GUILÉ EUROPEAN ENGAGEMENT FUND
The New Generation of Socially Responsible Investment
A new generation of SRI*




* Socially responsible investment


                                    P1
Three generations of socially responsible
investments




          Exclusion          Inclusion                Engagement...
Shareholder activism
> Concentrating on the balancing act of corporate governance


> Limited impact of shareholder motion...
The Ten Principles of the Global Compact

 The Global Compact’s ten principles in the areas of human rights, labour, the e...
The Ten Principles of the Global Compact
   Labour Standards
  Businesses should uphold the freedom of association and the...
The Global Compact
Support growth, reduce risks

 Exposure to ESG*   Engagement towards                                   ...
The Guilé European Engagement Fund: an
 overview


                      GUILÉ EUROPEAN
                      GUILÉ EUROPE...
Guilé’s engagement team

 Ernst-A. Brugger    Fondation Guilé, President of BHP Partners, Blue Orchard Finance, Board memb...
The services and the added value of Guilé



     > Evaluation of accomplishment and progress

     > Strategic seminar

 ...
Examples of value creation and social
engagement:


       Holcim                 AXA                   Siemens           ...
Investment process




                     P11
Why                                                     ?


      > An investment style focused on growth quality


      ...
Performance: 1999 – 2007* (Composite
PPT European Equities)

     180.00
     160.00
     140.00
                         ...
The management team

   Christopher Quast

              Christopher joined PPT in 1999 and is a partner of the firm. He w...
Investment Objectives

     > The objective of the Guilé European Engagement Fund is to realise a
          significant ca...
Portfolio construction

                                                                      Portfolio
                  ...
The principles of our investment process


Our investment process respects a certain number of principles which have not e...
The fundamentals of our investment style




                                                  who offer
                 ...
Potential to produce added value for the
shareholder




                       Debt/Free Cash flow




  Return on invest...
Return on Invested Capital (ROIC)

> Answers the following question: How much                        ROIC                 ...
Debt/Free cash flow

> Assesses the financial flexibility of the               Debt/Estimated FCF                         ...
Organic growth and the capacity to finance it


> Organic growth is an essential element in               Organic growth o...
Ratios which enable to measure the capacity to
produce value

       2006                                         Portfoli...
A significant competitive advantage

> This phase of analysis lies essentially on a qualitative estimate of the companies ...
Attractive valuation
> In order to evaluate the added value potential of companies of quality, a « Discounted Cash
  Flow ...
Example : Schneider Electric

> Schneider Electric, a French company, is the world leader in the production of electronic ...
Catalysts for an appreciation of the stock price


> In general, a company’s stock price moves when investors anticipate a...
Stock selling discipline

                    FALL IN THE STOCK PRICE


                      UNDER PERFORMANCE
          ...
GUILÉ Portfolio




                  P29
Current portfolio (at 23.8.07)

                                          Sectorial allocation

                          ...
Statistics (at 30.6.2007)

>       Average P/E         2007   14,9

>       Average P/E         2008   13,5

>       Avera...
Guilé : a new concept of ethical investment


> In going beyond the traditional approach of exclusion or filtering, PPT’s ...
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Strategic Engagement: The new generation of socially responsible investment - Case Study: The Guilé European Engagement Fund.

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Melchior De Muralt, Managing Partner - De Pury Pictet Turrettini & Co. Ltd. - Suisse

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Strategic Engagement: The new generation of socially responsible investment - Case Study: The Guilé European Engagement Fund.

