Uk equity income scotland (jun-13)


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Uk equity income scotland (jun-13)

  1. 1. Threadneedle UK Equity IncomeRichard Colwell – Fund ManagerLeigh Harrison – Fund Manager June 2013
  2. 2. 1. Threadneedle UK Equities2. Threadneedle UK equity income - performance3. Investment approach, portfolio positioning & attribution4. Macro and market backdropAP. AppendixContents2
  3. 3. Threadneedle UK Equities1
  4. 4. We believe that we can deliver superiorreturns for our clients through: An active approach that takes advantage ofmarket inefficiencies Our perspective advantage – thecombination of macro and micro insights The appropriate allocation of riskThreadneedle’s investment philosophy
  5. 5. UK Equities team – product range55Strategy Fund ManagerAlpha UK Fund (OEIC) UK Equities Fund (SICAV) UK Select Trust Simon BrazierHigh Alpha  UK Select  Mark WestwoodIncome UK Equity Income UK Monthly Income UK Monthly Extra Income UK Growth & Income Leigh Harrison, Richard Colwell,Jonathan BarberIncome High Alpha  UK Equity Alpha Income  Leigh Harrison, Richard ColwellMid / Small Cap UK Mid 250 UK Smaller Companies Simon Haines James ThorneAbsolute Alpha  UK Absolute Alpha  Chris Kinder, Mark WestwoodExtended Alpha  UK Extended Alpha  Chris Kinder
  6. 6. UK Equities team – performanceStrong performance across a full range of productsSource: Threadneedle, Factset, Morningstar as at 31 March 2013.1 Covers all funds/accounts managed by the Threadneedle UK Equities team. Fund performance measured in GBP, gross of fees when primary benchmark is anindex, and net of fees when primary benchmark is the peer group.6Percentage of funds outperforming index or peer group1 1 year 3 years 5 years 10 yearsBy AUM 79% 99% 97% 97%By number of funds 82% 96% 93% 91%No. of UK equity funds 39 28 27 236
  7. 7. Threadneedle UK equity income - performance2
  8. 8. Threadneedle UK Equity Income teamExperienced, resourced and ratedSource: Threadneedle. Ratings as at March 2013.Leigh Harrison 30 years’ experienceRichard Colwell 22 years’ experienceJonathan Barber 22 years’ experienceThreadneedle UK EquityIncomeThreadneedle UK EquityAlpha Income8
  9. 9. UK equity income at ThreadneedleAn extensive offeringAn extensive offering9Source: Morningstar as at 30 April 2013. Benchmark quoted is UK Unit Trust / OEICs Universe peer group median Fund data is in £ and is quoted on a bid to bidbasis with net income reinvested at bid. Fund data is net of fees.1 Benchmark for the UK Growth & Income Fund is the FTSE All Share index.2 This refers to the equity part of this fund only.Fund Sector Performance objectiveFundsizeTypical numberof stocksYieldTracking error(1 year)Equity IncomeUK Equity AlphaIncome FundUK Equity Income Top decile over rolling 3 year periods £421m 25-40 3.8 3.0UK EquityIncome FundUK Equity Income Top quartile over rolling 3 year periods £1,958m 45-60 3.7 2.4UK MonthlyIncome FundUK Equity Income Top 1/3 of peer group over rolling 3 year periods £579m 50-75 3.9 1.8Equity Growth & IncomeUK Growth &Income FundUK All Companies Top quartile over rolling 3 year periods £236m 35-55 3.5 3.71Equity & Bond IncomeMonthly ExtraIncome Fund2 UK Equity and Bond Income Top quartile over rolling 3 year periods £130m 40-60 3.82 3.8
  10. 10. UK Equity IncomeSource: Threadneedle Investments as at 31 December 2012.1 Past performance is not a guide to future returns. Where references are made to portfolio guidelines and features, these may be subject to change over time andprevailing market conditions. Actual investment parameters will be agreed and set out in the prospectus or formal investment management agreement. Please notethat the performance target may not be attained.Portfolio characteristicsStrategy UK Equity Income UK Equity Alpha IncomeBenchmark FTSE All Share FTSE All SharePerformance target 2%-3% p.a. >3% p.a.Yield target >110% of FTSE All Share yield >110% of FTSE All Share yieldExpected tracking error Max 8% Max 10%Expected information ratio 0.5-1.0 0.5-1.0Typical stock weightings +/- 5% versus benchmark +/- 8.5% versus benchmarkTypical sector weightings +/- 11% versus benchmark +/- 14% versus benchmarkTypical market cap weightings No market cap restrictions No market cap restrictionsTypical no. of holdings 45-60 25-35Current strategy size £3.8 billion10
  11. 11. Performance overviewThreadneedle UK equity income fundsSource: Morningstar as at 30 April 2013. Peer group is IMA UK Equity Income for the UK Equity Income and UK Equity Alpha Income funds, and IMA UK All Companiesfor the UK Growth & Income fund. Fund data in £ and quoted on a bid to bid basis with net income reinvested at bid. Fund data cumulative and net of fees.1 Sharpe ratio based on net of fees performance over three years.11UK Equity Income Fund UK Equity Alpha Income Fund24.020.735.432.817.846.1 43.931.3 31.101020304050601 year 3 years 5 years%Threadneedle UK Equity Alpha Income FundPeer group medianFTSE All Share Index21.120.732.817.842.445.335.431.3 31.101020304050601 year 3 years 5 years%Threadneedle UK Equity Income FundPeer group medianFTSE All Share IndexUK Growth & Income FundSharpeRatio1 0.98 1.04 0.9821.717.230.2 29.217.843.644.931.3 31.101020304050601 year 3 years 5 years%Threadneedle UK Growth & Income FundPeer group medianFTSE All Share Index
