Threadneedle nma retreat 7 9th september presentation

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Threadneedle nma retreat 7 9th september presentation

  1. 1. Threadneedle UK EquitiesNew Model Adviser RetreatSimon Brazier, Head of UK Equities September 2011
  2. 2. Agenda 2 Introduction to UK Equities at Threadneedle What has changed? Threadneedle UK Fund Portfolio Strategy Appendix 2
  3. 3. UK Equities Team Simon Brazier Leigh Harrison Head of UK Equities Head of Equities Chemicals and Health Care 27 years’ experience 12 years’ experience Mark Westwood Dominic Baker Dan Vaughan Jonathan Barber Travel & Leisure, Telecoms and Automotive, General Retailers and Small Caps Utilities and Property Food Retailers Technology 16 years’ experience 20 years’ experience 12 years’ experience 18 years’ experience Richard Colwell Chris Kinder Daniel Belchers2 James Thorne Consumer Services, Industrials, Banks and Oil Services Mining Small Caps Media and Insurance 9 years’ experience 8 years’ experience 12 years’ experience 20 years’ experience Adam Spagnoletti Simon Haines Stephen Thornber1 Tobacco, Beverages, Household Construction, Financial Services, Global Oil Goods and Support Services Homebuilders and Industrials 23 years’ experience 6 years’ experience 11 years’ experience Benjamin Malone Christopher Fox Dedicated UK Trader Dedicated UK Trader 18 years’ experience 11 years’ experience Neil Finlay Cathrine de Coninck-Smith Stéphane Jeannin Aamod Mishra Investment Specialist Governance & SRI Investment Specialist Investment Assistant 10 years’ experience 5 years’ experience 12 years’ experienceSource: Threadneedle as of 30 April 20111 Stephen is attached to the Global Equity Team2 Daniel is attached to the Commodities Team 3
  4. 4. UK Equities - Product Range 4 Strategy Fund ManagerCore  UK Fund  Simon BrazierHigh Alpha  UK Select  Mark Westwood  UK Equity Income Fund  UK Monthly Income  Leigh Harrison, Richard Colwell,Income  UK Monthly Extra Income Jonathan Barber  UK Growth & IncomeIncome High Alpha  UK Alpha Income Fund  Leigh Harrison, Richard Colwell  UK Mid 250  Simon HainesMid / Small Cap  UK Small Companies Fund  James ThorneAbsolute Alpha  UK Absolute Alpha  Chris Kinder, Mark WestwoodExtended Alpha  UK Extended Alpha  Chris Kinder, Simon Haines
  5. 5. UK Equities Team – Investment Process Monitoring and risk Idea generation Company research Portfolio construction control Experience  Rigorous fundamental  Stock conviction  Analysis of downside Company meetings analysis  Individual stock risk stock risk External research  Evaluation of stock in  Sector / thematic  Daily risk reports cycle stance  External checks and Broad macroeconomic, thematic and sector  Collaboration and  Competition for capital analytics views discussion  Valuation assessment  Analysts grade stocks 5
  6. 6. UK Equities Team - Performance 6Equity Quartile performance1 Asset class and IMA sector Fund name 1 year 3 years 5 years Since FM start Threadneedle UK Fund 2 2 2 1 30.04.10 Threadneedle UK Extended Alpha 1A - - 1 30.11.10 UK All Companies Threadneedle UK Select Fund 2 3 2 2 31.10.06 Threadneedle UK Mid 250 Fund 1 1 1 1 31.01.05 Threadneedle UK Growth & Income 2 2 2 2 31.12.09 UK Smaller Companies Threadneedle UK Smaller Companies Fund 2 2 2 2 30.04.10 Threadneedle UK Equity Alpha Income Fund 1 2 1 1 31.05.06 UK Equity Income Threadneedle UK Equity Income Fund 1 2 1 1 28.02.06 Threadneedle UK Monthly Income Fund 1 2 1 2 28.06.02 UK Equity and Bond Income Threadneedle Monthly Extra Income Fund 1 1 1 1 31.12.09 Absolute Returns Threadneedle UK Absolute Alpha Fund 1B - - 1 29.10.10Source: Morningstar as at 31 July 2011. Fund data is bid to bid and net of basic rate tax. All fund returns are based in £1 Quartile ranks of all funds are shown within their respective peer group sector from within the UK Unit Trust / OEICs UniverseA Performance since inception . Extended Alpha fund launched 30 November 2010B Performance since inception. Absolute Alpha fund launched 29 October 2010 6
  7. 7. 02What has changed?
