17575 - axa fram uk smaller cos - (to july 13)
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September 2013
Henry Lowson - Fund Manager
AXA Framlington UK Smaller Companies Fund
17575/CR50793
This communication is for professional advisers only and must not be relied
upon by retail clients. Circulation must be restricted accordingly.
The case for small cap investing
1 17575/CR50793
Attractions of small cap
Lack of research – undervalued securities
– market inefficiencies can be exploited
More entrepreneurial/motivated management
Large investment universe
Diversification
– different sector profile to FTSE All-Share Index
2 17575/CR50793
Asset class for superior long term returns?
FTSE Small Cap ex IT sales split
3 17575/CR50793
Source: FactSet as at 31/07/2013.
United Kingdom
Europe
United States
Rest of the World
Access to both domestic and global opportunities
FTSE Small Cap ex IT – sector breakdown
4 17575/CR50793
0
5
10
15
20
25
30
35
40
Industrials OtherFinancials
ConsumerServices
Technology Utilities ConsumerGoods
Telecoms BasicMaterials
Health Care Banks Oil & Gas
FTSE Small CAP ex IT FTSE All Share
Source: FactSet as at 31/07/2013.
A broad industry exposure
FTSE Small Cap ex IT performance
5 17575/CR50793
Source: FactSet as at 31/07/2013.
50
70
90
110
130
150
170
Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13
FTSE Small Cap ex IT FTSE All-SHare FTSE Actuaries Govt Securities UK Gilts All Stocks MSCI World
P/E Ratios by market cap
6 17575/CR50793
Source: FactSet as at 31/07/2013.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
60,
975
23,
874
10,
357
6,2
96
4,5
50
3,5
84
2,9
95
2,3
06
1,9
80
1,6
22
1,3
38
1,1
88
1,0
43
904
800
706
638
561
473
405
338
279
225
189
167
137
103 7
2
Ave
rag
e 1
2m
Fo
rwa
rd P
/E
Average free float (£m)
FTSE 100 FTSE 250 FTSE Small Cap
FTSE Small Cap ex IT 1m Forward P/E
7 17575/CR50793
Source: Citigroup as at 20/08/2013.
0
10
20
30
40
50
60
Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12
FTSE SMALL CAP - 12MTH FWD P/E RTIO Average FTSE Small Cap
FTSE Small Cap ex IT Earnings Revisions
8 17575/CR50793
Source: Peel Hunt as at 20/08/2013.
Current mandate and performance
17575/CR50793
UK Small Cap team
10 17575/CR50793
Experienced and dedicated UK small cap resource
In May 2012 Henry Lowson was promoted to lead fund manager of the
AXA Framlington UK Smaller Companies Fund. He is also responsible for the
management of the AIM Inheritance Tax Portfolio Service.
Henry is a CFA Charterholder and a Member of the Chartered Institute for Securities
and Investment. He graduated from Edinburgh University in 2004 with a MA (Hons)
degree in Economics and Geography.
Chris St John joined AXA Framlington in 2005. He is the lead manager for the AXA
Framlington UK Mid Cap Fund and several pension funds
Chris graduated from Durham University with an honours degree in Philosophy and
Psychology in 1995. He qualified as a Chartered Accountant in 1998
Source: AXA IM as at 31/12/2012.
AXA Framlington UK Smaller Companies
Name : AXA Framlington UK Smaller Companies Fund
Fund manager : Henry Lowson
Launch date : 27/04/2001
Fund size : £58.8m
Number of holdings : 83
Fund structure : Unit Trust
Management fee : 0.75% (Institutional Class); £100k minimum investment
Comparative benchmark : FTSE Small Cap ex IT (used as a point of reference)
Parameters : Unconstrained UK Small Capitalisation Portfolio
Typically 70-90 holdings
Normally no greater than 3% stock holding size
Source: AXA IM as at 31/07/2013.
Actively managed UK Small Cap fund
11 17575/CR50793
Performance
12 17575/CR50793
Performance – 5 years to 31/07/2013
Source: AXA IM as at 31/07/2013. Basis: Bid to Bid, Net income reinvested, net fees. *Date at which Chris St John repositioned the Fund.