  12. 12. Threadneedle UK equity incomeAttractive risk return characteristicsHigh information ratiosSource: Morningstar. Fund data quoted on a bid to bid basis with net income reinvested at bid, UK Basic Tax. Fund data is net of fees. Excludes one outlying datapoint with tracking error of 13.0% and return of -1.0%.12Relative return vs. tracking error – 30 April 2010 to 30 April 2013-8%-6%-4%-2%0%2%4%6%8%10%0% 1% 2% 3% 4% 5% 6% 7% 8% 9%Tracking Error Annualised (%)AnnualisedRelativeReturns(%)UK IMA - UK Equity Income Threadneedle UK Equity Income Threadneedle UK Monthly Income Threadneedle UK Equity Alpha Income
  13. 13. Investment approach, portfolio positioning & attribution3
  14. 14. UK Income investment approach14 Yield greater than 110% of FTSE All Share yield Steadily growing distribution Capital growthObjective Plain vanilla Manage for total return Construct yield at portfolio level Diversification to manage riskPhilosophy Focus on effective combination of top down and bottom up Search for durable investment themes Fundamentally based stock views Invest with conviction, not index constrainedCharacteristics
  15. 15. Investment process15Idea generationThreadneedle macro & themesCompany meetingsUK equity team and externalresearchImplementationPortfolio constructionRisk managementResearch / debateRigorous fundamental analysisCollaboration and discussionValuation assessment
  16. 16.  Focus on picking stocks: Not dependent on a buoyant market for returns Always look for businesses where ability to grow dividend on a sustainable base is not reflected in valuationUK Income stock selection16 Hidden gems – unloved stocks orbusinesses that have been overlooked Medium to long term potential – use shortterm volatility to build positions in longterm opportunities Value, not just optically cheap stocksWe like: Stock envy! Short term earnings momentum plays Speculative or bubble stocks ‘Comfort’ stocks Over reliance on macro betsWe avoid:
  17. 17. Cashflow compounders Companies that can achieve consistent high returns on capital employed without using excessive financialleverage, i.e. a low net debt to equity ratio Strong free cash flow generation, enabling long term self-funded growth Ideally, also a high percentage of international sales Measures look at ROCE, FCF yield, dividend growth, PE Examples: Unilever, Compass, Pearson, GlaxoSmithKline, Reed Elsevier, Johnson Matthey, Imperial TobaccoContrarian cyclicals Also selectively own more economically sensitive stocks, where happy to ride out share price volatility providedcompanies have structural drivers. As always, it’s about paying the right price! Through-cycle measures look at: EV/sales, PBV, PE Examples: GKN, IMI, Electrocomponents, W.S. Atkins, Wolseley, ITV, Marks & SpencerThreadneedle Income portfolio construction17
  18. 18.  Biggest exposure to free cash flow compounders 14% in Consumer Staples (e.g. Unilever, Imperial Tobacco); 10% in Pharmaceuticals (e.g. GlaxoSmithKline, AstraZeneca);15% in Consumer Discretionary (e.g. Compass, Reed Elsevier, Pearson, ITV) Balanced market cap exposure Approx. 75% FTSE 100, 22% FTSE 250 Zero weight in 12 of the top 20 biggest stocks in the market (e.g. no BP, HSBC, Tesco, Vodafone) Zero weight in Banks for 2 years Zero weight in Mining c.20% in Industrials Includes exposure to structural growth (e.g. Rolls-Royce); Defence (e.g. BAe Systems, Cobham). Other holdings include IMI,GKN, Wolseley, WS Atkins and DS Smith c.8% of the fund in Consumer Cyclicals (e.g. M&S, ITV)UK Equity Income – differentiated!18Source: Threadneedle as at 31 March 2013
  19. 19. Avoid unhealthy obsession with benchmarkingAll quotes from GMO’s James Montier19Too many investors obsess over relative performance and their respective tracking error“Relative benchmarks are often employed to the detriment of real returns and the preservation of capital”Do not get diversification confused with benchmarking!Value strategies work over the long run, but not necessarily in the short term"In order to pursue a value driven approach you need two key traits – patience and a willingness to be contrarian”“As long as investors continue to be overconfident in their abilities to consistently pick winners, and myopic enough that even a year ofunderperformance is enough to send them running, then Value strategies are likely to continue to do well over the long run”.
