Simon Brazier, Head of UK Equities<br />Threadneedle UK EquitiesNew Model Adviser Retreat<br />September 2011<br />
2<br />Agenda<br />Introduction to UK Equities at Threadneedle<br />What has changed?<br />Threadneedle UK Fund<br />Portf...
UK Equities Team<br />Leigh Harrison<br />Head of Equities<br />27 years’ experience<br />Simon Brazier<br />Head of UK Eq...
4<br />UK Equities - Product Range<br />
UK Equities Team – Investment Process<br />Idea generation<br />Company research<br />Portfolio construction<br />Monitori...
Company meetings
External research
Broad macroeconomic,  thematic and sector views
Rigorous fundamental analysis
Evaluation of stock in cycle
Collaboration and discussion
Valuation assessment
Analysts grade stocks
Stock conviction
Individual stock risk
Sector / thematic stance
Competition for capital
Analysis of downside stock risk
Daily risk reports
External checks and analytics</li></ul>5<br />
UK Equities Team - Performance<br />6<br />Equity<br />Source: Morningstar as at 31 July 2011. Fund data is bid to bid and...
What has changed?<br />02<br />
8<br />What has changed?<br />Volatility<br />Debt dynamics <br />UK economic backdrop<br />8<br />
Markets do not go up in straight lines<br />Source: Equity Gilt Study of 10 February 2011. UK real returns on equities – g...
Volatility is not something new<br />Annual return (%)<br />10<br />
Debt dynamics will continue to shape markets over the next decade<br />11<br />The old rules no longer apply<br />The conc...
What are the ways out of a debt crisis?<br />Cut, print or default<br />Cutters are few and far between<br />Only Britain ...
What are the ways out of a debt crisis?<br />UK - cutters<br />Biggest fiscal retrenchment ever only just beginning<br />M...
No more Mr NICE guy<br />Globalslowdown<br />Sovereign<br />debt contagion<br />Coalition<br />Inflation<br />Monetary pol...
15<br />Balancing tight fiscal policy …<br />Total consolidation plans<br />*Source: HM Treasury, Budget March 2011. Budge...
… with loose monetary policy<br />£503 billion<br />0.5%<br />Cost of money<br />Liquidity1 – SLS<br />£389 billion<br />£...
The risks - debt refinancing<br />17<br />
Threadneedle UK Fund<br />02<br />
Consistent long term performance<br />19<br />+2.6 %<br />+2.5%<br />Relative:<br />+3.2%<br />+5.9%<br />-0.1%<br />+1.4%...
Threadneedle UK FundFund characteristics and risk framework<br />Source: Threadneedle as at 15 August 2011<br />1  As at 1...
Threadneedle UK FundInvestment philosophy<br /><ul><li>First quartile over rolling three year periods</li></ul>Aim<br /><u...
Reward derived from valuation and profit opportunity
Focus on low business risk rather than index risk
Portfolio risk reduced by diversification</li></ul>Philosophy<br /><ul><li>Index unaware
Stocks across the market capitalisation spectrum
Maximise the Threadneedle research advantage</li></ul>Characteristics<br />Source: Threadneedle as at 30 June 2010<br />21...
Threadneedle UK FundInvestment strategy<br />Two key skills<br />Aiming to deliver – high alpha AND low volatility<br />22...
Investment strategy<br />Limiting downside risk<br />Valuation support<br />Excellent management<br />Conservative balance...