  1. 1. GUILÉ EUROPEAN ENGAGEMENT FUND The New Generation of Socially Responsible Investment
  2. 2. A new generation of SRI* * Socially responsible investment P1
  3. 3. Three generations of socially responsible investments Exclusion Inclusion Engagement • South Africa • Taking into • Exercise voting rights • Tobacco consideration corporate social and • Initiate dialogue with • Armament environmental criteria companies • Etc… P2
  4. 4. Shareholder activism > Concentrating on the balancing act of corporate governance > Limited impact of shareholder motions > Tension between management and shareholder activists > Creation of CSR departments as a defensive measure • Necessity to develop a new direction: a critical & legitimate cooperation with the corporate sector on the issues involving the vast social and environmental stakes • Transfer CSR from the communication department to the heart of corporate strategy. P3
  5. 5. The Ten Principles of the Global Compact The Global Compact’s ten principles in the areas of human rights, labour, the environment and anti-corruption are derived from the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development and the United Nations Convention Against Corruption. The Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment and anti-corruption. Human Rights Businesses should support and respect the protection of internationally proclaimed human rights and make sure that they are not complicit in human rights abuses P4
  6. 6. The Ten Principles of the Global Compact Labour Standards Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced and compulsory labour; the effective abolition of child labour; and the elimination of discrimination in respect of employment and occupation Environment Businesses should support a precautionary approach to environmental challenges undertake initiatives to promote greater environmental responsibility; and encourage the development and diffusion of environmentally friendly technologies Anti-Corruption Businesses should work against corruption in all its forms, including extortion and bribery P5
  7. 7. The Global Compact Support growth, reduce risks Exposure to ESG* Engagement towards Creation of financial Transmission factors problems The Global Compact drivers Legal risks and regulation Legal risks and regulation Risk premium Risk premium Human Rights Human Rights Operational risks Operational risks Labour standards Labour standards Reputation and branding Reputation and branding Operational efficiency Operational efficiency Costs Costs Environment Environment Strategy, Strategy, Innovation Innovation politicies, politicies, management management Access to new markets/products/sectors Access to new markets/products/sectors Anti-corruption Anti-corruption systems systems * Environmental, social and governance Access to knowledge and skills Access to knowledge and skills Revenues Revenues Community Community Access to key resources Access to key resources Acceptance by the community Acceptance by the community Others Others Others (tax issues Others (tax issues Others Others Reinvestment rates) Reinvestment rates) P6
  8. 8. The Guilé European Engagement Fund: an overview GUILÉ EUROPEAN GUILÉ EUROPEAN ENGAGEMENT FUND ENGAGEMENT FUND Voting Rights GUILÉ FOUNDATION In collaboration with PICTET, Luxembourg DE PURY PICTET TURRETTINI FUND CUSTODY FUND MANAGEMENT GUILÉ ENGAGEMENT FUND TEAM Service to portfolio firms : Portfolio ~ 25-40 Firms Portfolio ~ 25-40 Firms • Benchmarking on reporting which signed UNGC which signed UNGC • Case-Stories • Multi-stakeholder dialogue and initiatives • Suggestions for consulting GUILÉ INVESTOR COMMITTEE for Mult-istakeholder Initiative P7
  9. 9. Guilé’s engagement team Ernst-A. Brugger Fondation Guilé, President of BHP Partners, Blue Orchard Finance, Board member of Precious Wood. Vice-president Centre Henry Dunant. Guest professor at Stanford University and Zurich University. Beforehand, at Swiss Re and ICRC. Thomas Streiff Partner at BHP Partners. Beforehand responsible of « Group Sustainability Management » at Swiss Re, member of the management committee; Coopération Suisse au Développement (SDC); COO of Sustainability Forum Zürich. Fritz Brugger Partner at BHP Partners. Beforehand, member of programs committee at Helvetas. Specialist in water issues and the role of the corporate sector . Pionneer in the cooperation between NGO’s and the private sector Gilles Carbonnier Professor at HEI. Beforehand State Secretary at the department of the economy (SECO), responsible for negotiations for the entry of China and Vietnam in the WTO; Member of the executive committee at the ICRC, responsible for the coordination with the private sector. Olivier Johner Associate BHP, responsible within the Global Compact for the creation of a benchmark. P8
