e13005 european income fund presentation final
TRANSCRIPT
CAZENOVE EUROPEAN INCOME FUND
For professional advisers only
Q2 2013
European investment team
- 1 -
Steve Cordell Chris Rice
Lionel Rayon Kuldip Shergill James Sym
Pan-European Equity Team
- 2 -
Chris Rice
Head of Pan European Equities
All team members have sector research responsibilities as well as product responsibilities
Social environment and ethical (SEE) research is integrated into our mainstream investment process – in addition we have 2 SRI analysts.
UK
Steve Cordell (UK Absolute)
Paul Marriage (UK Smaller Companies)
Julie Dean (UK Equity)
John Warren (UK Smaller Companies)
Matthew Hudson (Equity Income)
David Docherty (UK Equity)
Wade Pollard (UK Equity)
Charlotte Morrish (UK Equity)
Europe
Chris Rice (Europe Ex UK)
Steve Cordell (Pan Europe)
Lionel Rayon (Pan Europe, High Alpha)
Kuldip Shergill (Pan Europe, High Alpha)
James Sym (Europe Ex UK)
Cazenove Capital European funds
- 3 -
• Chris Rice
• UK OEIC
• £933.6m
• IMA Europe ex UK
• FTSE Europe ex UK Index
• Steve Cordell
• Dublin OEIC
• €111.1m
• Equity Europe
• FTSE Europe Index
• Chris Rice
• Dublin OEIC
• €97.7
• Equity Europe ex UK
• FTSE Europe ex UK Index
As at 31 March 2013 †† Source & copyright: S&P Capital IQ
• Chris Rice & James Sym
• UK OEIC
• £126.4m
• IMA Europe ex UK
• FTSE Europe ex UK Index
Cazenove
European Fund
Cazenove European
Income Fund
Cazenove
Pan Europe Fund
Cazenove European
Equity (ex UK) Fund
Cazenove European Income Fund
- 4 -
Internal Performance Objective: The Fund aims to outperform by 2% pa over rolling 3 year periods and achieve
a minimum yield of 110% of the benchmark yield
Benchmark: FTSE World Europe ex UK Index
Number of stocks: 30-50
Portfolio Restrictions: Stock: +10 %/ No minimum
Business cycle style: + 20%
Tracking risk: 4-8% target range
Launch date: 1 May 2012
Structure: UK ICVC, UCIT
A sub-fund of Cazenove Investment Fund Company (CIFCo)
Share Classes: A, B and X income + Accumulation Shares. A and X Hedged
Yield Frequency: Quarterly
PROCESS
A Systematic Approach to the Universe of Stocks
- 6 -
We have developed a 3-factor, 90+ data-item screen of the investment universe that looks at stocks
from the perspective of dividend-sustainability
A systematic framework for answering the question:
Is the dividend yield sustainable?
Factor Data Example Goal
Dividend History • 10 year dividend history
• Growth in shares in issue
To establish whether the
company has a strong
dividend track record
Income Flexibility
• Operational & Financial gearing
• Working Capital Intensity
• Capex Intensity
To establish the extent to
which the P&L is a constraint
on paying dividends
Balance Sheet
Strength
• Debt ratios
• Q score
To establish whether the
balance sheet can support a
progressive dividend policy
Dividend Sustainability Database
Company Last year
M&A /cash
dividends
end 2 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 1 2 -5 -4 -3 -2 -1 5yr tota l -2 -1 1 2 -2 -1 1 2
