux) American 0.8% 4.8% 4.3% Absolute Alpha Fund (net) S&P 500 Index2 6.4% 30.2% 18.5%Source: Morningstar and Datastream as at 30 September 2012. All data quoted in $. Net performance based on 12pm prices, unadjusted income reinvested1 The funds inception date was 16 June 2010. Performance is shown from 30 June 2010 as the fund was not fully invested according to strategy until this time andtherefore any returns for that initial period would be unrepresentative of the funds true performance. Performance is annualised.2 Total Return Index in $ 33
  • 34. Threadneedle (Lux) American Absolute Alpha FundPortfolio composition Top 5 long holdings Fund (%) Sector positioning Net (%) Gross(%) Alliance Data Systems 3.0 Energy -0.7 0.7 Tyco International 1.9 Materials 5.1 9.0 Spansion 1.9 Industrials 1.2 7.6 EMC 1.8 Consumer discretionary 6.6 15.6 Capital One Financial 1.8 Consumer staples -2.4 3.2 Top 5 short holdings Fund (%) Healthcare 3.0 4.2 S&P 500 ETF -1.2 Financials 2.6 14.9 Payroll & HR services firm -1.0 Information technology 1.9 27.8 Semiconductors -0.9 Telecommunications -1.0 1.0 Customer relationship management -0.9 Utilities -1.0 1.0 Payroll & HR services firm -0.9 Total 15.4 85.4Source: Threadneedle as at 30 September 2012.Shown on a look-through basis. 34
  • 35. 07Conclusion
  • 36. Conclusion Decline in inflation leads to money printing, supporting asset prices US equities are attractive in this environment Conviction is key  Like CEOs, we assess investment opportunities in their macroeconomic context  A Risk/Return framework is instrumental to developing conviction 36
  • 37. APAppendix
  • 38. How we build portfolios Monitoring and Idea generation Company research Portfolio construction risk control Experience  Rigorous  Stock conviction  Consideration of Company meetings fundamental analysis  Individual stock risk downside  Collaboration and fundamental risk External research  Factor / systematic discussion risk  Daily risk reports Macroeconomic  Valuation  Competition for  Automated system of Thematic and sub- assessment compliance checks sector views capital  Target prices  11 strong risk department 38
  • 39. Idea generation Monitoring Idea Company Portfolio and generation research construction risk control Thematic / sector Macroeconomic views view Experience Proprietary Qualitative >12 yrs company screening average research > 500 stocks¹ c. 250 stocks Company External meetings research Stock selection is main source of Alpha1 S&P 500 Index constituents and opportunistic list of small / mid cap names 39
  • 40. Company research and upside/downside price targets Monitoring Intensive team debate – Formal and informal Idea generation Company research Portfolio construction and risk control Financial model Business model Valuation Management What is it worth? Upside / Downside analysis  Explicit risk / reward assessment  Up / down price targets 40
  • 41. The up/down in practise $220 Upside = $270 (+22.7%) Downside = $60 (-72.7%)  DCF based (discount rate  DCF based (discount rate 15%; +3% terminal growth)  Video streaming service 15%; -2% terminal growth)  Domestic business operating in North America,  Domestic business Latin America and the UK  Max penetration of 40m  Max penetration of 30m subscribers1  Streams movies and TV subscribers1 programs  Increase op. margin from  Increase in churn & 15% to 19%  25m subscribers program costs hitting CF  International business  No barrier to entry  International business  Roll-out in 2-3 markets p.a.  Content not on exclusive  Lack of brand recognition deals & 1st mover advantage  Targeting top 20 broadband markets  Penetration peaks at 35%  50% penetration in of broadband households Canada and LatAm.  Competitive operating  25% elsewhere Up/down = 0.3 to 1 environment and high customer acquisition costs  ARPU rise to $10 from $8Source: Threadneedle; Broker estimates – as at 2 September 2011(1) Management estimated the total addressable market at 55 to 65m households (i.e. households with broadband and a credit card) out of a total number ofhouseholds of c.110m. Netflix has a 4.5% monthly churn rate, with 66% of households cancelling their Netflix subscription not returning, which over time reduces thefirm’s total addressable market 41
  • 42. Broker estimates were unrealistic and failed to take churn into consideration Brokers estimates of 70m domestic subscribers by 2015 implied an unrealistic 100% penetration rateReal TAM penetration Fully penetrated at 45m subs 80000 70000 60000 US Households 50000 40000 30000 20000 10000 0 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 NFLX TAM (Broadband household w/credit card) NFLX domestic subs Total non returning cancellations Total market addressedSource: Threadneedle; Broker estimates – as at 2 September 2011 42
  • 43. Portfolio construction Monitoring Idea Company Portfolio Fund manager is sole decision maker generation research construction and risk control Conviction derived from up/down analysis drives portfolio construction Importance Stock conviction (risk/reward) Individual stock risk Contribution of stock risk to overall portfolio risk Sector weightings Constant review 43
  • 44. Risk monitoring Sample daily risk report Comprehensive risk reports  Active money  Active risk  Concentration analyses  Sector  Country  Region  Market cap size  Effective style analysis 44
