Cazenove capital management

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Cazenove capital management

  1. 1. OPPORTUNITIES IN UK EQUITY INCOME Matt Hudson, Fund Manager Cazenove UK Equity Income Fund Citywire Wealth Manager Retreat October 2012 For professional advisers only
  2. 2. Agenda• UK market overview• The business cycle in 2012• Key themes• Portfolio activity• Current portfolio positioning• Outlook -1-
  3. 3. UK market overview – 1970’s all over again• Challenging background; UK equities have de-rated 28 low growth, austerity, 26 UK Market: Trend P/E, 1973-2012 overleverage 24 22 20 Trend P/E (x) 18• 16 Fear of tail risks high 14 12 10 8• Political interventions 6 4 have increased investor 2 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 uncertainty but… Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Ja n- Trend P/E (7% p.a. growth, Apr. 78 base) Ave. post-73 + 1 SD -1 SD UK market price earnings multiple based on long-term trend earnings growth• …UK equities now lowly rated vs trend Source: Mirabaud at 30/06/12 -2-
  4. 4. The business cycle is alive and well125 UK market relative returns year to date Performance120 Business cycle style groupings year-to-date* FTSE 250 +17.1%115 Commodity Cyclicals -12.2%110 Industrial Cyclicals +9.7% FTSE All-Share +5.6% Consumer Cyclicals +20.2%105 FTSE 100 +3.4% Financials +11.8%100 Growth +4.5%95 Growth Defensives +2.6%90 Value Defensives -1.1% Business cycle in theory Business cycle in reality Global industrial production - % change year on year Recession Recovery Expansion Slowdown Expansion Slowdown Source: Cazenove Capital at 11/10/12 *Performance relative to FTSE 350 at 30/09/12 -3-
  5. 5. Where are we in the business cycle?UK Markit Manufacturing PMI US ISM Manufacturing PMIEuro-area Markit Manufacturing PMI China Markit Manufacturing PMI Source: Markit & Thomson Datastream at 28/09/12 -4-
  6. 6. Theme 1 – the bubble in securityThe “Nifty Fifty” beat the market by c.15% pa for 8 years Unilever price, relative performance and 2013 earnings forecasts • “Nifty Fifty”, a lesson from history • Secure growth has re-rated over deep cyclicals/value stocks from 2007 • Driven by the search for safety… • …and emerging market growth over developed market maturity Source: Morgan Stanley, Cazenove Capital at 26/09/12 -5-
  7. 7. Severn Trent (Value Defensive) Theme 2 – yield at a premium • Investors mistaking “low volatility” for growth • “Secure” dividend stocks squeezed upwards • Value traps Barclays (Financial) • “High volatility” stock de-rated is the opposite side of the trade • Value opportunities Trend P/E relative +SD Average -SD Source: Mirabaud at 31/08/12 -6-
  8. 8. Theme 3 – a preference for consumer cyclicalsUK corporate margins near record levels Credit easing for consumers22 Market ex Financials ex Commodities - EBITDA Margin2018161412 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12E13E • Further margin gains more challenging… • Outlook for consumers improving Source: Citigroup at 31/12/11, Deutsche Bank at 24/09/12 -7-
  9. 9. Theme 4 - dividend recovery• Dividend recovery underway FTSE All Share - DPS Growth (YoY %) 40• UK dividend growth 2012 / 2013 circa 30 6-7% 20 10• Dividend growth stocks re-rating 0 -10 -20• Special dividend enhancements -30 Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Dividend surprises performance Source: MSDW/Datastream, FTSE, Global Financial Data, Morgan Stanley Research, Shore Capital at 30/05/12 -8-
  10. 10. Portfolio strategy – activity in 2012• Preference for Consumer Cyclicals with Aviva (Financial) performance relative to FTSE All-Share pricing power – added to Easyjet, Buying Howden Joinery• Leading indicators turning up – new holdings in early-cycle Industrial Cyclicals – GKN, Premier Farnell• Policy action (OMT, QE3) prompts move towards neutral in Financials, increased Diageo (Growth Defensive) performance relative to exposure in Life Assurance and Other FTSE All-Share Financials (Aviva, Jupiter)• Reduced highly-rated Growth Defensives and “Safety” stocks – exited United Sold Utilities, Diageo Source: Thomson Reuters Datastream at 28/09/12 -9-