  8. 8. What has changed? 8  Volatility  Debt dynamics  UK economic backdrop 8
  9. 9. Markets do not go up in straight lines Decade Annualised market period return Positive vs. negative return years 1900s 4.90% 1910s -3.80% 1920s 7.80% 1930s 4.30% 1940s 3.80% 1950s 12.90% 1960s 4.40% 1970s -2.30% 1980s 15.60% 1990s 10.70% 2000s -1.20%Source: Equity Gilt Study of 10 February 2011. UK real returns on equities – gross income reinvested. Average annual rates of return between year ends 9
  10. 10. Volatility is not something newDistribution of real annual equity returns 9 8 Frequency (number of years) 7 6 5 4 3 2 1 0 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 Annual return (%) Source: Equity Gilt Study of 10 February 2011 10
  11. 11. Debt dynamics will continue to shape markets over the next decade Fiscal Balance and Debt as a % of GDP 6% 4% Hungary 2% Fiscal balance (% of GDP) The old rules no longer apply 0% Russia Indo nesia Turkey B razil -2% Germany The concept of emerging market vs. China M exico Israel -4% P hilippines developed market has permanently Ro mania M alaysia Italy P o rtugal changed -6% So uth A frica P o land Spain Greece -8% UK This means the ways in which India -10% Japan unsustainable debt trajectories are US Ireland -12% addressed will shape markets 0% 50% 100% 150% 200% 250% Governm ent debt (% of GDP) Developing economies Developed economies Source: Threadneedle, IMF Fiscal Monitor April 2011 and Haver Analytics as at 30 April 2011 11
  12. 12. What are the ways out of a debt crisis?Cut, print or default Cutters are few and far between  Only Britain 1815-1914 reduced debt burden exclusively through budget surpluses, lower interest rates and higher growth  And Britain had the advantage of the industrial revolution  Sweden and Canada undertook significant fiscal retrenchment in the early 1990’s Printers  Countries with monetary sovereignty  Countries with own-currency debt Defaulters  Countries with limited monetary sovereignty  Countries with foreign currency debtSource: 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 12
  13. 13. What are the ways out of a debt crisis? UK - cutters  Biggest fiscal retrenchment ever only just beginning  Monetary stimulus will be used to manage aggregate demand US - printers  Debt ceiling renegotiation  2012 will see fiscal contraction  Renegotiate, but lower growth in 2011 and 2012 Europe – Defaulters?  Greece is bust (solvency not liquidity)  Contagion to Portugal and Ireland is manageable  Spain and Italy the big issues  Circuit breaker or extend and defend or monetisation 13
  14. 14. No more Mr NICE guy Sovereign Inflation Global debt contagion slowdown Coalition Monetary Fiscal policy UK policy economy Double dip recession Crisis Promised critical land 14
  15. 15. Balancing tight fiscal policy … 15 Total consolidation plans Projections (£bn) 2010–2011 2011–2012 2012–2013 2013–2014 2014–2015 2015–2016 Announced at Budget* 8.4 15 20 30 38 - Inherited from Labour 1 26 41 58 72 - Total Consolidation 9.4 41 61 88 110 126*Source: HM Treasury, Budget March 2011. Budget June 2010 15
  16. 16. … with loose monetary policy 16 £503 0.5% billion Cost of money Liquidity1 – SLS £389 £200 billion billion Solvency2 – The great UK banks experiment – QESource: National Audit Office report as at 31 December 20101 Credit Guarantee Scheme, Special Liquidity Scheme and Loans to Banks2 Asset Protection Scheme, Cost of Bank Shares and Guarantees 16
  17. 17. The risks - debt refinancingA tidal wave of debt issuance to be funded 250.0 80.0% 70.0% 200.0 60.0% 150.0 50.0% 100.0 40.0% 30.0% 50.0 20.0% 0 10.0% 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 -50.0 0 Gross Issuance Net Issuance Net Debt/GDP% (£ billion) (£ billion)Source: DMO as at 28 March 20111 Data from the current financial year onwards are projections, while the earlier data are the actual historical figures.2 Net Debt / GDP figures are published by HM Treasury 17
  18. 18. 02Threadneedle UK Fund
  19. 19. Consistent long term performance 19Fund performance vs. FTSE All Share 20 UK Fund FTSE All Share 15 10 5 0 -5 3 months YTD 1 year Since manager start 3 years 5 yearsRelative: -0.1% +1.4% +3.2% +5.9% +2.5% +2.6 % Source: Threadneedle. Performance is in £. Fund data is quoted on a global close basis since 1st January 2008 with Income re-invested. Fund data is gross of tax and T.E.R to facilitate comparison with the indices. Returns greater than 1 year are annualised and calculated on a rolling-period basis. Fund returns as of 31 July 2011. Manager start date corresponds to the start of Simon Brazier’s tenure as UK Fund manager (30 April 2010). 19