  10. 10. The services and the added value of Guilé > Evaluation of accomplishment and progress > Strategic seminar > Examination of studies presented to the UNGC > « Multistakeholders » initiatives P9
  11. 11. Examples of value creation and social engagement: Holcim AXA Siemens ABB A « joint venture » Elaboration of a Industrialisation of a Windmill project in in India business model UNCTAD project in the Madagascar and a business areas of a micro water Building materials plan in the area of purification station and durable habitat micro health insurance with the Novartis Foundation, Swiss Re and the Swiss Development Cooperation (SDC) P10
  12. 12. Investment process P11
  13. 13. Why ? > An investment style focused on growth quality > A robust historic performance > First rate clients and first rate reputation P12
  14. 14. Performance: 1999 – 2007* (Composite PPT European Equities) 180.00 160.00 140.00 +41.33% 120.00 +27.32% 100.00 Mandat 80.00 DJ Stoxx 50 60.00 40.00 20.00 0.00 ar 9 ar 0 ar 1 ar 2 ar 3 ar 4 ar 5 ar 6 se .00 se .01 se .02 se .03 se .04 se .05 se .06 07 m t .9 m t .0 m pt .0 m t .0 m t .0 m pt .0 m pt .0 m t .0 s. s s s s s s s p p p p p se * Base 100 at 21/04/1999, data at 31/07/2007, SPPS P13
  15. 15. The management team Christopher Quast Christopher joined PPT in 1999 and is a partner of the firm. He was previously Senior Project Manager at McKinsey & Company in Zurich, New York and Geneva where he led a number of strategy and capital management projects for large banking and insurance clients. He started his career with Cargill and Shearson Lehman Brothers as broker active in financial derivative markets for institutional clients. Christopher graduated from the University of Lausanne with a Degree in Economics and holds an M.B.A. from INSEAD Jean Niklas, CPA, CFA, CMT Jean has been with PPT since 2001. He began his career in the audit field with Arthur Andersen in 1990, and then with Ernst & Young since 1994.In 1997 he joined the Swiss subsidiary of Pargesa Group (Orior Holding), composed of 30 companies active in different sectors (food, watch components, real estate). He held various responsibilities in the finance function (M&A, analysis of industrial investments, restructurings, consolidation, etc.). He joined PPT in 2001 and is in-charge of equity research, as well as the technical analysis of the markets. Jean graduated from HEC Lausanne, Switzerland. He is a US Certified Public Accountant, a Chartered Financial Analyst as well as a Chartered Market Technician. P14
  16. 16. Investment Objectives > The objective of the Guilé European Engagement Fund is to realise a significant capital appreciation all the while outperforming the European market* > The investment process consists essentially in identifying situations with a significant upside potential, to determine the catalysts which would allow to crystallize this value, to invest at the right moment, and to sell once the potential has been recognized by the market. > This investment method has been applied with success for more than seven years for our clients, institutional and private. * Dow Jones STOXX 50 Index P15
  17. 17. Portfolio construction Portfolio Portfolio 25-40 positions 25-40 positions Selection Risk control Risk control Portfolio construction Portfolio construction (sectors // liquidity // size of (sectors liquidity size of positions // market risk) positions market risk) Fundamental analysis (approx. 100 companies) Fundamental analysis (approx. 100 companies) Broker Broker Corporate Corporate Macroeconomic and Macroeconomic and Stock screening Stock screening recommendation recommendation visits visits technical analysis technical analysis Analysis Universe :: UN Global Compact European signatories (approx. 200 quoted companies) Universe UN Global Compact European signatories (approx. 200 quoted companies) * Dow Jones STOXX 50 Index P16