  11. 11. Portfolio strategy – active positions Underweight Market Overweight -6.16% HSBC easyJet +1.77% -4.74% BP Legal & General +1.67% -4.55% Royal Dutch Shell A Hargreaves Lansdown +1.67% -3.34% Royal Dutch Shell B BT Group +1.66% -2.59% Diageo WPP +1.66% -2.32% BHP Billiton Resolution +1.65% -1.59% Unilever Jupiter +1.64% -1.57% Standard Chartered Elementis 1.51% -1.48% SAB Miller Barclays +1.50% -1.47% Tesco Imperial Tobacco +1.49% Market Cap Exposures (%) Index Portfolio FTSE 100 84.7% 61.8% FTSE 250 13.0% 30.4%Portfolio Risk FTSE Small Cap 2.2% 1.4%Predicted Tracking error p.a. 4.5% AIM - 0.3%Beta 0.9 Ex Index - 1.9%# of stocks 56 Cash - 4.2% Source: Cazenove Capital Management at 05/10/12 - 10 -
  12. 12. Portfolio strategy – business cycle style tilts Change over 12 months vs FTSE Key income portfolio Fund % Index % holdings All-shareCommodity Cyclicals -6.0% 8.1 26.2 Rio TintoConsumer Cyclicals +19.5% 13.7 5.2 easyJetIndustrial Cyclicals +21.2% 11.7 5.9 MelroseFinancials +8.2% 16.8 17.8 AvivaOther/Cash/ Unallocated = 8.4 4.2 CineworldGrowth +2.0% 2.9 4.3 SageGrowth Defensives +8.4% 6.5 9.2 BabcockValue Defensives -6.3% 31.9 27.3 GlaxoSmithKline Overweight Underweight Neutral / NA Source: Cazenove Capital Management 05/10/12 - 11 -
  13. 13. Summary and outlook• Despite abundant liquidity, growth Central bank liquidity versus US GDP still weak and volatile…• …but leading indicators and economic surprise indicators improving• UK market attractively valued on PE and yield with dividend growth robust• Overall portfolio balanced position, preference for Consumer Cyclicals and adding to Financials Source: MSDW/Datastream, FTSE, Global Financial Data, Morgan Stanley Research, Shore Capital, BofA Merril Lynch Global Equity Strategy, Bloomberg at 01/09/2012 - 12 -
  14. 14. Appendix
  15. 15. Fund – dividends and income returnsCazenove UK Equity Income Fund Dividend distributions Fund income return FTSE All-Share return Year (net) 5 yrs cumulative 5 yrs cumulative 2007 4.39p 24.4% 19.71% 2008 5.12p 5 years ended 31 December 2011 (B Income class) 2009 4.84p Bloomberg Share Class Lipper Codes Ticker A Inc CAZUEAI LN 65000477 B Inc CAZUEBI LN 65000481 2010 4.55p X Inc CAZUKEX LN 65000480 X Acc CAZUKXA LN 68150522 2011 4.86p Source: Cazenove Capital Management - 14 -
  16. 16. The Cazenove UK Equity Income Fund – summaryInternal Performance Objective:“The Fund aims to outperform by 1.5% over rolling 3 year periods and achieve a minimum yieldof 110% of the benchmark yield”Benchmark FTSE All-Share Index • Pragmatic incomeNumber of stocks Current 56, minimum 35 • Income and Capital returnsPortfolio Restrictions Stock +5% / No minimum(Rel to FTAS) Sector +10 / No minimum • Business cycle approach 50% max weight in mid-cap,10% max in small/ AIM/ other • Focused portfolio (+ minimum 80% in UK Equities)Tracking Risk 4-8% target range, current 4.5% • Top decile 1, 3 and 5 years*Launch Date 6 May 2005Fund Size £133mStructure UK Domiciled, UCITS IIIBase Currency £ (Sterling)Historic Yield 3.9% *Source. Cazenove Capital Management, fund ranking in Lipper UK Equity Income universe as at 24/09/12 - 15 -
  17. 17. Income strategy – through the cycle Slowdown Recession Recovery Expansion Cycle: Stock: Delivers: Market yield & High yield Low / no yield, Dividend growth dividend growth high capital growth - 16 -
  18. 18. Income investing – focus on total returns Premium Income Capital ReturnsSuperior Dividend Growth• 3 “cogs”, portfolio allocations change through the cycle to deliver income and capital returns Source: Cazenove Capital, Datastream - 17 -
  19. 19. Cazenove UK Equity Income Fund – portfolio through the cycle Business cycle (+ve) active weights for Cazenove UK Business cycle (-ve) active weights for Cazenove UK Equity Income Equity Income 40 0 35 -5 30 -10Active weight (%) Active weight (%) 25 -15 20 -20 15 -25 10 -30 5 -35 0 -40 Commodity Cyclical Consumer Cyclical Financial Growth Commodity Cyclical Consumer Cyclical Financial Growth Growth Defensive Industrial Cyclical Value Defensive Growth Defensive Industrial Cyclical Value Defensive December December December December December December December 2005 2006 2007 2008* 2009 2010 2011 Premium real yields 44 49 68 86 60 54 55 Superior dividend growth 37 30 21 6 10 20 30 Capital Returns 19 21 11 8 30 26 15 No of stocks 69 78 58 51 68 57 52 Source: Cazenove Capital Management at 31/07/12 *cash 4.7% at year end 2008 - 18 -