NB: Past performance is not a guide to future performance.
0
50
100
150
200
250
300
350
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
AXA Framlington UK Smaller Companies IMA UK Smaller Companies
1Y 3Y31/12/2008*-
31/07/2013
AXA Framlington UK Smaller Companies 33.8 85.0 188.9
FTSE Small Cap exIT 48.5 68.8 165.1
IMA UK Smaller Companies 31.5 62.8 158.1
Ranking 30/52 6/51 11/51
Quartile 3 1 1
13 17575/CR50793
Growth at a reasonable
price
Fundamentally driven
process
Experienced
management team
Emphasis on companies with secular growth characteristics
Stock selection using a qualitative and quantitative approach
Portfolio construction discipline to improve risk-adjusted returns
Team led by Henry Lowson who has over 9 years’ market experience
Supported by experienced UK Equity Investment Team
Insights from other specialist teams
AXA Framlington UK Small Cap Strategy Key features
Superior long-term growth prospects
Good quality management and fundamentals
Attractive valuation
Source: AXA IM as at 31/07/2013.
Team
UK MID/SMALL CAP MULTI-CAP UK FUND MANAGERS
SECTOR INVESTMENT TEAM
INTERNATIONAL INVESTMENT TEAM
UK assets under management
31/07/2013 Value £Composite
weight*
FTSE 100 4,782,997,622.75 58.23
FTSE 250 2,376,195,912.59 28.93
FTSE Small Cap 443,602,524.11 5.40
FTSE Fledgling 26,206,219.45 0.32
FTSE AIM 584,421,209.97 7.12
TOTAL 8,213,423,488.86 100.00
Source: AXA IM as at 31/07/2013. FM years relate to experience. *Composite consists of the UK Equity portion for 30 funds and excludes cash.
Henry Lowson
UK Small Cap
9 years
Chris St John
UK Mid/Small Cap
14 years
Nigel Thomas
UK Growth
34 years
Jamie Hooper
UK Growth
18 years
Richard Peirson
Balanced
41 years
George Luckraft
UK Income
33 years
Jamie
Forbes-Wilson
UK Income 17 years
Rupert Hunter
Private Client
28 years
Michael Firth
Private Client
28 years
Jon Gould
Private Client
4 years
Jeremy Gleeson
Technology
15 years
Susan
Sternglass Noble
Financials 27 years
Linden Thomson
Biotech
9 years
Mark Tinker
Global
26 years
Chisako Hardie
Japan
22 years
Stephen Kelly
US
22 years
Gemma Game
Healthcare
112years
Dan Harlow
US
12 years
Julian Thompson
Emerging Markets
20 years
14 17575/CR50793
Investment process
17575/CR50793
AXA Framlington UK Small Cap Fund Investment process
16 17575/CR50793
Stock Selection Top-down sector/theme Portfolio Construction 1 2 3 4 Risk Management
Portfolio Review
Micro/macro economic drivers
Constantly reviewed
Management and industry
feedback
Organic growth
Pricing power
High barriers to entry
Customer diversification
Appropriate funding structure
Valuation
Individual stock weightings
resulting from
– level of conviction/expected
upside
– Normally no greater than 3%
size
– Market capitalisation spread
– Sector diversification
– Economic scenario/market
environment
Portfolio monitored and reviewed
constantly with respect to risk
exposures and client objectives
Daily monitoring of portfolio active
exposures, and risk metrics
Weekly Portfolio Review
AXA Framlington Team meetings
75 to 95 stocks
Source: AXA IM as at 31/12/2012.
1. Top-down sector theme analysis Strategy/thematic views
Emerging Markets’ development
Power efficiency and emission reduction
Health & Safety
Growth in data / internet / mobile communications
Increasing capital efficiency
Beneficiaries of credit boom
US housing recovery
17 17575/CR50793
Economic tailwinds rather than headwinds
Devro / Synergy
Oxford Instruments / Dialight
Porvair
NCC / IOMART / ANITE
RPC / Lavendon
Booker
Keller / Tyman
2. Bottom-up analysis Combining a qualitative & quantitative fundamental approach
18 17575/CR50793
Assessment of management’s ability to guard capital whilst capitalising on market position
Management track record
Organic growth
Pricing power
High barriers to entry
Customer diversification
Appropriate funding structure
Drivers for a quality portfolio Focus on companies whose upside
has not yet been priced
Earnings yield and growth
Superior dividend growth
Free cashflow
Return on capital
With a discipline towards absolute valuation Targeting quality growth companies….