  • 45. Apple – Growth at a very reasonable price  Market leadership  Extreme customer loyalty and brand reputationPerformance relative to S&P 500 Index  Participate in high growth market segments at much better than average gross margins (55% gross margin2-year total return on iphones) 200  Management has demonstrated an ability to execute through market transitions to maintain 180 high top line growth without sacrificing profitability (e.g. iPod to iPhone to iPad) 160  Shareholder returns Rebased = 100  High levels free cash flow have led to an accumulation of cash on the balance sheet (Q2’12: $110.2bn net cash 140 ($28.6bn over the past 2 quarters) or $117 per share)  Announced in March 2012: 120 – Initiation of a $2.65 quarterly dividend (~1.8% yield) – $10bn stock buy-back program 100  Attractive valuation but near-term risks 80 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12Source: Datastream as at 30 September 2012, in local currency.PT/12/01458 45
  • 46. Up/down discipline: the case of AppleApple share price and FY (Sep.) 2010 and 2011 consensus estimates 468 410 395 EPS consensus estimate (in $ per share) EPS’ 11 consensus estimate Apple share price (white line – in $) 353 299 236 215 EPS’10 consensus estimate 200 205 172Source: Bloomberg, IBES consensus estimates, June 2012.PT/11/00678 46
  • 47. BiographySTEPHEN MOOREFund Manager Stephen Moore began his career at First State Fund Managers in 1997, covering North American consumer cyclical companies before becoming an analyst then progressing to portfolio manager in 2001. In 2002, Stephen joined the US team at Threadneedle. He went on to manage Allied Dunbar Life and Pension funds as well as co-managing the Threadneedle American long / short equity fund. He was actively involved in the development of the American Extended Alpha Fund and has managed the fund since its launch in 2007. In March 2008 he became lead manager on the American long / short equity fund. In June 2010, he went on to manage the Threadneedle American Absolute Alpha Fund. Stephen holds a BComm and a BA from the University of Queensland, Australia. In 2000 he received his Investment Management Certificate. Stephen is an associate of the Securities Institute of Australia. Threadneedle start date: 2002 Industry start date: 1997 47
  • 48. BiographySTÉPHANE JEANNINInvestment Specialist Stéphane Jeannin is an Investment Specialist for Global and US equities long only and absolute return strategies. He is responsible for providing clients, prospective clients and consultants with detailed information on Threadneedle’s capabilities and investment views. Prior to joining Threadneedle, Stéphane spent six years at JP Morgan Investment Management in a variety of roles, including Global and European Equities Client Portfolio Manager. Stéphane holds a MA in Political Science and Economics from Sciences-Po Strasbourg and an MSc in Corporate Finance from Dauphine University, Paris. He is also a CFA charterholder. Threadneedle start date: 2004 Industry start date: 1998 48
  • 49. Threadneedle American Equities - Key RisksThreadneedle (Lux) American Absolute Alpha FundNo Capital Guarantee - Positive returns are not guaranteed and no form of capital protection applies.Liquidity Risk - The fund invests in assets that are not always readily saleable without suffering a discount to fair value. The portfolio may have to lower the sellingprice, sell other investments or forego another, more appealing investment opportunity.Valuation Risk - The fund’s assets may sometimes be difficult to value objectively and the true value may not be recognised until assets are sold.Short Selling Risk - Short selling is designed to make a profit from falling prices. However, if the value of the underlying investment increases, the short position willnegatively affect the fund’s value.Leverage Risk - Leverage amplifies the effect that a change in the price of an investment has on the fund’s value. As such, leverage can enhance returns to investorsbut can also increase losses.Derivatives Risk - Investment in derivatives may result in losses in excess of the amount invested.Threadneedle American Extended Alpha FundLiquidity Risk - The fund invests in assets that are not always readily saleable without suffering a discount to fair value. The portfolio may have to lower the sellingprice, sell other investments or forego another, more appealing investment opportunity.Valuation Risk - The fund’s assets may sometimes be difficult to value objectively and the true value may not be recognised until assets are sold.Short Selling Risk - Short selling is designed to make a profit from falling prices. However, if the value of the underlying investment increases, the short position willnegatively affect the fund’s value.Leverage Risk - Leverage amplifies the effect that a change in the price of an investment has on the fund’s value. As such, leverage can enhance returns to investorsbut can also increase losses.Derivatives Risk - Investment in derivatives may result in losses in excess of the amount invested. 49