  20. 20.  “I don’t want to stick to the list of who’s hot right now” (it’s about who’s perfect for that character) Famous for resurrecting old film stars’ careers; bringing them out of the professional equivalent of a comaQuentin Tarantino approach to fund management!20John TravoltaBruce WillisDaryl HannahDon Johnson
  21. 21.  Continued to outperform a rising market Underweight Energy, zero weight Mining and overweight Industrials key contributors at the sector level Key stock contributions spread across sectors: Continued to benefit from high conviction financial holdings in e.g. L&G and 3i Core positions in BT and Unilever also continued to contribute strongly Other stock highlights included ITV, Marks & Spencer, Compass, Booker and AstraZeneca Biggest detractor from performance has been zero weight position in VodafoneUK Equity Income – YTD performance overviewSource: Threadneedle, Factset Attribution produced relative to FTSE All Share, and based on geometric analysis, as at end May 201321
  22. 22. Threadneedle UK Equity Income Fund1 year stock attributionSource: Threadneedle as at 30 April 2013.Attribution is relative to the Lipper UK Equity Income Index. Overweight stocks are in bold.22Positive stock contribution vs. LipperUnilever +104 bpsLegal & General +94 bpsBT +88 bps3i +74 bpsITV +70 bpsCompass +66 bpsBooker +65 bpsWolseley +57 bpsReed Elsevier +52 bpsDS Smith +50 bpsAstraZeneca +49 bpsNegative stock contribution vs. LipperHSBC -95 bpsVodafone -91 bpsPrudential -41 bpsBP -34 bpsIntermediate Capital -33 bpsSSE -29 bpsProvident Financial -28 bpsReckitt Benckiser -27 bpsClose Brothers -27 bpsStandard Life -26 bps
  23. 23. Undervalued high yielding large capsStock performance versus index5-year relative performanceSource: Datastream as at 30 April 2013, in local currency.The mention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle Investments does not give any investment advice.2380100120140160180200220Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13Rebasedto100AstraZeneca relative to FTSE All Share Index5060708090100110120130Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13Rebasedto100BT relative to FTSE All Share Index8090100110120130140150160Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13Rebasedto100Unilever relative to FTSE All Share Index
  24. 24. Hidden gems, attractively valued with self-help opportunitiesStock performance versus index3-year relative performanceSource: Datastream as at 30 April 2013, in local currency.The mention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle Investments does not give any investment advice.245060708090100110120Apr 10 Apr 11 Apr 12 Apr 13Rebasedto1003i relative to FTSE All Share Index80859095100105110115120Apr 10 Apr 11 Apr 12 Apr 13Rebasedto100Marks & Spencer relative to FTSE All Share IndexInitialpurchasehereInitialpurchasehere6080100120140160Apr 10 Apr 11 Apr 12 Apr 13Rebasedto100ITV relative to FTSE All Share IndexInitialpurchasehere
  25. 25. UK Equity Income – yield and dividend growth composition Yield > [market + 10%]: 43% Yield within [market +/- 10%]: 16% Yield < [market - 10%]: 41%Threadneedle UK Equity Income fundYield composition Growth > 10% p.a. 36% Growth of 5-10% p.a. 26% Growth of 0-5% p.a. 38%Threadneedle UK Equity Income fundDividend growth potentialCombining yield and dividend growth potential Yield is a more stable part of returns Income funds also own growth potentialSource: Threadneedle as at January 201325
  26. 26. Largest 10 activeoverweightsLoaddifference %BT 4.1Legal & General 3.2Unilever 3.0AstraZeneca 2.7RSA Insurance 2.3Compass 2.1Reed Elsevier 1.9Morrisons 1.9DS Smith 1.8ITV 1.8Largest 10holdingsPortfolioweight %GlaxoSmithKline 5.6BT 5.2AstraZeneca 4.9Unilever 4.7Royal Dutch Shell (CL B) 4.5Legal & General 3.7Compass 2.9Imperial Tobacco 2.9British American Tobacco 2.6RSA Insurance 2.5Largest 10 activeunderweightsLoaddifference %HSBC -6.7Vodafone -5.0BP -4.6Royal Dutch Shell (CL B) -2.7Diageo -2.5BHP Billiton -1.9Barclays -1.9Rio Tinto -1.9SABMiller -1.7Standard Chartered -1.6Portfolio composition – UK Equity Income rep. account vs. FTSE All ShareSource: Threadneedle, as at 30 April 2013. Benchmark index is FTSE All Share.26