  20. 20. ? Total returns – the power of compoundingWhat we know - income reinvested outperforms Annualised returns**over the long term* 6.00 5.51 Capital Return % (Annualised) Total Return % (Annualised) 5.00 4.03 4.00 3.00 2.67 2.00 0.86 1.00 0.42 0.00 -1.00 -0.70 Cazenove UK Equity FTSE All-Share IMA UK Equity Income B Inc Income Sector • Interim 2012 dividend + 6% year on year *Source: Cazenove Capital 24.09.2012 **Source: Lipper, Dec 2005 – July 2012 - 19 -
  21. 21. Fund manager: Matt HudsonMATTHEW HUDSON joined Cazenove in 2001. He is a member of the Pan-European equity team with responsibility forequity income portfolios. He is manager of the Cazenove UK Equity Income Fund and The Equity Income Trust forCharities, a UK authorised Common Investment Fund and he is responsible for the following UK sectors: Banks,Construction & Materials, Gas Water & Multi Utilities, Mining and Electricity. Matthew joined from AIB Govett InvestmentManagement where he was a UK equity fund manager. Prior to this he was a chartered accountant atPricewaterhouseCoopers in the financial services division. Matthew graduated from Cambridge University with a degree inHistory. Matthew has 13 years of investment experience Source: Citywire at 28/09/12 - 20 -
  22. 22. Pan-European Equity Team Chris Rice Head of Pan European Equities UK Europe Steve Cordell (UK Absolute) Chris Rice (Europe Ex UK) Julie Dean (UK Equity) Steve Cordell (Pan Europe) Matthew Hudson (UK Equity Income) Lionel Rayon (Pan Europe, High Alpha) Paul Marriage (UK Smaller Companies) Kuldip Shergill (Pan Europe, High Alpha) John Warren (UK Smaller Companies) James Sym (Europe Ex UK) David Docherty (UK Equity) Wade Pollard (UK Equity) All team members have sector research responsibilities as well as product responsibilities Social environment and ethical (SEE) research is integrated into our mainstream investment process – in addition we have 2 SRI analysts. - 21 -
  23. 23. UK equities research responsibilities Steve Cordell Julie Dean David Docherty • Technology Hardware • General Financial • Aerospace & Defence • Healthcare Equipment • Automobile & Parts • Life Insurance • Electronic & Electrical Equipment • Non-Life Insurance • Forestry & Paper • Pharmaceuticals & Biotechnology • General Industrials • Software & Computer Services • Industrial Engineering • Industrial Metals • Oil & Gas Producers • Oil Equipment & Services Matthew Hudson Paul Marriage Charlotte Morrish • Beverages• Banks • Smaller Companies • Food & Drug Retailers• Chemicals • Food Producers• Construction & Materials • General Retailers• Electricity • Household Goods - Personal• Gas, Water & Multi-Utilities • Media• Mining • Personal Goods• Software & Computer Services • Travel & Leisure Wade Pollard John Warren• Household Goods - Housebuilders • Support Services – ex FTSE 100• Industrial Transportation • Travel & Leisure• Real Estate• Support Services – FTSE 100• Telecoms• Tobacco - 22 -
  24. 24. Business cycle investing – market analysis• Sector market divides are not homogenous. They do not necessarily help us determine the behaviour of these stocks within the cycle.• Define the beta of stocks and allocate them to seven style groupings: Commodity Cyclicals Growth Financials Growth Defensives Consumer Cyclicals Value Defensives Industrial Cyclicals HIGHER BETA LOWER BETA• Pragmatic approach combining top-down macro view with earnings based security selection• Avoid permanent style / size bias• Demand for products and services changes throughout the business cycle• Operational gearing of companies impacts profitability of companies - 23 -