Fund positioning
17575/CR50793
Top 20 holdings
20 17575/CR50793
Market value
%
% of
portfolio
Market value
%
% of
portfolio
CLS Holdings PLC 1,632,000 2.7 Spirit Pub Company PLC 1,046,250 1.8
Tyman PLC 1,511,250 2.5 Elementis PLC 1,002,400 1.7
St. Modwen Properties PLC 1,343,425 2.3 Booker Group PLC 989,250 1.7
RPC Group PLC 1,314,450 2.2 Dunelm Group PLC 984,000 1.7
RWS Holdings PLC 1,207,000 2.0 Hyder Consulting PLC 942,000 1.6
Entertainment One Ltd. 1,161,780 2.0 Innovation Group PLC 934,375 1.6
Paragon Group of Companies PLC 1,125,250 1.9 Restaurant Group PLC 926,625 1.6
Keller Group PLC 1,104,000 1.9 Aveva Group PLC 901,500 1.5
Devro PLC 1,093,750 1.8 Brammer PLC 888,188 1.5
Oxford Instruments PLC 1,064,250 1.8 Porvair PLC 883,200 1.5
22,054,943 37.1
Source: FactSet using TBR Methodology, end of day prices as at 31/07/2013.
AXA Framlington UK Smaller Companies Relative sector positions
21 17575/CR50793
Source: FactSet as at 31/07/2013.
Largest overweight sectors Largest underweight sectors
Sector
Variation in
ending weight
%
Sector
Variation in
ending weight
%
Software & Computer Services 7.73 Real Estate -7.15
General Industrials 4.88 Industrial Transportation -3.20
Financial Services 3.50 General Retailers -3.07
Food & Drug Retailers 3.14 Household Goods & Home Construction -2.87
Construction & Materials 2.44 Mining -2.85
Market capitalisation spread of fund and UK small cap indices
22 17575/CR50793
Fund remains focused on genuine UK small cap opportunities
Source: FactSet and HGSC as at 31/07/2013.
1.01.7
4.6
6.4
12.7
6.0
1.8
10.4
14.2
7.8
17.0
7.8 8.1
0.50.0 0.0
2.0
3.2
7.3
11.612.3
15.9
23.4
13.3
10.9
0.0 0.0 0.00.3 0.5 0.8 0.6
1.7
2.72.2 2.6
5.1 5.0
17.917.1
13.1
14.2
7.6
6.5
2.1
0.0 0.0
0
5
10
15
20
25
30
0.0 - 25.0 25.0 -50.0
50.0 -75.0
75.0 -100.0
100.0 -150.0
150.0 -200.0
200.0 -250.0
250.0 -300.0
300.0 -400.0
400.0 -500.0
500.0 -750.0
750.0 -1000.0
1000.0 -1250.0
1250.0 -1500.0
1500.0 -1750.0
1750.0 -2000.0
2000.0 -2250.0
> 2250.0 Cash
%
£m
AXA Framlington UK Smaller Companies FTSE Small Cap ex IT NSCI ex IT
Market outlook
In our view geopolitical/macro economic uncertainty will create stock market volatility.
Evidence of credit conditions easing for corporates should be positive for company growth
plans and potential shareholder returns.
Smaller companies have been an overlooked area of the market in spite of their strong
performance in recent years. Recent flows into equities are supportive for markets.
Small Cap valuations continue to look attractive both in a historical context and relative to other
asset classes.
Mergers and acquisitions, share buybacks and dividend growth all supportive of Small Cap
equities.