  20. 20. Threadneedle UK FundFund characteristics and risk frameworkBroadly diversified UK equity fund by market size and sector. At least 50% exposure toFTSE 100 and maximum of 10% small cap exposure Current fund size1 £1,072 million Target First quartile over rolling three year periods Benchmark UK IMA – All Companies Index FTSE All Share Index Typical tracking error range 3%–7% Typical number of stocks 60–100 Typical maximum stock weight 5% Typical maximum sector2 load difference3 +8% Aim to remain fully investedSource: Threadneedle as at 15 August 20111 As at 15 August 20112 FTSE All-Share ICB Sectors3 Against the FTSE All Share Index 20
  21. 21. Threadneedle UK FundInvestment philosophy Aim  First quartile over rolling three year periods  Risk and reward drives all investment decisions  Reward derived from valuation and profit opportunity Philosophy  Focus on low business risk rather than index risk  Portfolio risk reduced by diversification  Index unaware Characteristics  Stocks across the market capitalisation spectrum  Maximise the Threadneedle research advantageSource: Threadneedle as at 30 June 2010 21
  22. 22. Threadneedle UK FundInvestment strategyTwo key skillsStock picking Portfolio construction  Valuation  Quality of business model Diversify the fund by  Financials (cash flow)  Investment theme  Growth drivers  Growth drivers  Margin sustainability  Style  Management  Market capitalisation  CatalystsAiming to deliver – high alphaAND low volatility 22
  23. 23. Investment strategyLimiting downside risk Valuation support Excellent management Conservative balance sheet structure Tangible and saleable assets Clear accounting policies Focus on cash flow generation Organic rather than acquired growth Shareholder value creation focus 23
  24. 24. Simon BrazierUK Fund performance 24Performance relative to FTSE All Share index 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% May 10 June 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 2.0% 1.8% 1.5% 1.0% 1.0% 0.9% 0.7% 0.8% 0.7% 0.6% 0.5% 0.5% 0.4% 0.2% 0.0% -0.2% -0.5% -0.3% -0.4% -0.4% -0.4% -1.0% May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Source: Threadneedle as at 31 July 2011. Indicated performance relates to Threadneedle UK Fund, gross of fees, end of day pricing in sterling. Fund managed by Simon Brazier from 30 April 2010 to present Consistent monthly returns 24
  25. 25. Simon Brazier – UK equity retail fund performance 25Performance relative to FTSE All Share index Outperformance No. of months No. of months % Market up 28 20 71 Market down 27 16 59 Total 55 36 65Source: Schroders, gross of fees, end of day pricing in sterling up to 31 October 2009, Threadneedle gross of fees, end of day pricingin sterling up to 31 July 2011 25
  26. 26. Recent performance highlights Contributions (in %)Period Stocks Sectors TotalQ2 2011 +0.6 +0.6 +1.2Q1 2011 +0.7 -0.1 +0.6Q4 2010 +1.0 +0.3 +1.3Q3 2010 +1.5 -0.4 +1.1Q2 2010 +0.4 +0.6 +1.2Q1 2010 +1.6 +0.6 +2.2 Source: Threadneedle. Please note that attributions are approximate. Performance attribution as at 30 June 2011Consistent outperformance drivenby stock selection 26 26
  27. 27. 04Portfolio strategy
  28. 28. Portfolio strategy 2011 Fiscal consolidation underway, a large positive At the stock level valuation focus is key with opportunities across all sectors Finding value in domestic cyclical stocks for the first time in four years Very real exogenous risks (Regulation, global growth shock, sovereign debt crisis, cost push inflation) Minimising downside risk both at the stock and sector level M&A to remain a dominant feature Longer-term, more positive on the UK market than on the underlying UK economyFocusing on stocks, not sectors 28
  29. 29. UK equities - themes for 2011 29Themes Portfolio strategy Examples  Market leaders  Pearson, Standard Chartered, JohnsonStrong franchises /  Strong finances/management Matthey, Smith & Nephew, Ultraunique assets  Barriers to entry Electronics, De La Rue, Booker  New management strategy  Rentokil Initial, Wolseley, Melrose,Restructuring / recovery  Improving returns Housebuilders, Headlam  Value creation  Growth potential  Aggreko, Rotork, Daily Mail, WoodQuality cyclicals  Overseas earnings Group, Amec, Berendsen, Carnival  Strong financesContrarian views /  Strong valuation support  IG Group, Rexam, Stagecoach, JDhidden gems  Out of favour growth options Wetherspoons, Firstgroup, Easyjet  Strong global franchises  GlaxoSmithKline, AstraZeneca, BT,Undervalued megacaps  High cash yields / dividends BG, BP, BAT, Unilever  Attractive total return outlookSource: Threadneedle as at July 2011 29
