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  1. 1. ACCESSING VALUE OPPORTUNITIES IN EUROPEAN MARKETS Cazenove European Income Fund Chris Rice, Head of Pan-European Equities Citywire Private Client Manager’s Retreat, May 2012 For professional advisers only
  2. 2. Agenda• Where are we in the cycle?• Cazenove European Income Fund – Key features – Yields – Investment process – Portfolio composition• Appendix -2-
  3. 3. The business cycleUS ISM New Orders-Inventories German, French, Italian and Spanish PMIChinese and Brazilian PMI • US has kept global growth going over last 9 months. • US slowing slightly, no recovery yet in Asia and Europe. Source: Cazenove Capital, Datastream -3-
  4. 4. The policy cycleUS Deficit % Cycle ECB Balance Sheet Chinese and Brazilian Rates • The key in the West is whether a summer “deflation scare” elicits another monetary response. • China has been slower than other emerging markets in loosening policy. Source: Cazenove Capital, Datastream -4-
  5. 5. The corporate cycle• Massive government deficits = big corporate (and household) surpluses.• Determining causality is tricky, but message to corporates is beware governments.• With corporate surpluses at a record and income inequality never higher, George Osborne cuts taxes for high earners and corporations. You couldn’t make it up if you tried. Source: ASR -5-
  6. 6. Earnings cycle – US and Europe Europe, ex-Financials: EPS with trend, 1980 - US, ex-Financials: EPS with trend, 1973-2012 2012 Notional € on indexNotional $ on index EU ex-Fin. Premium (Discount) to US ex-Fin. Trend PE, 1980-2012 • For all the talk of crisis the US corporate earnings cycle has been as normal as can be.Trend P/E (x) • Europe has suffered some form of earnings and valuation “impairment” relative to the US. Source: Mirabaud -6-
  7. 7. The earnings cycle - Europe “Secure Europe” vs “Vulnerable Europe”• The divergence in earnings between Europe and the US is a function of the impact of the Euro crisis upon countries with current account and fiscal deficits.• The current policy medicine exacerbates the divergence – basically the core is enjoying the most undervalued exchange rate in the world.• Beware the “pain threshold” in deficit nations. It will affect investment returns! Source: Cheuvreux -7-
  8. 8. The valuation cycle High & low quality price performance relative Europe (ex-bubble): trend P/E, 1980-2012 to equal weight benchmarkMultiple (x) of trend earnings • Overall European Equities are cheap relative to history, and we know they are cheap relative to the US. • The divergence in earnings, valuation, and performance between high quality security and low quality risk is becoming extreme. • A big call may be looming. Source: Mirabaud, Bank of America Merrill Lynch -8-
  9. 9. A lesson from historyThe Nifty Fifty beat the market by 15% pa for 8 years Nifty Fifty valuations eventually hit bubble levels … • The Nifty Fifty theme – analogous with the current secure global growth theme – was a resounding success in the build up to the crisis of the 1970’s. • The relative performance peak coincided with the negative “event” (the oil shock) though absolute performance began to weaken before that. • The underperformance of the style from the market low was massive. • Lesson – valuations may become so depressed that a new bull market in value will begin. Source: Morgan Stanley -9-
  10. 10. European Income Fund – key features Performance Longer term returns and Target 2% pa performance over low asset turn index over rolling 3 years Yield As equity valuations fall, yield Target 110% index yield relative becomes more important Concentrated To enhance returns and meet Target 30-50 stocks performance objectives Business cycle A dynamic appreciation of yield Target looser business cycle style and income growth limits at +20% compared to index weight A fund capable of taking a longer-term value approach to European markets - 10 -
  11. 11. The case for European incomeEuropean Valuation Cycle MSCI Europe % of stocks with PE < 10 The crisis has generated the most attractive European equity valuations for 30 years Source: Mirabaud Securities, Datastream - 11 -
  12. 12. European yields – a comparison Global investors aversion to Europe has created an opportunity Source: Thomson Datastream - 12 -
  13. 13. Income process – the business cycle Stage of cycle Slowdown Recession Recovery Expansion Bu si ne france telecom Clariant ss Cy cl e Stock NOVARTIS SGS Delivers Market yield & High yield Low / no yield, Dividend growth dividend growth high capital growth Value & growth Portfolio bias Growth defensive Cyclical Growth/cyclical - 13 -
  14. 14. European Income Fund – simulating the business cycleStage of cycle Slowdown Recession Recovery ExpansionDominant style Growth Value & growth Cyclical Growth/cyclical defensivesSelected key simulated Growth defensive +10% Value defensive +13% Industrial cyclical +13% Commodity +3%style weights Industrial cyclical -6% Growth defensive +13% Consumer cyclical +12% cyclical +6% Industrial cyclical -12% Value defensive -13% Consumer cyclical -8% Financial -11% Value defensivesNumber of stocks 35 35 50 41Predicted trading error 5.5% 6.7% 7.9% 4.4%Beta 0.82 0.71 1.32 1.01Trailing yield relative 108% 114% 115% 100%Predicted yield relative 112% 115% 109% 105% Managing yield and income growth through the cycle Based on Northfield data; Cazenove simulated weights - 14 -
  15. 15. Delivering performance through the cycle Source: Cazenove Capital Management, Factset - 15 -
  16. 16. A systematic approach to the universe of stocksWe have developed a 3-factor, 90+ data-item screen of the investment universe that looks at stocks fromthe perspective of dividend-sustainability Factor Data example Goal Dividend history • 10 year dividend history To establish whether the company • Growth in shares in issue has a strong dividend track record Income flexibility • Operational & financial To establish the extent to which gearing the P&L is a constraint on paying • Working capital intensity dividends • Capex intensity Balance sheet • Debt ratios To establish whether the balance strength • Q score sheet can support a progressive dividend policy A systematic framework for answering the question: Is the dividend yield sustainable? - 16 -