  18. 18. The principles of our investment process Our investment process respects a certain number of principles which have not evolved over the years : > The choice of stocks is done on a fundamental « bottom-up » analysis. > Our objective is to identify companies capable of outperforming the European market in its whole within an investment horizon of several years. > In order to identify the appropriate opportunities, a certain number of criteria measuring financial performance and its durability are applied > The portfolio is structured in order to contain 25 to 40 stocks, a number which diversifies the specific risk and maintains the portfolio volatility in line with the market. > The structure of the underlying benchmark* does not influence the choice of stocks; a sectorial diversification is however assured by a « top-down » view of the portfolio. > This approach can bring about a high « tracking error » (up to 7% in the past years). The most important element of the investment process is the method used to pick individual stocks. The following pages describe the fundamental details of our investment style. * Dow Jones STOXX 50 Index P17
  19. 19. The fundamentals of our investment style who offer who offer catalysts in catalysts in view of an view of an appreciation of appreciation of the value of its the value of its who have an who have an stock price stock price attractive attractive valuation valuation which benefit which benefit from a from a significant significant competitive competitive which produce which produce advantage advantage added value added value for the for the shareholder shareholder P18
  20. 20. Potential to produce added value for the shareholder Debt/Free Cash flow Return on invested Organic growth capital (ROIC) P19
  21. 21. Return on Invested Capital (ROIC) > Answers the following question: How much ROIC 2006 2005 does the company make on every € invested ? • Portfolio 35,7 % 31,7 % > Is measured by the ratio between net • European Stocks* 32,4 % 20,1 % operational profit (after taxes) divided by the invested operational capital. * Stock universe followed by Exane BNP Paribas (approx.. 240 European stocks) Source : Exane BNP Paribas, PPT analysis > Is often neglected by the market (which has a tendency to focus on growth) > A high ROIC means that the activities of the company produce much cash and does not need financing by the banking sector (or other). It thus has the flexibility to optimize the utilisation of its cash flow, either by reinvesting it or by distributing it to its shareholders. P20
  22. 22. Debt/Free cash flow > Assesses the financial flexibility of the Debt/Estimated FCF 2006 2005 company • Portfolio 2,3x 5,5x > Is measured by the ratio between the level of net debt + provisions, divided by free • European Stocks* 2,9x 7,1x cash flow *Stock universe followed by Exane BNP Paribas (approx.. 240 European stocks) Source : Exane BNP Paribas, PPT analysis > This data can be expressed in number of years that the company would need in order to completely reimburse its debts by using the free cash flow which it generates > A high ratio means that the company lacks flexibility. In the case of financial pressure, it is obliged to reimburse its creditors without being able to optimize the use of its liquidity P21
  23. 23. Organic growth and the capacity to finance it > Organic growth is an essential element in Organic growth of sales 2006 2005 order to create future value for the shareholder, provided that the company is • Portfolio 9,4 % 8,2 % capable of financing it without increasing unseemly the weighting of its • European Stocks* 7,6 % 5,4 % indebtedness *Stock universe followed by Exane BNP Paribas (approx.. 240 European stocks) Source : Exane BNP Paribas, PPT analysis > This capacity can be measured by • the estimation of the organic growth of sales • the ratio between investments (« capex » including the ones in working capital) and operational cash flow • the evolution of ROIC over time > A high « capex/cash flow » ratio, accompanied by a stable ROIC or growing means that the company has the capacity to reinvest its cash flow in a profitable way P22
  24. 24. Ratios which enable to measure the capacity to produce value 2006 Portfolio European Stocks • ROIC (Net debt + provisions) 35,7 % 32,4 % • Free Cash flow 2,3x 2,9x • Organic growth of sales 9,4 % 7,6 % Compared to the whole of the European market, the portfolio should be able to create more value for the shareholder, because companies which compose the portfolio… > Have a superior return on invested capital – thus generate more profits on every € invested > Reach this objective with less indebtedness on the balance sheet, thus have a greater capacity to allocate their resources. > Experience quicker growth. P23
