CAZENOVE EUROPEANINCOME FUNDFor professional advisers onlyQ2 2013
European investment team- 1 -Steve CordellChris RiceLionel Rayon Kuldip Shergill James Sym
Pan-European Equity Team- 2 -Chris RiceHead of Pan European EquitiesAll team members have sector research responsibilities as well as product responsibilitiesSocial environment and ethical (SEE) research is integrated into our mainstream investment process – in addition we have 2 SRI analysts.UKSteve Cordell (UK Absolute)Paul Marriage (UK Smaller Companies)Julie Dean (UK Equity)John Warren (UK Smaller Companies)Matthew Hudson (Equity Income)David Docherty (UK Equity)Wade Pollard (UK Equity)Charlotte Morrish (UK Equity)EuropeChris Rice (Europe Ex UK)Steve Cordell (Pan Europe)Lionel Rayon (Pan Europe, High Alpha)Kuldip Shergill (Pan Europe, High Alpha)James Sym (Europe Ex UK)
Cazenove Capital European funds- 3 -• Chris Rice• UK OEIC• £933.6m• IMA Europe ex UK• FTSE Europe ex UK Index• Steve Cordell• Dublin OEIC• €111.1m• Equity Europe• FTSE Europe Index• Chris Rice• Dublin OEIC• €97.7• Equity Europe ex UK• FTSE Europe ex UK IndexAs at 31 March 2013†† Source & copyright: S&P Capital IQ• Chris Rice & James Sym• UK OEIC• £126.4m• IMA Europe ex UK• FTSE Europe ex UK IndexCazenoveEuropean FundCazenove EuropeanIncome FundCazenovePan Europe FundCazenove EuropeanEquity (ex UK) Fund
Cazenove European Income Fund- 4 -Internal Performance Objective:The Fund aims to outperform by 2% pa over rolling 3 year periods and achievea minimum yield of 110% of the benchmark yieldBenchmark: FTSE World Europe ex UK IndexNumber of stocks: 30-50Portfolio Restrictions:Stock: +10 %/ No minimumBusiness cycle style: + 20%Tracking risk: 4-8% target rangeLaunch date: 1 May 2012Structure:UK ICVC, UCITA sub-fund of Cazenove Investment Fund Company (CIFCo)Share Classes: A, B and X income + Accumulation Shares. A and X HedgedYield Frequency: Quarterly
A Systematic Approach to the Universe of Stocks- 6 -We have developed a 3-factor, 90+ data-item screen of the investment universe that looks at stocksfrom the perspective of dividend-sustainabilityA systematic framework for answering the question:Is the dividend yield sustainable?Factor Data Example GoalDividend History• 10 year dividend history• Growth in shares in issueTo establish whether thecompany has a strongdividend track recordIncome Flexibility• Operational & Financial gearing• Working Capital Intensity• Capex IntensityTo establish the extent towhich the P&L is a constrainton paying dividendsBalance SheetStrength• Debt ratios• Q scoreTo establish whether thebalance sheet can support aprogressive dividend policy
Income Process – the business cycle- 8 -Growth and Stable yield Growth yieldSlowdown Recession Recovery ExpansionStable and High yield Cyclical yieldSTOCK:DELIVERS:STAGE OF CYCLE:Growth Growth/CyclicalValue & Growth Defensive CyclicalPORTFOLIO BIAS:
Focusing on Bottom Up Research- 9 -Systematic DatabaseStage of Cycle Yield RelativeProjectedIncome GrowthStock TearsheetResearch & Company MeetingsValuationIDEA INVESTMENTDECISION
Key theme in Q1: re-establishing quality leadership- 11 - Source: Cazenove Capital, Datastream, 15/04/13• In many ways Q1 ‘13 was a rerun of Q1 ’12, an up market led by this cycle’s leadership theme of secure globalgrowth stocks. Conversely risk and value performed poorly. Market participants rationalise this as euro risk off aroundCyprus debacle and Italian elections. Maybe we were just due a pause for breath.• We suggest that after the summer rally value is no longer in a structural bear market. Indeed we see a catch up inrisk and low quality over the coming quarters.• Longer term, we reiterate that safety has attracted an excessive premium. It’s GAAP not GARP.European high vs. low risk performance and European equity markets
Business Cycle – perception vs reality- 12 - Source: Cazenove Capital, Datastream, 31/03/13• The economic data suggests we are contracting at a less bad rate. Carry on like this and we’re at risk of a ‘normal’ cycle.• Perhaps because it has taken so long to recover, perhaps because politics is supressing animal sprits, perhapsbecause of policy action, whatever the reason the perception is that we are slowing down to enter recession.The market is pricing this too.Economic signals generated over the past 12m from EUComposite Macro IndexWhere we are in the Economic cycle?Investors perception based on the FMS
The market does NOT expect a normal cycle- 13 -Rieter – textile machinery BASF – chemicals2007 eps forecast2014 eps forecast2014e PE 11x2007a PE 3x2014e PE 11x2007a PE 18xSource: Bloomberg
The valuation case for value- 14 -• Dispersion remains incredibly high, indeed at levels only surpassed at true bubble momentssuch as tech in 2000 or nifty fifty in the 60s. Cheap has (almost) never been so cheap.• So strong is the investor preference for this investment theme it will probably only end when the cycle ends.• Taking a medium term view, value offers a much more attractive RoI that safety or growth.• Sectors include Telcos, Utilities, Resources, some cyclicals, the periphery, domestic Eurozonestocks and many Financials.Source: Mirabaud
How are we investing? Focus on European Income Fund- 16 - Source: Cazenove CapitalThe fund exposes investors to 2 themes. Firstly, to eurozone risk abating and a normalisation of the business cycle.Secondly to an outperformance of value. Essentially, we will do well if it’s not different this time.We have recently added to or bought:• Renault, which has the chance to cut costs for the first time in 7 years and is growing its entry brand at 20%+, on 6.5x PE• Scania, which is about to monetise a vast emerging market backlog of orginial equipment with service and spare parts• Azimut, the EUR20bn asset manager that is growing at >15% p.a. (sound familiar?) with a PE ratio of 10x• Fortum, the Finnish utility which yields 6.7% and should be over the worst regulatory and capex hurdles.Dividend Style % Fund31/03/13Cyclical Yield 46.4Growth Yield 7.5High Yield 31.3Stable Yield 13.3Net Yield4.0%
Scania- 18 -• Europe’s best run, fastest growing,highest return truck manufacturer.• Well behaved market on thesupply side: regional oligopoliesthat remained profitable eventhrough 2009.• A huge base of Original Equipment inemerging markets with servicerevenues expected to grow rapidly.• Europe bottoming, continue to winmarket share.