  • 50. Disclaimer for (Lux) American Absolute Alpha FundPast performance is not a guide to future performance.The value of investments and any income from them can go down as well as up.Threadneedle (Lux) is an investment company with variable capital (Société d’investissement à capital variable, or "SICAV") formed under the laws of the Grand Duchy of Luxembourg. The SICAV issues,redeems and exchanges shares of different classes, which are listed on the Luxembourg Stock Exchange. The management company of the SICAV is Threadneedle Management Luxembourg S.A, who isadvised by Threadneedle Asset Management Ltd. and/or selected sub-advisors.The SICAV is registered in Austria, Belgium, France, Finland, Germany, Hong Kong, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, Switzerland, Taiwan and the UK; however, this issubject to applicable jurisdictions and some sub-funds and/or share classes may not be available in all jurisdictions. Shares in the Funds may not be offered to the public in any other country and thisdocument must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local legislation.This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services.Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms &conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English, French,German, Portuguese, Italian, Spanish and Dutch (no Dutch Prospectus) and can be obtained free of charge on request by writing to the SICAV’s registered office at 69, route D’Esch. L-1470 Luxembourg,Grand Duchy of Luxembourg and/or from:- in Austria from Erste Bank, Graben 21 A-1010 Wien;- in Belgium: J.P. Morgan Chase Bank Brussels, 1, Boulevard du Roi Albert II, 1210 Brussels;- in France from CACEIS Bank, 1/3 Place Valhubert, 75013 Paris; - inFinland from Eufex Bank Plc, Keilaranta 19, 02150 Espoo, Finland- in Germany from JP Morgan AG, Junghofstr. 14, 60311 Frankfurt,- in the UK from JPMorgan Worldwide Securities Services, 60 Victoria Embankment, London EC4Y 0JP.- in Sweden from Skandinaviska Enskilda Banken AB (publ), Sergels Torg 2, 106 40 Stockholm.The mention of any specific shares or bonds should not be taken as a recommendation to deal.The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and ismade available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. Information obtained from external sources is believed to bereliable but its accuracy or completeness cannot be guaranteed.This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any formor passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request.Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 11024274, rue Mühlenweg, L-2155 Luxembourg, Grand Duchy of Luxembourg.Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies. 50
  • 51. Disclaimer for American Extended Alpha FundPast performance is not a guide to future performance.The value of investments and any income from them can go down as well as up.Threadneedle Specialist Investment Funds ICVC (“TSIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in theUK by the Financial Services Authority (FSA) as a UCITS scheme.TSIF is registered for public offer in Austria, Belgium, France, Germany, Hong Kong (some sub-funds only), Italy, Luxembourg, the Netherlands, Spain, Switzerland (some sub-funds only) and the UK.Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to thepublic and are in accordance with applicable local legislation.This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services.Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms &conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English, French,German, Portuguese, Italian, Spanish and Dutch (no Dutch Prospectus) and can be obtained free of charge on request from the following:- in Austria: Raiffeisen Zentralbank Österreich AG, Am Stadtpark 9, 1030 Wien (TIF and TSIF), and Erste Bank, Graben 21 A-1010 Wien (TFIF);- in Belgium: J.P. Morgan Chase Bank Brussels, 1, Boulevard du Roi Albert II, 1210 Brussels;- in France: BNP Paribas Securities Services, 66 rue de la Victoire, 75009 Paris;- in Germany: JP Morgan AG, Junghofstr. 14, 60311 Frankfurt,- in Ireland: J.P. Morgan Bank Administration Services (Ireland) Limited, J.P. Morgan House International Financial Services Centre, Dublin 1- in Italy: State Street Bank S.p.A., via Col Moschin 16, 20136 Milano.- in Luxembourg: State Street Bank Luxembourg S.A., 49 Avenue J. F. Kennedy, 1855 Luxembourg;- in the Netherlands: Fortis Intertrust, Rokin 55, 1012 KK Amsterdam;- in Spain: any appointed distributor listed on the Spanish Financial Regulator’s website (www.cnmv.es);- in UK; Threadneedle Investments’ Client Services department P.O. Box 1331, Swindon SN38 7TA.The mention of any specific shares or bonds should not be taken as a recommendation to deal.The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and ismade available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. Information obtained from external sources is believed to bereliable but its accuracy or completeness cannot be guaranteed.This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any formor passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request.Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, St Mary Axe, London EC3A 8JQ, United Kingdom. Authorised and regulated in the UK bythe Financial Services Authority.Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies. 51

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