  27. 27. Threadneedle UK Equity Income FundSource: Threadneedle as at 30 April 2013. Index is the Lipper UK Equity Income Index.1 FTSE sector classification.Sectors1 Active %Top overweightIndustrials +6.2Consumer Services +5.1Health Care +1.8Consumer Goods +0.7Top underweightFinancials -9.9Oil & Gas -3.9Telecoms -1.7Basic Materials -1.7Stocks Fund % Index % Active %Top 5 overweightUnilever 4.7 1.6 +3.2BT 5.0 2.4 +2.6Legal & General 3.9 1.5 +2.3AstraZeneca 5.0 2.8 +2.2RSA Insurance 2.8 0.7 +2.1Top 5 underweightHSBC 0.0 3.5 -3.5Vodafone 0.0 3.3 -3.3BP 0.0 2.8 -2.8Rio Tinto 0.0 1.1 -1.1BHP Billiton 0.0 1.1 -1.1Breakdown by market cap Fund % Index %FTSE 100 75.2 65.4FTSE Mid 250 22.1 24.4FTSE Small Cap 1.4 5.1Not in index 1.2 5.0Key characteristics Fund IndexP/E (FY1) 12.3 12.2Yield (%) 3.7 4.0Price / Book 2.7 2.1Price / Cash flow 7.3 7.6Number of holdings 54 598Beta 1.0 n/aTracking error (%) 2.4 n/a27
  28. 28. Threadneedle UK Equity Alpha Income FundSource: Threadneedle as at 30 April 2013. Index is the Lipper UK Equity Income Index.1 FTSE sector classification.28Sectors1 Active %Top overweightIndustrials +7.1Consumer Services +2.8Health Care +0.3Utilities -0.0Top underweightOil & Gas -3.6Financials -3.1Basic Materials -2.2Telecoms -1.6Stocks Fund % Index % Active %Top 5 overweightRSA Insurance 4.9 0.7 +4.2Legal & General 5.3 1.5 +3.8Reed Elsevier 4.5 1.1 +3.4BAE Systems 5.0 1.6 +3.4Unilever 4.7 1.6 +3.2Top 5 underweightHSBC 0.0 3.5 -3.5Vodafone 0.0 3.3 -3.3BP 0.0 2.8 -2.8Centrica 0.0 2.0 -2.0Imperial Tobacco 0.0 1.9 -1.9Breakdown by market cap Fund % Index %FTSE 100 74.0 65.4FTSE Mid 250 24.4 24.4FTSE Small Cap 1.6 5.1Not in index 0.0 5.0Key characteristics Fund IndexP/E (FY1) 11.9 12.2Yield (%) 3.8 4.0Price / Book 2.4 2.1Price / Cash flow 7.5 7.6Number of holdings 36 598Beta 1.1 n/aTracking error (%) 3.0 n/a
  29. 29.  Strong performance track record across income product range Pleased with resilience of recent performance in a strong equity market Vindicated balance of portfolio, and addition to cyclicals on weakness, over last 3 years Still wary of banks and miners Not chasing market rally, with animal spirits high Valuations still attractive versus overseas equities and especially versus bonds UK equity income strategy should continue to perform well in this environment We play to our strengths!Conclusion29
  30. 30. Macro and market backdrop4
  31. 31. …. Better to be a Front Cover Contrarian!‘Roaring Bull market’? …oh dearPrint edition: 11 May 2013Print edition: 12 May 2013Source: The Economist, Barron’s, Berenberg.
  32. 32. S&P 500Barron’s Poll of Professional Investors’ Track Record!Source: John Hussman, “The endgame is forced liquidation”, 22 April 2013.321 May 20002 May 200720 April 2013
  33. 33. …Adjusted for the Fed’s balance sheet, stocks are flat since 2008.QE: “The Fed has been the stock market!”¹¹Source: David Rosenberg (…money printing can inflate asset prices … but what are the unintended consequences?
  34. 34. Global central banks balance sheetsCan global equities go up without central banks expanding balance sheets?Source: Longview Economics, Reuters Ecowin, March 2013.340. 87 89 91 93 95 97 99 01 03 05 07 09 11 13US$(thousandbillions)China - central bank B/S (US$ trillions) ECB - Balance sheet size (US$ trillions)Japan - BoJ balance sheet (US$ trillions) US Federal reserve banks, total assets, USDStart ofJapanese crisisStart of globalfinancial crisis
  35. 35. New Bank of Japan Governor Kuroda announced full blown western style QE in early April.Those measures include the doubling of its holdings of Japanese government bonds and exchange-traded funds over two years.As a result, the BOJ would buy 7 trillion yen ($75 billion) of JGBs a month, up from the current ¥3.8 trillion.At the end of 2 years, relative to GDP, this will be more than 2x the size of the current US QE purchase.Haruhiko Kuroda, the BoJ’s new governor, argued that his strategy to double Japan’s money supply was not an attempt tomanipulate the value of the yen and would not give rise to asset bubbles."Im not concerned that long-term interest rates could spike or asset market bubbles will emerge, Mr. Kuroda said. "I dont haveany intention of financing government spending." (Pants on fire?!!!)"Our stance is to take all the policy measures imaginable at this point to achieve the 2% price stability target in two years," Mr. Kurodasaid…Japan enters the race!Source:
  36. 36. Equity valuations have closely tracked real bond yields over the past 10 yearsSource: Morgan Stanley Research, Datastream, 18 March 2013.36-4-3-2-1012345Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12Real10YGiltYields67891011121314151612mPEforMSCIUK10 Year Real UK Yiled 12M PE for MSCI UK (RHS) …if US bond yields go up slowly then should be good for equities …but if they go up quickly, then it will be bad!