Air Liquide Dec-12 3.1% 0% 20% 10% 14% 13% 10% 0% 11% 6% 10% 7% 8% 2.1 1.5 1.4 1.6 1.7 68% 1.5 1.6 1.4 1.2 5.8 5.5 5.6 5.8
Akzo Nobel Dec-12 3.3% 0% 0% 0% 0% 50% 0% -25% 4% 4% 0% 3% 5% 1.2 1.2 1.2 1.6 1.7 521% 1.1 1.2 0.6 0.2 4.0 4.0 4.6 5.4
Arkema Dec-12 3.4% - - - - +ve -20% 0% 67% 30% 38% 17% 12% 1.4 1.1 1.3 1.7 1.5 507% 0.6 0.9 0.8 0.6 3.9 4.5 4.6 4.9
BASF Dec-12 4.1% 0% 21% 18% 50% 30% 0% -13% 29% 14% 4% 4% 4% 1.1 1.0 1.0 1.4 1.6 69% 1.0 1.0 0.8 0.7 5.7 5.3 5.5 5.7
Bayer Dec-12 2.8% -44% 10% 84% 5% 35% 4% 0% 7% 10% 15% 11% 10% 1.6 1.3 1.3 1.3 1.5 70% 1.1 0.9 0.7 0.5 6.6 6.9 6.7 6.9
Brenntag Dec-12 2.3% - - - - - - - +ve 43% 20% 9% 12% 1.0 0.8 1.0 1.0 0.8 680% 2.2 2.1 1.6 1.2 5.8 6.0 6.1 6.5
Clariant Dec-12 3.0% +ve -100% +ve 2% 1% -100% - - +ve 14% 6% 14% 1.2 0.8 1.2 1.8 1.4 - 2.0 2.3 1.0 0.7 2.4 2.3 3.1 3.5
DSM Dec-12 3.5% 0% 0% 14% 0% 20% 0% 0% 12% 7% 3% 3% 5% 1.5 1.2 1.3 1.5 2.0 255% 0.0 1.3 0.9 0.6 5.7 4.1 4.7 5.0
EMS Chemie Dec-12 3.2% 5% -49% 25% 10% 9% -15% 0% 30% 8% 7% 10% 7% 1.4 0.8 1.1 1.7 0.0 13% -0.8 -0.9 -0.8 -0.8 8.4 9.2 9.1 9.2
Fuchs Petrolub Dec-12 2.0% 8% 6% 25% 43% 50% 7% 6% 59% 11% 28% -9% 12% 2.9 1.8 1.8 2.0 3.4 20% -0.2 -0.4 -0.6 -0.7 8.5 9.1 9.3 9.0
Givaudan Dec-12 3.9% 10% 10% 80% 7% 4% 3% 9% 4% 2% 64% 12% 10% 2.2 1.3 1.7 2.6 2.1 -7% 1.8 1.3 1.2 1.0 6.8 7.3 7.4 7.6
K+S Dec-12 3.7% 0% 30% 38% 11% 0% 380% -91% 400% 30% 8% -7% 0% 1.3 1.1 1.0 1.3 2.0 181% 0.0 0.4 0.4 0.3 6.2 5.8 5.7 5.9
Kemira Oyj Dec-12 5.3% 10% 3% 6% 33% 4% -50% 19% 167% 10% 0% 3% 10% 1.4 0.8 0.9 1.2 1.2 162% 2.1 2.0 1.6 1.2 5.1 5.0 5.0 5.2
LANXESS Dec-12 2.2% - - - +ve 300% -50% 0% 40% 21% 18% 0% 20% 1.5 1.1 1.9 2.4 2.1 481% 1.4 1.3 1.6 1.2 3.7 4.6 3.9 4.6
Lenzing Dec-12 2.8% 50% 33% 0% 25% 40% 0% 0% -23% 61% -20% -15% 4% 2.2 2.2 2.6 1.9 3.0 44% 0.5 1.1 1.7 1.4 6.4 5.8 4.6 5.0
Linde Dec-12 2.3% 0% 11% 12% 12% 13% 6% 0% 22% 14% 8% 7% 10% 1.4 1.2 1.2 1.4 1.5 205% 1.8 2.4 2.0 1.6 4.8 5.1 5.2 5.4
Solvay Dec-12 3.3% 0% 6% 5% 5% 5% 0% 0% 5% 0% 39% 2% 4% 1.9 1.1 0.9 1.5 0.9 333% 1.5 0.9 0.8 0.5 2.9 3.8 3.7 4.1
Symrise Dec-12 2.6% - - - - +ve 0% 0% 20% 3% 5% 15% 7% 1.5 1.5 1.7 1.4 1.5 71% 1.5 1.3 1.1 0.9 7.5 7.7 7.8 8.0
Syngenta Dec-12 2.9% 90% 43% 47% 7% 30% 25% 0% 16% 14% 19% 8% 9% 2.3 3.1 1.9 1.6 1.9 41% 0.4 0.5 0.3 0.1 8.1 8.2 8.3 8.7
Tessenderlo ChemieDec-12 6.5% 0% 6% 0% 0% 6% 5% 0% 0% 0% 33% 0% 0% 1.0 1.1 1.2 1.6 1.6 93% 1.2 2.0 1.8 1.4 1.9 1.7 1.6 1.9
UMICORE SA Dec-12 3.1% 14% 37% 30% 14% 55% 0% 0% 23% 25% 0% 5% 5% 2.0 1.7 1.4 1.7 1.8 30% 0.5 0.4 0.4 0.3 5.0 4.9 4.8 5.0
Wacker Chemie Dec-12 1.3% - - +ve 25% 13% -20% -33% 167% -31% -73% -33% 96% 2.0 2.0 1.5 1.7 1.8 97% 0.1 0.9 1.4 1.4 6.0 4.3 2.4 2.7
Yara Intl Dec-12 4.2% - +ve 4% 6% 60% 13% 0% 22% 27% 86% -15% 2% 1.9 1.9 1.4 1.2 1.2 313% 0.4 0.1 0.0 -0.1 6.8 6.6 6.4 6.1
Capex / Depreciation
Divide
nd Q-scoreDebt/EBITDADiv growth
- 7 -
• Example of the Chemical Sector, using selected data points
• Allows a very rapid and unemotional assessment of the sustainability and growth potential of the dividend
• First stage before further investigation. Often induces questions for management.