24<br />Simon BrazierUK Fund performance<br />Consistent monthly returns<br />24<br />
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Threadneedle nma retreat 7 9th september presentation

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  • Threadneedle nma retreat 7 9th september presentation

    1. 1. Simon Brazier, Head of UK Equities<br />Threadneedle UK EquitiesNew Model Adviser Retreat<br />September 2011<br />
    2. 2. 2<br />Agenda<br />Introduction to UK Equities at Threadneedle<br />What has changed?<br />Threadneedle UK Fund<br />Portfolio Strategy<br />Appendix<br />2<br />
    3. 3. UK Equities Team<br />Leigh Harrison<br />Head of Equities<br />27 years’ experience<br />Simon Brazier<br />Head of UK Equities<br />Chemicals and Health Care<br />12 years’ experience<br />Jonathan Barber<br />Utilities and Property<br />20 years’ experience<br />Mark Westwood<br />Travel & Leisure, Telecoms and Food Retailers<br />12 years’ experience<br />Dominic Baker<br />Automotive, General Retailers and Technology<br />18 years’ experience<br />Dan Vaughan<br />Small Caps<br />16 years’ experience<br />Daniel Belchers2<br />Mining<br />8 years’ experience<br />Richard Colwell<br />Consumer Services, Industrials, Media and Insurance<br />20 years’ experience<br />James Thorne<br />Small Caps<br />12 years’ experience<br />Chris Kinder<br />Banks and Oil Services<br />9 years’ experience<br />Adam Spagnoletti<br />Tobacco, Beverages, Household Goods and Support Services<br />6 years’ experience<br />Simon Haines<br />Construction, Financial Services, Homebuilders and Industrials<br />11 years’ experience<br />Stephen Thornber1<br />Global Oil<br />23 years’ experience<br />Benjamin Malone<br />Dedicated UK Trader<br />18 years’ experience<br />Christopher Fox<br />Dedicated UK Trader<br />11 years’ experience<br />Cathrine de Coninck-Smith<br />Governance & SRI<br />5 years’ experience<br />Stéphane Jeannin<br />Investment Specialist<br />12 years’ experience<br />Neil Finlay<br />Investment Specialist<br />10 years’ experience<br />Aamod Mishra<br />Investment Assistant<br />Source: Threadneedle as of 30 April 2011<br />1 Stephen is attached to the Global Equity Team<br />2 Daniel is attached to the Commodities Team<br />3<br />
    4. 4. 4<br />UK Equities - Product Range<br />
    5. 5. UK Equities Team – Investment Process<br />Idea generation<br />Company research<br />Portfolio construction<br />Monitoring and risk control<br /><ul><li>Experience
    6. 6. Company meetings
    7. 7. External research
    8. 8. Broad macroeconomic, thematic and sector views
    9. 9. Rigorous fundamental analysis
    10. 10. Evaluation of stock in cycle
    11. 11. Collaboration and discussion
    12. 12. Valuation assessment
    13. 13. Analysts grade stocks
    14. 14. Stock conviction
    15. 15. Individual stock risk
    16. 16. Sector / thematic stance
    17. 17. Competition for capital
    18. 18. Analysis of downside stock risk
    19. 19. Daily risk reports
    20. 20. External checks and analytics</li></ul>5<br />
    21. 21. UK Equities Team - Performance<br />6<br />Equity<br />Source: Morningstar as at 31 July 2011. Fund data is bid to bid and net of basic rate tax. All fund returns are based in £<br />Quartile ranks of all funds are shown within their respective peer group sector from within the UK Unit Trust / OEICs Universe<br />A Performance since inception . Extended Alpha fund launched 30 November 2010<br />B Performance since inception. Absolute Alpha fund launched 29 October 2010<br />6<br />
    22. 22. What has changed?<br />02<br />
    23. 23. 8<br />What has changed?<br />Volatility<br />Debt dynamics <br />UK economic backdrop<br />8<br />
    24. 24. Markets do not go up in straight lines<br />Source: Equity Gilt Study of 10 February 2011. UK real returns on equities – gross income reinvested. Average annual rates of return between year ends<br />9<br />
    25. 25. Volatility is not something new<br />Annual return (%)<br />10<br />
    26. 26. Debt dynamics will continue to shape markets over the next decade<br />11<br />The old rules no longer apply<br />The concept of emerging market vs. developed market has permanently changed<br />This means the ways in which unsustainable debt trajectories are addressed will shape markets<br />
    27. 27. What are the ways out of a debt crisis?<br />Cut, print or default<br />Cutters are few and far between<br />Only Britain 1815-1914 reduced debt burden exclusively through budget surpluses, lower interest rates and higher growth<br />And Britain had the advantage of the industrial revolution<br />Sweden and Canada undertook significant fiscal retrenchment in the early 1990’s<br />Printers<br />Countries with monetary sovereignty <br />Countries with own-currency debt<br />Defaulters<br />Countries with limited monetary sovereignty<br />Countries with foreign currency debt<br />Source: Willem Buiter (2010) and Niall Ferguson, Harvard University, ‘Fiscal Crises & Imperial Collapses: Historical Perspectives on Current Predicaments’ 9th Annual Niarchos Lecture, Peterson Institute for International Economics, Washington DC, 13 May 2010<br />12<br />