  37. 37. US QE tapering?¹Source: Bloomberg, Bank for International Settlements, 16 May 2013: “Hitting the limits of Outside the Box Thinking.”37“… True, monetary policy can buy time to implement the necessary balance sheet repair and structural reforms. But itcannot substitute for them. After five years of buying time, one has to ask whether that time has been, or will be, usedwisely.… the importance of being prepared for the eventual exit from the extraordinarily accommodative monetary conditionsthat have prevailed for the past several years. While central banks surely have all the tools available to technicallyengineer an exit, it cannot be taken for granted that it will be smooth. The global bond market crash of 1994 is acautionary tale of the risks involved in exiting from a prolonged period of low interest rates.”¹Bond Yields: How quickly will they rise?US 10 yr Treasury yields
  38. 38. “There is no place in the long run for ascheme of this kind … We do notwant … a government guaranteedmortgage market”Sir Mervyn KingHelp to Buy..... An election!!!Or as Rachel Lomax (ex deputy governor Bank of England) branded it ‘HAIR OF THE DOG APPROACH’!Source: FT, 23 May 201338“There is a risk that … the resultwould ultimately be mostly houseprice increases that would workagainst the aim of boostingaccess to housing”IMF“The key issue is: is [theHelp to Buy scheme] justgoing to drive up houseprices? By and large, in theshort run, the answer is yes”Stephen Nickell, OBR“It is by no means clear thata scheme whose primaryoutcome may be to supporthouse prices will be in theinterests of first-time buyers”Treasury Select Committee
  39. 39. ‘In Britain, the pain of banks and home owners ofdealing with big and unsustainable debts may simplyhave been stretched out and postponed, rather thaneliminated. Perhaps we in the UK are now starring ina financial remake of the film Shaun of the Dead: arewe a country of zombie banks and zombie homeowners?’Robert Peston from ‘How do we fix this mess?: theeconomic price of having it all and the route to lastingprosperity’ 2012Zombie banks!39
  40. 40. “Mr Carney is acknowledged as the outstanding central banker ofhis generation”George Osborne, 26 November 2012“It is premature for George Osborne to have declared that Mr Carneyis the outstanding, pre-eminent central banker of his generation…He hasthe disadvantage that he has never lived through a period of highinflation. But he may get to do so”Terry Smith, 18 December 2012Carney: New Governor. Reputation inflated?!40
  41. 41. Carney’s legacy: “Canadas Housing Market...A large bubble now looks set to burst”¹ Economist, 17 May 2013: Housing markets are notoriously prone to boom and bust. To judge whether prices are at sustainable levels two yardsticks are used; theratio of prices to disposable income per person, a measure of affordability; and the price-to-rent ratio, which is analogous to the price-to-earnings ratio used forequities, with rents going to landlords (or saved by homeowners) equivalent to corporate profits. If these gauges are higher than their historical averages, property isovervalued; if they are lower, it is undervalued.41On this basis Canada’s market is especially vulnerable¹. House prices areovervalued 73% against rents and 34% again income … with banks like Bankof Montreal offering aggressive low interest rate 5 year mortgages. A largebubble now looks set to burst.Home sales in March were 15% down on a year earlier. Buyers are in shortsupply. A recent poll showed that only 15% of Canadians are likely to buy ahome in the next two years, down from 27% last year—the steepest decline inthe 20-year history of the survey. After a big boom, the housing bust will be awrenching affair.Canadas Reckless BanksInflate House Price Bubble
  42. 42. Investment spending as % of GDP – during industrialisation phases (various Asian economies)China: can authorities exercise the China 8% GDP growth put?!Source: Longview Economics, Reuters EcoWIn, IMF, December 2012.1 Source: Longview Economics, December 2012.4201020304050601952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009China Taiwan Japan South Korea Singapore China’s investment rate of GDP at approx. 50% is overextended and extreme Any normalisation back towards 30-35% would be a growth headwind History on Emerging Markets suggests China economic growth will slow to approx. 4-5% trend1’90 JapanCrisis’97 Asiancrisis
  43. 43. …So is the UK Shiller P/E… (latest 13.7x)UK P/E is now around its very long-term averageof 12.2x… (latest 14.9x)Trailing DY is slightly below its very long-termaverage… (latest 3.4%)UK valuations now close to long term averages, but not stretchedSource: Morgan Stanley Research, FTSE, Global Financial Data, April 2013.N.B. Shiller PE defined as inflation adjusted price to 10yr average EPS430510152025303527 32 37 42 47 52 57 62 67 72 77 82 87 92 97 02 07 12TrailingPricetoEarningsAverage0510152025303537 42 47 52 57 62 67 72 77 82 87 92 97 02 07 12TrailingShillerPricetoEarningsAverage01234567891027 32 37 42 47 52 57 62 67 72 77 82 87 92 97 02 07 12TrailingDividendYield%AveragePayout ratio is now close to average since the 70s…(latest 50.4%)2030405060708070 75 80 85 90 95 00 05 10MSCIUK-TrailingPayoutRatio%Average