  30. 30. Threadneedle UK Fund Largest 10 holdings Largest 10 active overweights Sector exposure relative to FTSE All Share Portfolio Active Top 5 overweight and underweight Portfolio weight % weight % sub-sectors (%) weight % BP 4.2 Rexam 2.9 Support Services 7.7 GlaxoSmithKline 4.2 BT 2.3 General Industrials 4.0 Industrial Rio Tinto 3.9 Melrose 2.2 3.4 Engineering BG 3.9 Booker 2.0 Travel & Leisure 2.9 Royal Dutch Shell 3.6 Filtrona 1.8 Oil Services 2.8 AstraZeneca 3.3 Persimmon 1.7 Oil & Gas Producers -2.9 BT 3.2 Legal & General 1.6 Beverages -3.3 Rexam 3.0 AMEC 1.6 Banks -4.8 HSBC 3.0 EasyJet 1.6 Mobile Telecoms -5.1 Melrose 2.3 De La Rue 1.5 Mining -5.9Source: Threadneedle as at 31 July 2011 -6 -4 -2 0 2 4 6 8 30 30
  31. 31. Strong franchises Performance relative to FTSE All Share Index Education and consumer publishing business with 3-year performance brands such as the FT, Penguin, Prentice Hall, 180% Addison-Wesley 170% Strong brands and weak competitors lead to 160% pricing power 150% Rebased=100 Market-leading digital learning resources 140% Risk to US education spend limited thanks to 130% Federal bailout of US states 120% Very strong balance sheet (1x net D/EBITDA) post 110% the disposal of IDC (financial markets data) 100% Beneficiary of weak sterling (80% profits are US dollar denominated) 90% Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Conservative accounting Source: DataStream as at 30 August 2011, in local currency > 4% dividend yield 31
  32. 32. Quality cyclicals Performance relative to FTSE All Share Index 3-year performance 140% 130% Engineering, production support, maintenance for 120% the oil and gas industry and gas turbine servicing 110% for the power generation industry Rebased=100 100% Record of strong organic growth and high returns 90% on capital 80% Strong balance sheet 70% Cost initiatives protected margins in downturn 60% Recovery in engineering and gas turbine end 50% markets should drop through to profitability 40% Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Source: DataStream as at 30 August 2011, in local currency 32
  33. 33. Restructuring / recovery Performance relative to FTSE All Share Index 3-year performance Building material and lumber product distributor in 130% the US, UK and France 120% 2009 was a very tough year as end markets collapsed and the company needed to rebuild its 110% balance sheet with a rights issue 100% Rebased=100 With a rebuilt balance sheet, Wolseley is now a 90% turnaround story with a focus on improving margins and returns on capital. It is not a call on 80% US construction recovery 70% Management is undertaking action to refocus the 60% group on high return areas and to improve low 50% return areas for eventual sale Exiting the downturn Wolseley should demonstrate 40% Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 high operational gearing and strong cash Source: DataStream as at 30 August 2011, in local currency generation 33
  34. 34. Contrarian views Performance relative to FTSE All Share Index One of the UK’s leading house builders, 3-year performance headquartered in York 180% Unloved sector with low valuations (0.7x book value vs. a 20-year average of 1.3x) 160% Book value conservative (due to land 140% provisions passed) Rebased=100 Best management team in the sector 120% Business aggressively restructured during 100% the downturn Margins currently at 8% (vs. mid 20% at the peak 80% and 1% at the trough) – could go back to mid teens thanks to mix and using cheap land from 60% their land bank Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Source: DataStream as at 30 August 2011, in local currency Expecting shares to remain volatile on the back of macroeconomic newsflow 34