23 17575/CR50793
Appendix 1: Portfolio Construction
24 17575/CR50793
Decision drivers – buy/accumulate
Expectation of positive earnings surprise
Material improvement in broader trading environment
Valuation anomaly (but wary of value traps)
Information advantage born out of company meetings
Management change – re-energising nascent business model
25 17575/CR50793
Absolute return focus
Decision drivers – sell/reduce
Material deviation from strategy
Unexpected market/economic development
Evidence of management inconsistency/dishonesty
Unexplained deterioration in profitability/cash generation
Extreme relative outperformance
26 17575/CR50793
Opportunity cost of capital is paramount
Portfolio construction
27 17575/CR50793
Unconstrained investment approach within risk controlled
environment
– Benchmark aware rather than benchmark driven
– Continuous checks for any systematic biases via risk models and
mitigated if unintended and unwanted
High active share – aim to diversify stock risk and ensure
stock selection is principal alpha generator
– Diversified portfolio structure: typically 80 – 100 stocks
– Average holding size c.0.5-2.0% at cost - normally no greater
than 3%
Stock weightings will reflect individual risk/return profile,
valuation, upside to fair value, near-term catalysts
Integrated risk management with continuous risk checks
for systematic biases
– Portfolio construction executed by investment team with advice
from Portfolio Engineer
Principles Portfolio structure
Source: AXA IM as at 31/072013.
0 10 20 30 40 50
0.5 - 1%
1 - 1.5%
1.5% - 2%
2 - 2.5%
2.5 - 3%
Below 0.5%
Illustrative drivers of investment weighting
28 17575/CR50793
Holding size correlates to risk reward
Low
liquidity
Asset
backed
Upside
conviction
Track record
of delivery Visible
earnings stream
Proven
management Cashflow
stability
Organic
growth
Secular
growth
Larger market
capitalisation
High
growth
Low
visibility
Unknown
management
Pre-profitable
business
Increasing weight and conviction
Holding size vs market capitalisation
29 17575/CR50793
UK Smaller Companies Unit Trust Stock Market Cap vs Fund Weight 31 July 2013
Source: AXA IM as at 31/07/2013.
0
500
1,000
1,500
2,000
2,500
0.0 0.5 1.0 1.5 2.0 2.5
Mark
et
Cap
GB
P M
illi
on
s
Fund Weight %
AXA Framlington UK Smaller Companies – turnover analysis
30 17575/CR50793
Source: AXA IM as at 31/07/2013.
*
*
Target holding period typically 3-5 years
0
5
10
15
20
25
30
35
40
0
2
4
6
8
10
12
Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13
1M Turnover 12m Average of 1M Turnover ann
Appendix 2: Case Studies
31 17575/CR50793
Case study (buy): Porvair
32 17575/CR50793
Description World leader in filtration and separation technology
Strategic attraction
of investment Reorientation of business towards higher growth regulated market segments and greater levels of IP and
design in its products
Bottom-up analysis
A global leader in microfiltration and metals filtration
Solid base of long term recurring revenues giving good visibility due the consumable/replacement nature of
their product
High barriers to entry as their filters are often accredited, bespoke and designed into their customer’s
product
Supportive regulatory backdrop in their end markets.
Strong cash generation has led to an improved balance sheet, giving financial flexibility
Opportunity to materially improve margins from 7% to 10%
Valuation
Conservative earnings forecasts of over 10% growth p.a
P/E of 12.5x at cost, with a 3% dividend yield – attractive in absolute terms but also relative to US peer,
Pall Corp
Free cashflow yield over 10%
Source: AXA IM as at 31/12/2012.
Case study (buy): Porvair
33 17575/CR50793
Decision driver
Recently won multi-million dollar contracts in aviation and gasification with significant global clients and
order book at record levels
Meeting with management in January 2012
Broker informed us of a line of stock on offer
Portfolio sizing Decision to take 0.5% holding due to size, liquidity and availability of stock (10/01/2012)
Holding now over 1% of fund
Source: AXA IM as at 31/12/2012.