  44. 44. Valuations cheap relative to other equity marketsSource: IBES, MSCI, Factset, Citi Research (March 2013).44UK vs. World PE 2013E UK vs. World DY 2013E0 2 4 6 8 10 12 14 16CEEMEAEMUKAsia Pac ex JapEur Ex UKLatAmAC WorldDMUSAJapan0 1 2 3 4UKCEEMEAEur Ex UKAsia Pac ex JapLatAmEMAC WorldDMUSAJapan
  45. 45. Valuations cheap relative to bonds1 Source: Bloomberg, Global Financial Data, Morgan Stanley Research as at April 2013.2 Source: Datastream and Citi Research as at January 2013.45Yield cross over with gilts again234567891099 00 01 02 03 04 05 06 07 08 09 10 11 12 13IBOXX Euro BBB - Bond Yield UK Equities - Dividend YIeldAnd now with corporate bonds0123456700 01 02 03 04 05 06 07 08 09 10 11 12 13FTSE All Share Dividend Yield Benchmark 10-yr Gilt Yield%
  46. 46. Dividends matter!Source: Citigroup.46-10-505101520251970s 1980s 1990s 2000s 2010s All PeriodsDividend Re-Rating Growth Total Return In a lower growth world, dividends and their reinvestment could account for an even greater percentage of realreturns than the historic 80% High dividend cover underpins quality of yieldsReturn Composition – MSCI UK Dividend growth will be the main driver of returns in the end; shut out the noise!
  47. 47. The original Nifty Fifty beat the market by 15% pafor 8 years in late 1960s and early 1970sNifty Fifty valuations reached bubble levels: therelative re-rating peaked in mid-1972The “Nifty Fifty” DebateSource: FactSet, Haver, Morgan Stanley Research, May 2013050100150200250300350Feb-62 Feb-66 Feb-70 Feb-74 Feb-78MedianNiftyFiftyStockRelativetoS&P6080100120140160180S&PPerformanceRel Perf of Nifty Fifty S&PPerf (RHS)050100150200250300350Mar-64 Mar-66 Mar-68 Mar-70 Mar-72 Mar-74 Mar-76 Mar-78 Mar-80%Premium/DiscountofPE&PBVofNiftyFiftyPrice to Earnings Price to Book… and the rerating of resilient franchises with high returns and strong cash generation in a world of low growth.In this context, is the current valuation of Staples & Pharma scary?In some cases now high end of historic trading range but not in New Paradigm territory… in period of weak real GDP growth and inflation trendinghigher… the group ended up on 42x vs market on 19x. The averagemultiple over the 8 years was 23-35x
  48. 48. Balance sheets rebuilt1 Source: MSCI, Worldscope, Factset estimates, Morgan Stanley Research. Dotted lines = Factset estimates, December 2012.2 Source: MSCI, Worldscope, Morgan Stanley Research, December 2012.3 Source: CIRA, Dealogic, Datastream, December 2012.Note: Data excludes financials sector.48UK equities - Net Debt to EBITDA UK equities - Capex to Sales %02040608010012014016018020082 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 …but capex remains low Levers in place for M&A to pick up!M&A deals UK target (<£5bn)025507510001 02 03 04 05 06 07 08 09 10 11 120100200300400< £5bn (LHS) Number of Deals (RHS)
  49. 49. AppendixAP
  50. 50. Threadneedle UK Equity Income Fund2012 attributionSource: Threadneedle as at 31 December 2012.Attribution is relative to the Lipper UK Equity Income Index. Overweight stocks are in bold.1 Geometric analysis.50Positive stock contribution vs. LipperLegal & General +75 bpsBT +72 bpsITV +62 bpsAviva +55 bpsWolseley +52 bpsDS Smith +47 bpsRSA Insurance +46 bpsIMI +43 bpsBooker +43 bpsOxford Instruments +43 bpsOverall performance1 +44 bpsStock selection +45 bpsSector allocation 0 bpsNegative stock contribution vs. LipperHSBC -93 bpsMorrisons -32 bpsPrudential -31 bpsProvident Financial -26 bpsDiageo -23 bpsRio Tinto -22 bpsStandard Life -22 bpsSSE -20 bpsWilliam Hill -20 bpsUBM -20 bps
  51. 51. Threadneedle UK Equity Alpha Income Fund2012 attributionSource: Threadneedle as at 31 December 2012.Attribution is relative to the Lipper UK Equity Income Index. Overweight stocks are in bold.1 Geometric analysis.51Positive stock contribution vs. LipperLegal & General +185 bpsDS Smith +114 bpsBT +103 bpsRSA Insurance +91 bpsReed Elsevier +88 bpsWolseley +79 bpsAviva +75 bpsMisys +73 bpsWS Atkins +71 bpsBAE Systems +69 bpsOverall performance1 +246bpsStock selection +228 bpsSector allocation +17 bpsNegative stock contribution vs. LipperHSBC -93 bpsPrudential -31 bpsIntermediate Capital -31 bpsProvident Financial -26 bpsDiageo -23 bpsRio Tinto -22 bpsStandard Life -22 bpsGo-Ahead Group -21 bpsSSE -20 bpsWilliam Hill -20 bps