    28. 28. What are the ways out of a debt crisis?<br />UK - cutters<br />Biggest fiscal retrenchment ever only just beginning<br />Monetary stimulus will be used to manage aggregate demand<br />US - printers<br />Debt ceiling renegotiation<br />2012 will see fiscal contraction<br />Renegotiate, but lower growth in 2011 and 2012<br />Europe – Defaulters?<br />Greece is bust (solvency not liquidity)<br />Contagion to Portugal and Ireland is manageable <br />Spain and Italy the big issues<br />Circuit breaker or extend and defend or monetisation<br />13<br />
    29. 29. No more Mr NICE guy<br />Globalslowdown<br />Sovereign<br />debt contagion<br />Coalition<br />Inflation<br />Monetary policy<br />Fiscal policy<br />UK economy<br />Double dip recession<br />Crisis critical<br />Promised land<br />14<br />
    30. 30. 15<br />Balancing tight fiscal policy …<br />Total consolidation plans<br />*Source: HM Treasury, Budget March 2011. Budget June 2010<br />15<br />
    31. 31. … with loose monetary policy<br />£503 billion<br />0.5%<br />Cost of money<br />Liquidity1 – SLS<br />£389 billion<br />£200 billion<br />Solvency2 – UK banks<br />The great experiment – QE<br />16<br />Source: National Audit Office report as at 31 December 2010<br />1 Credit Guarantee Scheme, Special Liquidity Scheme and Loans to Banks<br />2 Asset Protection Scheme, Cost of Bank Shares and Guarantees<br />16<br />
    32. 32. The risks - debt refinancing<br />17<br />
    33. 33. Threadneedle UK Fund<br />02<br />
    34. 34. Consistent long term performance<br />19<br />+2.6 %<br />+2.5%<br />Relative:<br />+3.2%<br />+5.9%<br />-0.1%<br />+1.4%<br />19<br />
    35. 35. Threadneedle UK FundFund characteristics and risk framework<br />Source: Threadneedle as at 15 August 2011<br />1 As at 15 August 2011<br />2 FTSE All-Share ICB Sectors<br />3 Against the FTSE All Share Index<br />20<br />
    36. 36. Threadneedle UK FundInvestment philosophy<br /><ul><li>First quartile over rolling three year periods</li></ul>Aim<br /><ul><li>Risk and reward drives all investment decisions
    37. 37. Reward derived from valuation and profit opportunity
    38. 38. Focus on low business risk rather than index risk
    39. 39. Portfolio risk reduced by diversification</li></ul>Philosophy<br /><ul><li>Index unaware
    40. 40. Stocks across the market capitalisation spectrum
    41. 41. Maximise the Threadneedle research advantage</li></ul>Characteristics<br />Source: Threadneedle as at 30 June 2010<br />21<br />
    42. 42. Threadneedle UK FundInvestment strategy<br />Two key skills<br />Aiming to deliver – high alpha AND low volatility<br />22<br />
    43. 43. Investment strategy<br />Limiting downside risk<br />Valuation support<br />Excellent management<br />Conservative balance sheet structure<br />Tangible and saleable assets<br />Clear accounting policies<br />Focus on cash flow generation<br />Organic rather than acquired growth<br />Shareholder value creation focus<br />23<br />
    44. 44. 24<br />Simon BrazierUK Fund performance<br />Consistent monthly returns<br />24<br />
    45. 45. 25<br />Performance relative to FTSE All Share index<br />Source: Schroders, gross of fees, end of day pricing in sterling up to 31 October 2009, Threadneedle gross of fees, end of day pricing in sterling up to 31 July 2011<br />Simon Brazier – UK equity retail fund performance<br />25<br />
    46. 46. 26<br />Recent performance highlights<br />Source: Threadneedle. Please note that attributions are approximate. Performance attribution as at 30 June 2011<br />Consistent outperformance driven by stock selection<br />26<br />
    47. 47. Portfolio strategy<br />04<br />
    48. 48. Portfolio strategy 2011<br />Fiscal consolidation underway, a large positive<br />At the stock level valuation focus is key with opportunities across all sectors<br />Finding value in domestic cyclical stocks for the first time in four years<br />Very real exogenous risks (Regulation, global growth shock, sovereign debt crisis, cost push inflation)<br />Minimising downside risk both at the stock and sector level<br />M&A to remain a dominant feature<br />Longer-term, more positive on the UK market than on the underlying UK economy<br />Focusing on stocks, not sectors<br />28<br />
    49. 49. 29<br />UK equities - themes for 2011<br />Source: Threadneedle as at July 2011<br />29<br />
    50. 50. 30<br />Threadneedle UK Fund<br />Source: Threadneedle as at 31 July 2011<br />30<br />