  35. 35. Recovery and growth Absolute performance and relative strength UK biggest wholesale distributor, serving corner shops, 3-year performance caterers, pubs etc. 300% Excellent management led by Charles Wilson 280% 2007 reverse takeover of Blueheath. Gained AIM listing. 260% Highly incentivised management, with >20% share 240% ownership 220% Rebased=100 Extra store refurbishment successfully rolled out. Additional 200% growth coming from internet portal, direct contracts (e.g. 180% NHS) and the expansion of the premier retail branded 160% corner shops 140% Current infrastructure could handle 50% more volume 120% Icelandic stock overhang removed. Moved to FTSE full list 100% in Autumn 2009 80% Margins continue to benefit from changes to sales mix 60% away from tobacco and towards catering Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Strong balance sheet (net cash after £360m of debt in Source: DataStream as at 30 August 2011, in local currency 2005). Started to do acquisitions to strengthen position India opportunity 35
  36. 36. Restructuring/ recovery Performance relative to FTSE All Share Index Market-leading information management, 3-year performance exhibitions and publishing business covering scientific, technological and legal sectors 130% Stock suffered during financial crisis 120%  Earnings dropped sharply  Undertook rights issue in July 2009 to pay down debt 110% Rebased=100  Two chairmen and three CEOs 100% Free cash flow of $700m with debt is now of $6.3bn mark (2x–3x net debt / EBITDA) 90% Legal business (15% of EBITDA) should see uptick in margins thanks to extra R&D investment 80% – targeting margins back up to 20%+ (vs. current 14%) 70% Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Currently trading at trough-cycle valuation of 12x Source: DataStream as at 30 August 2011, in local currency P/E, versus a long term average of 15x. 4% yield provides some additional protection 36
  37. 37. APAppendix
  38. 38. Government forecasts – corporates must invest 38UK GDP breakdown 2000– % change y-o-y 2007 2008 2009 2010 2011 2012 2013 2014 20061 Household 3.0 3.0 1.3 -3.2 0.8 0.6 1.3 1.8 2.1 consumption Business 2.3 9.8 0.0 -18.9 2.5 6.7 8.9 10.6 10.2 investment Government 2.8 1.5 3.5 1.0 1.0 0.8 -1.2 -1.8 -2.4 consumption Government 5.3 6.5 17.3 16.9 4.4 -12.0 -9.9 -5.6 -1.4 investment Exports - - - -10.1 5.8 7.9 6.5 6.2 5.7 Imports - - - -11.9 8.5 5.0 2.9 3.8 3.8 GDP 2.4 3.0 0.8 -4.9 1.3 1.7 2.5 2.9 2.9 Source: UK Treasury, Office for Budget Responsibility, March 2011 Budget Report 1 Average rate 38
  39. 39. Continued loose monetary policyBank rate and forward market interest rates 6% 5% 4% 3% 2% 1% 0% 2008 2009 2010 2011 2012 2013 2014 Bank rate February 2011 report May 2011 report August 2011 report Source: BofE Inflation Report as at August 2011. Report curves are estimated using overnight index swap (OIS) rates in the 15 working days to 9 February 2011 and 3 August 2011 39
  40. 40. The risks - consumers saveHousehold savings16%14%12%10% 8% 6% 4% 2% 0%-2% 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E 2014E 2016ESource: Threadneedle, BofE report as at 31 March 2011 40
  41. 41. The risks - inflation 41CPI goods inflation excluding energy and CPI services inflation 6% 5% 4% 3% 2% 1% 0%-1%-2%-3% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 CPI goods excluding energy CPI services Source: BofE Inflation Report as at 3 August 2011 41
  42. 42. Macroeconomic summary 42 Debt constrains economic growth Although, fiscal consolidation is a necessity and not a choice In the UK, domestic consumption, government spending and net trade to remain weak Economic recovery relies on corporate investment. The Government will support this through policy making Even muted recovery requires very loose monetary policy to offset tight fiscal policy Risks to recovery include sustained cost-push inflation, sovereign debt contagion, the failure of the coalition and global slowdown 42
  43. 43. Mining – don’t forget the risksCommodity prices 350 300 250 200 150 100 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Agriculture and livestock Industrial metalsSource: Threadneedle, BofE as at 9 February 2011 43
  44. 44. Biography SIMON BRAZIER Simon Brazier is Threadneedle’s Head of UK Equities. He joined the company in 2010 and manages the Threadneedle UK Fund. Simon began his career at Schroders in 1998 and, since 2002, he was a member of the Schroder UK Specialist Equity team with responsibility for running a variety of institutional mandates as well as the Schroder UK Equity Fund. Simon holds a BA (Hons) in Economics with French from Durham University and also studied at the University of Aix-Marseille. Threadneedle start date: 2010 Industry start date: 1998 44

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