  52. 52. BTPerformance relative to FTSE All Share Index2-year performanceSource: Datastream as at 30 April 2013, in local currency.The mention of stocks is not a recommendation to deal. Self-help story, with the potential for uncorrelated returnsand earnings enhancing net cost savings for many yearsto come Market had been overly concerned about pension deficit,Global Services outlook and fixed line competition, leadingto overly depressed valuations Fibre roll-out and ability to bundle dramatically improvingcompetitive position, however Ground breaking pension prepayment of £2bn in 2012,reducing pension deficit to c.£4bn (peak was £9bn) Greater freedom to grow dividends as a result (forecastgrowth of 15% p.a.), implying a rebasing over the next fewyears back to the level at which dividends were cut in 2009 Move into content with acquisition of broadcasting rightsfor e.g. Premier League football and rugby, and women’stennis, providing additional growth opportunities whilstkeeping to cash flow generation and restructuring story525290100110120130140Apr 11 Oct 11 Apr 12 Oct 12 Apr 13Rebased=100
  53. 53. ITVSource: Datastream as at 30 April 2013, in local currency.The mention of stocks is not a recommendation to deal.5370%80%90%100%110%120%130%140%Apr 11 Oct 11 Apr 12 Oct 12 Apr 13ChangePerformance relative to FTSE All Share Index2-year performance Audience viewing share growing for first time in 20 years,challenging analyst view that revenue mix to remainunchanged for next three years IT platform and YouView digital TV box to drive furtherexpansion. Upside not currently reflected in valuation Cash contribution to offset pension liabilities (over 10years, rather than 5) to allow greater degree of investmentinto the business Possibility for increased cash returns to shareholders, ifliabilities are paid down at a less aggressive rate (Currentannual contribution stands at £40m + 10% of any EBITover £300m) Cash discipline to be maintained, no major acquisitionsapart from opportunistic bolt-ons Trading on c.6.5x EV/EBITDA as the shares remainneglected
  54. 54. 3iPerformance relative to FTSE All Share Index2-year performance54545060708090100110120Apr 11 Oct 11 Apr 12 Oct 12 Apr 13Rebased=100 Highly regarded new CEO implemented far reachingreview. Taking out 25% of costs by 2014 (37% ofheadcount) is brutal but shows how bloated it had got.Also, rapidly reducing expensive gross debt With shares on mid 30s discount to NAV post writedowns, there is significant scope for a re-rating. Requiresevidence of realisations above book cost to come through Applying industry best practice not rocket science butshould make real difference to credit control and ensuredon’t get a repeat of “boom/bust” from reckless investingin 06/07 and 99/00 peaksSource: Datastream as at 30 April 2013, in local currency.The mention of stocks is not a recommendation to deal.
  55. 55. Biography55LEIGH HARRISONHead of EquitiesLeigh Harrison is Threadneedle’s Head of Equities and has overall responsibility for the management andperformance of the company’s equity products. He also co-manages the Threadneedle UK Equity Alpha IncomeFund and the Threadneedle UK Equity Income Fund.Prior to joining Threadneedle, Leigh was a Director and senior portfolio manager for UK equities at Credit SuisseAsset Management, where he built an outstanding reputation for UK equity income products.He has also held the positions of Associate Director at Rowan Dartington and Director at Hill Samuel InvestmentManagement, where he focused on UK smaller company funds.Leigh holds a BA (Hons) from Nottingham University and an MSc from University College, London. He is also aMember of the Securities Institute.Threadneedle start date: 2006Industry start date: 1983
  56. 56. Biography56RICHARD COLWELLFund ManagerRichard Colwell joined Threadneedle in 2010 as a fund manager in the UK Equity Income team. He manages theThreadneedle UK Growth & Income, UK Overseas Earnings and Monthly Extra Income funds and is the co-managerof the Threadneedle UK Equity Income and UK Equity Alpha Income funds.Prior to joining Threadneedle, Richard ran high alpha UK equity portfolios at Aviva Investors. He has also held fundmanagement roles at Credit Suisse and Schroders and worked at the Bank of England.Richard has a degree in Banking, Insurance & Finance from the University of Bangor.He is also a member of UKSIP and the Chartered Institute of Bankers.Threadneedle start date: 2010Industry start date: 1990
  57. 57. Biography57JONATHAN BARBERFund ManagerJonathan Barber joined Threadneedle in 1994. He manages the Threadneedle UK Monthly Income Fund and theAllied Dunbar High Income Fund. He is also the Deputy Manager of the Threadneedle UK Growth and Income andThreadneedle UK Equity Alpha Income Funds.Jonathan started his career with Scottish Equitable as an investment analyst in 1990 before joining Eagle StarInvestment Managers1 as a Fund Manager in 1992.He holds a BSc (Hons), Business Administration from Bath University and is also an associate member of the CFASociety of the UK.Threadneedle start date: 1994Industry start date: 19901 Eagle Star Investment Managers became part of Threadneedle in 1994 .