Azimut- 19 -• Italian asset manager with a target toadd 50% to AUM in 3 years.• Huge brand and product advantagerelative to traditional private bankswho are hamstrung by legacy assets.• Virtually unassailable businessmodel with tied financial advisorslocked in with significant equity. Veryentrepreneurial top management.• Resultant fee margin is a mindboggling 2.4%!Market cap EUR1.9bn for an AUMthe same as Cazenove Capital.
Conclusion• Europe remains cheap.Still finding lots of opportunities.• Internal inconsistency in the market,shift to later cycle businesses• Good news: we can protectourselves pretty cheaply.• In a non-crisis environment,corporates will spend and thesupercycle in growth stocks islikely to fade• Follow the money. Policy actionwill dominate asset returns formany years to come.- 20 -Equity Yields attractiveSource: Goldman Sachs, September 2012
Europe: “Have I missed it?”- 22 -41%Trend PE of European Equities vs US EquitiesSource: Datastream, February 2013
Europe: “Have I missed it?”- 23 -332%Trend PE of European Equities vs ‘trend PE’ of European Bonds**Trend PE of European non-financials relative to the inverse of the 10 year German Government bund yieldSource: Datastream, January 2013
Focus on what’s important… and its not the economy!!- 24 -• Don’t be bearish based solely on a poor economic outlook.• Valuation is far, far more important.Source: Datastream, Oriel
Deleveraging with growth – historical precedents- 25 -• The bears are obsessed with the Debt/ GDP chart. “It will all go wrong in the end” is a common refrain.• Well maybe. But in fact there are many examples in history where economies have successfully deleveraged.Mathematically, if the nominal growth rate is above the nominal bond yield, deleveraging occurs acrossthe economy (which is what really matters). This is the current policy preference, and is normally very positivefor equities.Source: Dalio, R., 2012.‘An In-DepthLook at Deleveragings’, Bridgewater.
‘Beautiful’ vs ‘Ugly’ Deleveragings of the last 100 years- 26 -Beautiful:Ugly:USA 1929-38 UK 1944-69 USA 2008-12Japan 1988-2012 Spain 2008-2012 Germany 1918-1924Source: Dalio, R., 2012.‘An In-DepthLook at Deleveragings’, Bridgewater.
- 27 -Secure Growth Today vs Nifty FiftySource: Morgan Stanley• The Nifty Fifty theme – analogous with the current secure global growth theme – was a resounding success in the buildup to the crisis of the 1970’s.• The relative performance peak coincided with the negative “event” (the oil shock) though absolute performance beganto 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.The Nifty Fifty beat the market by 15% pa for 8 years Nifty Fifty valuations eventually hit bubble levels …
Protecting capital- 28 -• Not cyclical• Not crowded trades• No heroic assumptions• Not over-valuedSource: Morgan Stanley, January 2013TelecomsPrice and prospective EPS relativeConsumer staplesPrice and prospective EPS relativeCheap defensives overexpensive secure growth
Regulatory information and risk warnings- 29 -This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitutean offer to enter into any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein.This document is solely for the use of professional intermediaries and is not for general public distribution.The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable lawor regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove Capital orconnected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or anyrecommendations expressed herein which, moreover, are subject to change without notice.This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view.Unless otherwise stated all views are those of Cazenove Capital Management. It may not be reproduced in any form without the express permissionof Cazenove Capital Management and to the extent that it is passed on, care must be taken to ensure this is in the form which accurately reflectsthe information given here. Unless otherwise indicated, the source for all data is Cazenove Capital.Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down aswell as up and an investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates. CazenoveCapital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment FundManagement Limited (registered No. 2134680) each authorised and regulated by the Financial Conduct Authority and of 12 Moorgate London EC2R6DA provide investment products and services.The fund has a concentrated portfolio and may carry a high risk to capital. It will be potentially more volatile than funds investing in a morediversified portfolio. Investments in overseas securities are exposed to movements in exchange rates. These changes may have an adverse effecton the value, price or income of investments.