0.30
0.50
0.70
0.90
1.10
1.30
1.50
1.70
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
Porvair PLC
Case study (buy): Keller Group
34 17575/CR50793
Description Keller is an international ground engineering specialist, providing solutions and services relating to
ground behaviour to the construction industry (ie foundation support, ground retention, underground
excavation)
Strategic attraction
of investment Capitalise on improving global economic conditions and reindustrialisation of the US
Bottom-up analysis
Strong management with Board Chairman, Roy Franklin (ex Paladin Resources) and Justin Atkinson,
CEO
Market leader
Balance sheet financing position ahead of market expectations
Order book at all time high
Contract wins underwrite forecasts
Capital requirement, scale and expertise provide barriers to entry
Valuation Trough multiple with operational gearing (0.5% move up in EBITDA margins = 17% uplift in profitability)
22.8p dividend, 7% yield at first purchase
Source: AXA IM as at 31/12/2012.
Case study (buy): Keller Group
35 17575/CR50793
Decision driver 13/01/12 company wins largest contract ever in Australia for Wheatstone LNG Plant - £120m
13/01/12 met company management at short notice
Contract momentum building, US prices stabilised, US construction market turning
Portfolio sizing 1% holding taken initially (316p initial purchase – 17/01/2012)
Subsequently added to holding (400p final purchase)
Holding now 1.5% of fund
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
Keller Group PLC
Source: AXA IM as at 31/12/2012.
Case study (sell): Severfield Rowen
36 17575/CR50793
Description Severfield-Rowen is a structural steelwork fabricator. It designs, fabricates and erects steel structures and
principally operates in the UK and India
Strategic attraction
of investment Market leader in UK steel fabrication with an emerging growth opportunity in the Indian market
Bottom-up analysis
Cyclical recovery in the UK Construction market, with secular growth of steel construction in India (concrete
to steel substitution opportunity)
Building market share to 20% through downturn as competitors have failed
Potential to rebuild margins and profitability to over 15%
Experienced management team with long tenure
Valuation
EV/EBITDA for 2012 of c. 11x but forecast earnings growth of 50% at risk
Free cash flow yield of only 2% and return on capital employed forecast to be 14% in contrast to over 50%
in 2009
Dividend yield now only 2.5% following a cut to the dividend in 2011
Source: AXA IM as at 31/12/2012.
Case study (sell): Severfield Rowan
37 17575/CR50793
Decision Driver
Earnings at risk as UK Construction market remains challenging
Pricing pressure as competition in private sector chase work at any price. Therefore margins under
pressure
Pipeline of new work deteriorating
Cash flow deteriorating and gearing increasing putting the balance sheet at risk
Portfolio sizing Decision to sell 100% of holding (May 2012)
Source: AXA IM as at 31/12/2012.
0.30
0.80
1.30
1.80
2.30
2.80
3.30
3.80
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
Severfield-Rowen PLC
Important notice
This communication is intended for Investment Professional use only and should not be relied upon by retail clients. Circulation must be restricted
accordingly. Any reproduction of this information, in whole or in part, is prohibited.
This communication does not constitute an offer to sell or buy any units in the Fund. Information relating to investments is based on research and analysis
undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA Group
of Companies which, in turn, may have acted on it. Whilst every care is taken over these comments, no responsibility is accepted for errors and omissions that
may be contained therein. It is therefore not to be taken as a recommendation to enter into any investment transactions.
This communication should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA investment service or product and is
provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of any
company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability towards
third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.
Information relating to investments may have been based on research and analysis undertaken or procured by AXA Framlington for its own purposes and may
have been made available to other expertises within the AXA Investment Managers Group, who in turn may have acted upon it. Information in this document may
be updated from time to time and may vary from previous or future published versions of this document.
Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the
amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller
companies offer the possibility of higher returns but may also involve a higher degree of risk. The price of units and the income from them can go down as well as
up and investors may not get back the amount originally invested. An initial charge is usually made when you purchase units. Your investment should be for the
medium to long term i.e. typically 5-10 years. Changes in exchange rates will affect the value of trust investments overseas.
AXA Framlington is an expertise of AXA Investment Managers UK Limited. Issued by AXA Investment Managers UK Limited which is authorised and regulated
by the Financial Conduct Authority. Registered in England and Wales No: 01431068 Registered Office: 7 Newgate Street, London
EC1A 7NX. Telephone calls may be recorded for quality assurance purposes.
38 17575/CR50793