  58. 58. Market Risk - The value of investments can fall as well as rise and investors might not get back the sum originallyinvested.Investor Currency Risk - Where investments in the fund are in currencies other than your own, changes in exchangerates may affect the value of your investments.High Volatility Risk - The fund typically carries a risk of high volatility due to its portfolio composition or the portfoliomanagement techniques used. This means that the fund’s value is likely to fall and rise more frequently andpronounced than with other funds.Effect of Portfolio Concentration (UK Equity Alpha Income Fund) - The fund has a concentrated portfolio (holds alimited number of investments and/or takes large positions in a relatively small number of stocks) and if one or more ofthese investments declines or is otherwise affected, it may have a pronounced effect on the fund’s value.Key risks58
  59. 59. Important information59For internal use and for Professional and/or Qualified Investors only (not to be used with or passed on to retail clients)Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchangerate fluctuations. This means that an investor may not get back the amount invested.Threadneedle Investment Funds ICVC (“TIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised andregulated in the UK by the Financial Conduct Authority (FCA) as a UCITS scheme.TIF is registered for public offer in Austria, Belgium, Finland, France, Germany, Hong Kong, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Switzerland (some sub-fundsonly) and the UK. Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstanceswhich do not constitute an offer to the public and are in accordance with applicable local legislation.TIF is registered with Danish Financial Services Authority for marketing to professional investors only. The Funds may not be offered or sold to retail investors in Denmark.TIF is authorised in Spain by the Comisión Nacional del Mercado de Valores (CNMV) and registered with the relevant CNMVs Registeredwith number 482.This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not bereproduced in any form or passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of ThreadneedleInvestments and must be returned upon request.Het compartiment is op grond van artikel 1:107 van de Wet op het financieel toezicht opgenomen in het register dat wordt gehouden door de Autoriteit Financiële Markten. / Pursuantto article 1:107 of the Act of Financial Supervision, the subfund is included in the register that is kept by the AFM.Income may fluctuate in accordance with market conditions and taxation arrangements. The difference at any one time between the sale and repurchase price of units in the schememeans that the investment should be viewed as a medium to long term investment. Investments may be subject to sudden and large falls in value, and the investor could lose the totalvalue of the initial investment.Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”, as defined in Regulation Sunder the 1933 Act.This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment adviceor services.Please read the Prospectus before investing.This document is a marketing communication. The research and analysis included in this document have not been prepared in accordance with the legal requirements designed topromote its independence and have been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and ismade available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice.Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.
  60. 60. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and theapplicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The abovedocuments are available in English, French, German, Portuguese, Italian, Spanish and Dutch (no Dutch Prospectus) and can be obtained free of charge on request from:- in Austria: Raiffeisen Zentralbank Österreich AG, Am Stadtpark 9, 1030 Wien (TIF and TSIF), and Erste Bank, Graben 21 A-1010 Wien (TFIF);- in Belgium: J.P. Morgan Chase Bank Brussels, 1, Boulevard du Roi Albert II, 1210 Brussels;- in France: BNP Paribas Securities Services, 66 rue de la Victoire, 75009 Paris;- in Finland: Eufex Bank Plc, Keilaranta 19, 02150 Espoo, Finland (TIF)- in Germany: JP Morgan AG, Junghofstr. 14, 60311 Frankfurt,- in Ireland: J.P. Morgan Bank Administration Services (Ireland) Limited, J.P. Morgan House International Financial Services Centre, Dublin 1- in Italy: State Street Bank S.p.A., via Col Moschin 16, 20136 Milano.- in Luxembourg: State Street Bank Luxembourg S.A., 49 Avenue J. F. Kennedy, 1855 Luxembourg;- in the Netherlands: Fortis Intertrust, Rokin 55, 1012 KK Amsterdam;- in Spain: any appointed distributor listed on the Spanish Financial Regulator’s website (;- in UK; Threadneedle Investments’ Client Services department P.O. Box 1331, Swindon SN38 7TA.For Swiss Investors:Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document , as well as the latest annual or interim reports, whichcan be obtained free of charge on request, and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in anyfund and specifically this Fund. The above documents and the instrument of incorporation are available on request from our representative and Paying Agent in Switzerland, BNPParibas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16,CH-8002 Zurich.Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, St Mary Axe, London EC3A 8JQ, United Kingdom.Authorised and regulated in the UK by the Financial Conduct Authority.Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle groupof companies.Important Information