    51. 51. Strong franchises<br />Education and consumer publishing business with brands such as the FT, Penguin, Prentice Hall, Addison-Wesley<br />Strong brands and weak competitors lead to pricing power<br />Market-leading digital learning resources<br />Risk to US education spend limited thanks to Federal bailout of US states<br />Very strong balance sheet (1x net D/EBITDA) post the disposal of IDC (financial markets data)<br />Beneficiary of weak sterling (80% profits are US dollar denominated)<br />Conservative accounting<br />> 4% dividend yield<br />31<br />
    52. 52. Quality cyclicals<br />Engineering, production support, maintenance for the oil and gas industry and gas turbine servicing for the power generation industry<br />Record of strong organic growth and high returns on capital<br />Strong balance sheet<br />Cost initiatives protected margins in downturn<br />Recovery in engineering and gas turbine end markets should drop through to profitability<br />32<br />
    53. 53. Restructuring / recovery<br />Building material and lumber product distributor in the US, UK and France<br />2009 was a very tough year as end markets collapsed and the company needed to rebuild its balance sheet with a rights issue<br />With a rebuilt balance sheet, Wolseley is now a turnaround story with a focus on improving margins and returns on capital. It is not a call on US construction recovery<br />Management is undertaking action to refocus the group on high return areas and to improve low return areas for eventual sale<br />Exiting the downturn Wolseley should demonstrate high operational gearing and strong cash generation<br />33<br />
    54. 54. Contrarian views<br />One of the UK’s leading house builders, headquartered in York<br />Unloved sector with low valuations (0.7x book value vs. a 20-year average of 1.3x)<br />Book value conservative (due to land provisions passed)<br />Best management team in the sector<br />Business aggressively restructured during the downturn<br />Margins currently at 8% (vs. mid 20% at the peak and 1% at the trough) – could go back to mid teens thanks to mix and using cheap land from their land bank<br />Expecting shares to remain volatile on the back of macroeconomic newsflow<br />34<br />
    55. 55. Recovery and growth<br />UK biggest wholesale distributor, serving corner shops, caterers, pubs etc.<br />Excellent management led by Charles Wilson<br />2007 reverse takeover of Blueheath. Gained AIM listing. Highly incentivised management, with >20% share ownership<br />Extra store refurbishment successfully rolled out. Additional growth coming from internet portal, direct contracts (e.g. NHS) and the expansion of the premier retail branded corner shops<br />Current infrastructure could handle 50% more volume<br />Icelandic stock overhang removed. Moved to FTSE full list in Autumn 2009<br />Margins continue to benefit from changes to sales mix away from tobacco and towards catering<br />Strong balance sheet (net cash after £360m of debt in 2005). Started to do acquisitions to strengthen position<br />India opportunity<br />35<br />
    56. 56. Restructuring/ recovery<br />Market-leading information management, exhibitions and publishing business covering scientific, technological and legal sectors<br />Stock suffered during financial crisis<br />Earnings dropped sharply<br />Undertook rights issue in July 2009 to pay down debt<br />Two chairmen and three CEOs<br />Free cash flow of $700m with debt is now of $6.3bn mark (2x–3x net debt / EBITDA)<br />Legal business (15% of EBITDA) should see uptick in margins thanks to extra R&D investment – targeting margins back up to 20%+ (vs. current 14%)<br />Currently trading at trough-cycle valuation of 12x P/E, versus a long term average of 15x. 4% yield provides some additional protection<br />36<br />
    57. 57. Appendix<br />AP<br />
    58. 58. 38<br />Government forecasts – corporates must invest<br />UK GDP breakdown<br />Source: UK Treasury, Office for Budget Responsibility, March 2011 Budget Report<br />1 Average rate<br />38<br />
    59. 59. Continued loose monetary policy<br />39<br />
    60. 60. The risks - consumers save<br />40<br />
    61. 61. The risks - inflation<br />41<br />41<br />
    62. 62. Macroeconomic summary<br />42<br />Debt constrains economic growth<br />Although, fiscal consolidation is a necessity and not a choice<br />In the UK, domestic consumption, government spending and net trade to remain weak<br />Economic recovery relies on corporate investment. The Government will support this through policy making<br />Even muted recovery requires very loose monetary policy to offset tight fiscal policy<br />Risks to recovery include sustained cost-push inflation, sovereign debt contagion, the failure of the coalition and global slowdown<br />42<br />
    63. 63. Mining – don’t forget the risks<br />43<br />
    64. 64. Biography<br />44<br />

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