• Always read with valuation in mind
Source: Cazenove Capital, 31/03/13
Income Process – the business cycle
- 8 -
Growth and Stable yield Growth yield
Slowdown Recession Recovery Expansion
Stable and High yield Cyclical yield
STOCK:
DELIVERS:
STAGE OF CYCLE:
Growth Growth/Cyclical Value & Growth Defensive Cyclical PORTFOLIO BIAS:
Focusing on Bottom Up Research
- 9 -
Systematic Database
Stage of Cycle Yield Relative Projected
Income Growth
Stock Tearsheet
Research & Company Meetings
Valuation
IDEA INVESTMENT
DECISION
CURRENT VIEWS
Key theme in Q1: re-establishing quality leadership
- 11 -
Source: Cazenove Capital, Datastream, 15/04/13
• In many ways Q1 ‘13 was a rerun of Q1 ’12, an up market led by this cycle’s leadership theme of secure global
growth stocks. Conversely risk and value performed poorly. Market participants rationalise this as euro risk off around
Cyprus debacle and Italian elections. Maybe we were just due a pause for breath.
• We suggest that after the summer rally value is no longer in a structural bear market. Indeed we see a catch up in
risk and low quality over the coming quarters.
• Longer term, we reiterate that safety has attracted an excessive premium. It’s GAAP not GARP.
European high vs. low risk performance and European equity markets
Business Cycle – perception vs reality
- 12 -
Source: Cazenove Capital, Datastream, 31/03/13
• The economic data suggests we are contracting at a less bad rate. Carry on like this and we’re at risk of a ‘normal’ cycle.
• Perhaps because it has taken so long to recover, perhaps because politics is supressing animal sprits, perhaps
because of policy action, whatever the reason the perception is that we are slowing down to enter recession.
The market is pricing this too.
Economic signals generated over the past 12m from EU
Composite Macro Index
Where we are in the Economic cycle?
Investors perception based on the FMS
The market does NOT expect a normal cycle
- 13 -
Rieter – textile machinery BASF – chemicals
2007 eps forecast
2014 eps forecast
2014e PE 11x
2007a PE 3x
2014e PE 11x
2007a PE 18x
Source: Bloomberg
The valuation case for value
- 14 -
• Dispersion remains incredibly high, indeed at levels only surpassed at true bubble moments
such as tech in 2000 or nifty fifty in the 60s. Cheap has (almost) never been so cheap.
• So strong is the investor preference for this investment theme it will probably only end when the cycle ends.
• Taking a medium term view, value offers a much more attractive RoI that safety or growth.
• Sectors include Telcos, Utilities, Resources, some cyclicals, the periphery, domestic Eurozone
stocks and many Financials.
Source: Mirabaud
FUND POSITIONING
How are we investing? Focus on European Income Fund
- 16 - Source: Cazenove Capital
The fund exposes investors to 2 themes. Firstly, to eurozone risk abating and a normalisation of the business cycle.
Secondly to an outperformance of value. Essentially, we will do well if it’s not different this time.
We have recently added to or bought:
• Renault, which has the chance to cut costs for the first time in 7 years and is growing its entry brand at 20%+, on 6.5x PE
• Scania, which is about to monetise a vast emerging market backlog of orginial equipment with service and spare parts
• Azimut, the EUR20bn asset manager that is growing at >15% p.a. (sound familiar?) with a PE ratio of 10x
• Fortum, the Finnish utility which yields 6.7% and should be over the worst regulatory and capex hurdles.
Dividend Style % Fund
31/03/13
Cyclical Yield 46.4
Growth Yield 7.5
High Yield 31.3
Stable Yield 13.3
Net Yield
4.0%
Cazenove European Income Fund
- 17 -
Top 10 Active Stocks
Weight FY1
PER
FY1
Yield %
Renault 4.3% 4.7x 3.8
AXA 3.6% 6.3x 5.4
Tessenderlo 3.5% 11.5x 6.6
Catalana Occi 3.3% 8.1x 3.5
Arkema 3.2% 7.8x 2.8
Azimut 3.2% 11.1x 4.4
ProSiebenSat.1 3.2% 13.7x 4.8
Snam 3.2% 12.5x 6.8
Reiter 3.1% 12.5x 1.8
Volvo 3.0% 9.9x 3.4
Key Style Weighting
Industrial Cyclical +11%
Growth Defensive -16%
Small Cap (<€1bn)
18%
Mid Cap (€1-5bn)
27%
Large Cap (>€5bn)
55%
Market Cap Weighting
Source: Cazenove Capital, 31/03/13
Scania
- 18 -
• Europe’s best run, fastest growing,
highest return truck manufacturer.