  25. 25. Business cycle investing - seven style groupings• Commodity Cyclicals – stocks whose revenues are linked either directly or indirectly to a particular commodity product such as oil, steel, gas, mining, bulk chemicals e.g. BP, Rio Tinto• Consumer Cyclicals – cyclical stocks which rely on consumer spending for their revenues e.g. retailers, automotives, house builders, leisure, general retail e.g. Marks & Spencer, Easyjet• Industrial Cyclicals – stocks which manufacture capital goods or which have revenues linked to industrial production e.g. engineering, aerospace, construction e.g. GKN, Cookson• Growth – stocks which grow revenues well in excess of GDP with a high degree of uncertainty or volatility e.g. luxury goods, medical technology, IT e.g. Smith and Nephew, ARM Holdings• Financials/Interest Rate Sensitive – stocks whose business depends on interest rate spreads, financial markets and asset valuations e.g. banks, insurers, real estate e.g. Barclays, Land Securities• Growth Defensives – stocks which grow revenues in excess of GDP with a low volatility and high visibility e.g. support services, food retailers e.g. Pearson, Compass group• Value Defensives – stocks which grow revenues at or below GDP with low volatility and high visibility e.g. telecommunications, pharmaceuticals, utilities, food producers, beverages, tobacco, e.g. GlaxoSmithKline, Vodafone - 24 -
  26. 26. Business cycle investing - horses for courses Performance relative to FTSE All-Share* 31/12/99 – 12/03/03 – 15/06/07 – 03/03/09 –Stock Sector Style 12/03/03 15/06/07 03/03/09 30/04/12 Electronic &Morgan Crucible Cyclical -74% +272% -42% +129% Electrical IndustrialBodycote Cyclical -55% +114% -26% +120% EngineeringCookson General Industrials Cyclical -80% +98% -78% +246%Diageo Beverages Defensive +147% -17% +40% 19%Unilever Food Producers Defensive +178% -35% +57% -2%Reed Elsevier Media Defensive +72% -23% +43% -38% *Source: Thomson Datastream - 25 -
  27. 27. History and background 1823 1930s 1980s 2000sThe origins of Cazenove can By the 1940s the business had Cazenove played an important The firm changed from abe traced to the early become one of the City of part in most of the British partnership to corporate statusHuguenot financiers who left London’s pre-eminent Government’s privatisation in April 2001.France in the late stockbroking partnerships. issues. As the only majorseventeenth century. independent firm in London, it In 2005 Cazenove and Cazenove began investing onIn 1819 Phillip Cazenove successfully built its business JPMorgan formed a joint behalf of pension funds andjoined the business of his both domestically and venture with respect to their UK private individuals in 1945.brother-in-law John Menet: in internationally. investment banking activities.1823 they became partners, Cazenove Capital Management The fund management businessand the firm of Cazenove demerged from the Cazenove was separately incorporated inwas established. Group to create an 1988. independent asset management business. - 26 -
  28. 28. Funds under management - £15.9 billion Funds under management Wealth management £11.8bn Investments Funds £4.1bn TOTAL £15.9bnInvestment Funds Asset Class Long only funds £3.3bn Equities £6.3bn Sub-advisory £0.5bn Cash & Bonds £3.5bn Long/short funds £0.3bn Multi-Manager £4.5bn TOTAL £4.1bn Hedge Funds £1.3bnWealth Management Other Alternatives £0.3bn Private Clients TOTAL £15.9bn £8.6bn Charities £3.2bn TOTAL £11.8bn As at 31/07/12 - 27 -
  29. 29. Company informationFully diluted share capital Cazenove Capital Other Employees under Institutions Option 14.39% 2.77% Other individual Employees 19.39% holders 63.45% Source: Cazenove Capital Management, December 2011 - 28 -
  30. 30. Regulatory information and risk warningsIssued by Cazenove Capital Management which is the name under which Cazenove Capital ManagementLimited and Cazenove Investment Fund Management Limited both authorised and regulated by the FinancialServices Authority provide investment products and services. Past performance should not be seen as anindication of future performance. The value of investments and the income from them can go down as well asup and an investor may not get back the amount originally invested and may be affected by fluctuations inexchange rates. The levels and bases of tax assumptions may change. This document is for informationpurposes only and does not constitute an offer to enter into any contract/agreement nor is it a solicitation to buyor sell any investment or to provide any services referred to therein. This document is intended for IndependentFinancial Advisers, Professional Intermediaries and non-private clients only.Telephone calls may be recorded for training and monitoring purposes. - 29 -

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