  17. 17. Focusing on bottom up research Systematic database Early stage analysis Stock tearsheet Drill down to stock level Engage with company Research & company meetings on dividend policy Valuation Stage of cycle Yield relative Projected income growth - 17 -
  18. 18. Portfolio composition Income style Size bias Source: Cazenove Capital at 02/05/12 - 18 -
  19. 19. Portfolio composition Stable high yield High yield ENI 5% Telisonera 5% Sanofi 5% Swedbank 3.5% GSW 3% Veolia 3.5% Growth Yield Cyclical Yield Bic 5% ProSieben 5% Bureau Veritas 2% Rieter 3% Casino 2% Pirelli 4.5% Predicted portfolio gross yield: 4.72% Fund size at launch: £32m Source: Cazenove Capital at 02/05/12 - 19 -
  20. 20. APPENDIX
  21. 21. Your fund management team Chris Rice James Sym Head of Pan-European Equities Fund Manager • Joined Cazenove Capital in 2002. • Joined Cazenove Capital in 2007. • Head of Pan-European Equities, responsible for all aspects of • Member of the pan-European equity team with pan-European equity strategy and portfolio construction. responsibility for Chemicals, Support Services, Household • Manages the Morningstar OBSR Silver-rated* Cazenove Goods, Personal Goods, Pharmaceuticals & European Fund, the S&P AAA-rated Cazenove European Equity Biotechnology and Telecommunication sector coverage. (ex UK) Fund, and the Cazenove European Equity Absolute • Graduated from St Johns College, Cambridge University Return Fund. with a degree in Natural Sciences (Mineral Physics) and • Joined from HSBC Asset Management where he was Head of Management Studies and is a Chartered Financial European Equities, responsible for the retail and institutional Pan- Analyst. European and European equity funds. Prior to HSBC, he was a • Has 5 years’ investment experience. Japanese and European fund manager at Scottish Amicable Investment Managers. • Graduated from the University of Salford with First Class Honours in Finance and Accounting, as well as a MPhil in Monetary Economics from the University of Glasgow. Chris is IIMR qualified. • Director of Cazenove Capital and has 21 years investment experience. *Source and copyright: Morningstar OBSR Analyst Rating™. - 21 -
  22. 22. Cazenove European Income Fund Internal performance objective: Looks to outperform the benchmark by 2% pa over rolling 3 year periods and achieve a minimum yield of 110% of its yield* Benchmark: FTSE World Europe ex UK Index Number of stocks: 30-50 Portfolio restrictions: Stock +10 %/ No minimum Business Cycle Style + 20% Tracking risk: 4-8% target range Launch date: 2 May 2012 Structure: UK ICVC, UCITs A sub-fund of Cazenove Investment Fund Company (CIFCo) Base Currency: £ (Sterling) Share Classes: A, B and X Income & Accumulation Shares Yield Frequency: Quarterly – End of February, May, August & November Fund codes: Sedol A Inc: B6QR3M9 B Acc: B79FC31 X Inc: B7FHV23 B Inc: B7CM2R3 X Acc: B6S00Y7 ISIN A Inc: GB00B6QR3M93 B Acc: GB00B79FC312 X Acc: GB00B6S00Y77 B Inc: GB00B7CM2R31 X Inc: GB00B7FHV230 Bloomberg A Inc: CAZEIAI LN B Acc: CAZEIBA LN X Acc: CAZEIXA LN B Inc: CAZEIBI LN X Inc: CAZEIXI LN *Not guaranteed - 22 -
  23. 23. Example - Pirelli • Perception is cyclical industry at peak margins. Analyst forecasts are conservative, the valuation is low • The dividend-sustainability database identified a company in change • Subsequent analysis justified a trip to the Milan factory to meet the CEO & Chairman • Technological change means premium tyres is a much sticker business than historically. A rerating is in the offing. Industry remains capacity constrained • Strong balance sheet, cashflow and a shareholder- friendly focus support 40%+ dividend growth to a 5.1% yield over 3 years • 3 year forecast return of 40%, plus 15% dividend. A rerating and potential upgrades could lead to total return c.100% Strong dividend growth and attractive business cycle characteristics - 23 -
  24. 24. Example - ENI • Market cap EUR 71bn. Dividend yield 5.9% • Growth increasingly expensive. Capex going up over 10%. Major new resource discovery • We expect utility holdings to be divested for cash. This will help fund capex but also support the dividend policy • Euro crisis of 2011 moved the stock into deep value territory • Total return coming predominantly from income rather than growth in invested capital. Some valuation upside Market growth but attractive yield and solid fundamentals - 24 -
  25. 25. Regulatory information and risk warnings Issued by Cazenove Capital Management which is the name under which Cazenove Capital Management Limited (registered no. 3017060) and Cazenove Investment Fund Management Limited (registered no. 2134680), both of 12 Moorgate London EC2R 6DA, authorised and regulated by the Financial Services Authority provide investment products and services. Prepared for professional advisers for information purposes only and must not be distributed to retail investors. This document does not constitute an offer to enter into any agreement nor is it a solicitation to buy or sell any investment therein. Telephone calls may be recorded for training and monitoring purposes. Investment in this Fund will not be suitable for all investors. Any investment should be considered against an investor’s investment needs and attitude to risk. This is a specialist Fund, which invests in small, less liquid companies. The Fund is likely to provide a higher level of volatility and this may carry increased risk. The levels and bases of, and reliefs from, taxation may change. Investors should obtain professional advice on taxation where appropriate before proceeding with any investment. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Details of the terms and risk warnings are contained in the Key Investor Information document. - 25 -