• Well behaved market on the
supply side: regional oligopolies
that remained profitable even
through 2009.
• A huge base of Original Equipment in
emerging markets with service
revenues expected to grow rapidly.
• Europe bottoming, continue to win
market share.
Azimut
- 19 -
• Italian asset manager with a target to
add 50% to AUM in 3 years.
• Huge brand and product advantage
relative to traditional private banks
who are hamstrung by legacy assets.
• Virtually unassailable business
model with tied financial advisors
locked in with significant equity. Very
entrepreneurial top management.
• Resultant fee margin is a mind
boggling 2.4%!
Market cap EUR1.9bn for an AUM
the same as Cazenove Capital.
Conclusion
• Europe remains cheap.
Still finding lots of opportunities.
• Internal inconsistency in the market,
shift to later cycle businesses
• Good news: we can protect
ourselves pretty cheaply.
• In a non-crisis environment,
corporates will spend and the
supercycle in growth stocks is
likely to fade
• Follow the money. Policy action
will dominate asset returns for
many years to come.
- 20 -
Equity Yields attractive
Source: Goldman Sachs, September 2012
APPENDIX
Europe: “Have I missed it?”
- 22 -
41%
Trend PE of European Equities vs US Equities
Source: Datastream, February 2013
Europe: “Have I missed it?”
- 23 -
332%
Trend PE of European Equities vs ‘trend PE’ of European Bonds*
*Trend PE of European non-financials relative to the inverse of the 10 year German Government bund yield
Source: Datastream, January 2013
Focus on what’s important… and its not the economy!!
- 24 -
• Don’t be bearish based solely on a poor economic outlook.
• Valuation is far, far more important.
Source: Datastream, Oriel
Deleveraging with growth – historical precedents
- 25 -
• The bears are obsessed with the Debt/ GDP chart. “It will all go wrong in the end” is a common refrain.
• Well maybe. But in fact there are many examples in history where economies have successfully deleveraged.
Mathematically, if the nominal growth rate is above the nominal bond yield, deleveraging occurs across
the economy (which is what really matters). This is the current policy preference, and is normally very positive
for equities.
Source: Dalio, R., 2012.‘An In-Depth
Look at Deleveragings’, Bridgewater.
‘Beautiful’ vs ‘Ugly’ Deleveragings of the last 100 years
- 26 -
Beautiful:
Ugly:
USA 1929-38 UK 1944-69 USA 2008-12
Japan 1988-2012 Spain 2008-2012 Germany 1918-1924
Source: Dalio, R., 2012.‘An In-Depth
Look at Deleveragings’, Bridgewater.
- 27 -
Secure Growth Today vs Nifty Fifty
Source: Morgan Stanley
• The Nifty Fifty theme – analogous with the current secure global growth theme – was a resounding success in the build
up to the crisis of the 1970’s.
• The relative performance peak coincided with the negative “event” (the oil shock) though absolute performance began
to weaken before that.
• The underperformance of the style from the market low was massive.
• Lesson – valuations may become so depressed that a new bull market in value will begin.
The Nifty Fifty beat the market by 15% pa for 8 years Nifty Fifty valuations eventually hit bubble levels …
Protecting capital
- 28 -
• Not cyclical
• Not crowded trades
• No heroic assumptions
• Not over-valued
Source: Morgan Stanley, January 2013
Telecoms
Price and prospective EPS relative
Consumer staples
Price and prospective EPS relative
Cheap defensives over
expensive secure growth
Regulatory information and risk warnings
- 29 -
This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitute
an offer to enter into any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein.
This document is solely for the use of professional intermediaries and is not for general public distribution.
The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law
or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove Capital or
connected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or any
recommendations expressed herein which, moreover, are subject to change without notice.
This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view.
Unless otherwise stated all views are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission
of Cazenove Capital Management and to the extent that it is passed on, care must be taken to ensure this is in the form which accurately reflects
the information given here. Unless otherwise indicated, the source for all data is Cazenove Capital.
Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as
well as up and an investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates. Cazenove
Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment Fund
Management Limited (registered No. 2134680) each authorised and regulated by the Financial Conduct Authority and of 12 Moorgate London EC2R
6DA provide investment products and services.
The fund has a concentrated portfolio and may carry a high risk to capital. It will be potentially more volatile than funds investing in a more
diversified portfolio. Investments in overseas securities are exposed to movements in exchange rates. These changes may have an adverse effect
on the value, price or income of investments.