  25. 25. A significant competitive advantage > This phase of analysis lies essentially on a qualitative estimate of the companies capacity in maintaining or developing its position on the market over time. It is done on within the dimensions of the Porter model : Newcomers Newcomers • Size • Market share potential • New technology Threats of newcomers Competitors Competitors Negotiating power Negotiating power Suppliers Suppliers Buyers Buyers of suppliers Rivalry between Rivalry between of buyers existing existing • Brand value • Size • Brand companies companies • Patents • Market share Threat of substituted products or services Substitutions • Change of technology Substitutions Source : Michael Porter P24
  26. 26. Attractive valuation > In order to evaluate the added value potential of companies of quality, a « Discounted Cash Flow » (DCF) model is applied with standardized hypotheses : • Risk free rate : 4,0 % • Market risk premium : 4,0 % • Shareholders equity : 8,0 % (if beta = 1) • Assessment of free cash flow in year 1 • Assessment of free cash flow growth over 5 years (a relatively short time frame) • Growth rate beyond 5 years : Generally 3 % (In line with long term growth potential of the economy) > This model allows to test the hypothesise in a consistent manner (« sanity check »). P25
  27. 27. Example : Schneider Electric > Schneider Electric, a French company, is the world leader in the production of electronic material Hypotheses Free Cash Flow to Equity (2006) 1'345 Risk-Free Rate 4.0% Market Risk Premium 4.0% Cost of Equity 8.0% Long-term Growth 3.0% Net Debt (including provisions) 5'400 Expected Free Cash Flow Growth (5 years) 6.5% Number of shares outstanding 226 Value per Share 2006 2007 2008 2009 2010 2011 >2011 0 1 2 3 4 5 5 Free Cash Flow 1'345 1'432 1'526 1'625 1'730 1'843 37'961 Free Cash Flow Growth 6.5% 6.5% 6.5% 6.5% 6.5% 3.0% Discount rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Discount factor 1.08 1.17 1.26 1.36 1.47 1.47 Discounted Free cash Flow 1'326 1'308 1'290 1'272 1'254 25'836 Entreprise Value 32'286 Less: Net Debt 5'400 26'886 Nb of Shares 226 Fair Value per Share 119 Share price 93 Potential Upside 28% P26
  28. 28. Catalysts for an appreciation of the stock price > In general, a company’s stock price moves when investors anticipate a change in its situation and thus adapt the value of the stock with their expectations. > These changes, when positive, often include the following aspects : Internal, for example : • A new management announcing a new strategy • Measures taken to improve margins or to increase market share • « Spin-offs », mergers or acquisitions External, for example : • Change in the company’s competitive environment (increased competition, new technology, etc…) • Increase in the demand for its products • Impact of the economic cycle, monetary and interest rate movements > We analyse the impact of these changes on the valuation of the company and we can thus determine its value added potential P27
  29. 29. Stock selling discipline FALL IN THE STOCK PRICE UNDER PERFORMANCE Durable compared to the underlying benchmark What are the reasons ? Significant Erroneous reasoning – sell position Not significant Wait 2-3 months and monitor position (« watch list ») P28
  30. 30. GUILÉ Portfolio P29
  31. 31. Current portfolio (at 23.8.07) Sectorial allocation • Banking 17.6% • Insurance 11.2% • Food & Beverages 10.9% • Oil & gas 10.7% • Industrial goods & services 10.1% 10 biggest positions • Construction 7.0% • Arcelor Mittal • Utilities 6.8% • Royal Dutch • Base materials 4.3% • Total • Healthcare 3.7% • Standard Chartered • Retail 3.2% • E.ON • Automobiles 3.2% • Holcim • Distribution 3.1% • ABB • Media 2.6% • Nestlé • Technology 0.4% • Saint Gobain • Chemicals 0.00% • Zurich Financial Services • Telecommunications 0.00% • Travel & leisure 0.00% P30
  32. 32. Statistics (at 30.6.2007) > Average P/E 2007 14,9 > Average P/E 2008 13,5 > Average P/B 2,7 > Volatility 14,86 > TE 2,71 > Information ratio 0,6 P31
  33. 33. Guilé : a new concept of ethical investment > In going beyond the traditional approach of exclusion or filtering, PPT’s SRI approach has the ambition of creating value for its shareholders through : • A rigorous stock selection on the basis of financial criteria • A real capacity to influence CSR strategies of companies held in its portfolio • An accompaniment of CSR projects and a willingness to measure both social and financial added value. * Corporate social responsibility P32

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