investors seek new ways to create...

Investors Seek New Ways to Create Value2016 BCG Investor Survey

May, 2016

2016_BCG_Investor_Survey-Results_Summary 5-20-16 version B.pptx 1

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Executive Summary

In February 2016, The Boston Consulting Group launched its eighth annual Investor Survey for portfolio

managers, buy-side analysts, and sell-side analysts

• The purpose was to understand investors' views on the state of capital markets and on priorities for

companies to drive value creation

• The survey was launched in partnership with Thomson Reuters, ensuring a broad global perspective

• Over 725 individuals from around the world completed the full survey, representing over $2.7 trillion in

assets under management

Several key themes emerged from the survey:

• Investors' short-term outlook is much more bearish in 2016, also affecting TSR expectations– 32% of investors are (very) bearish, which is the highest since 2009, reflecting high uncertainty– The three-year market average return expectation is down to 5.5% annually, owing to the impact of a

–3% decline in valuation multiples

• Expectations for cash payouts are record high, but appetite for more may be limited – Investors' expect a 4.4% payout yield going forward (80% of TSR), continuing the upward trend in

expected cash returns over the past few years– At the same time, investors may now see cash returns as "table stakes" and prioritize reinvestment and

potentially deleveraging (due to rising interest rates) over higher payouts

The need for strategy is stronger than ever, as investors seek the next wave of value creation• Investors prioritize companies' strategy and management credibility in making investment decisions,

although key TSR drivers (such as growth outlook, room or P/E and margin improvement) remain important• Strategically, investors see opportunities in R&D investments and portfolio shaping (M&A and divestitures)• Investors see improvement potential in companies' strategic management processes, such as capital

allocation and strategy development and planning


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Agenda

Context for 2016 Investor Survey

Findings from 2016 Investor Survey

• Short-term concerns, reverting to positive mid-term outlook

• Steeply lower TSR expectations due to multiple decline

• Strategic avenues for value creation

Takeaways and implications for companies


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2016 BCG Investor Survey is the 8th annual edition


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The 2016 BCG Investor Survey is based on 729 respondents

from a diverse pool (I/II)

37

17

11

12

8

4

11

0

25

50

75

100

<$500M

$500M to $1B

$1B to $2B

$2B to $5B

$5B to $10B

$10B to $20B

$20+ B

2016Source: 2016 BCG Investor Survey.Note: Value of fund assumed to be midpoint of interval or $0.25B for the low, $30B for the top.1. Based on 521 respondents who indicated a fund size; the rest chose not to disclose or were N/A.

Respondents (%)

Investors represent

$2.7T+ in assets1

60% of investors have

time horizon of <3 years

Almost half are

portfolio managers

15

24

38

22

0

25

50

75

100

N/A

5 years and greater

3 – 5 years

1 – 3 years

1 month – 1 year

Less than 1 month

2016

1

Respondents (%)

48

24

28

0

25

50

75

100

Sell-side analyst

Buy-side analyst

Portfolio manager

2016

Respondents (%)


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62

22

9

6

0

20

40

60

80

100

Hang Seng Index

Nikkei 225

2016

1

S&P 500

Euro Stoxx 50

FTSE 100

29

29

16

14

11

0

20

40

60

80

100

Europe

North America

Global

Asia

Other (Africa, Australia /

New Zealand, Middle

East, S. America)

2016

The 2016 BCG Investor Survey is based on 729 respondents

from a diverse pool (II/II)

But geography is very diverseS&P 500 is dominant index

Source: 2016 BCG Investor Survey.

Respondents (%) Respondents (%)


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Agenda








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Bearish sentiment for 2016: Sharp increase – highest since '09

46

14 15 2014

18

30

31

46

32

46

38

49 35

37

15

37

50

33

51

3744

30

8 10

100

80

60

40

20

0

2013

0

2015

Respondents (%)

1

2

2014

0

1

2012

0

1

2011

0

3

2010

0

3

2009

00

2016

2

1


Extremely bearishBearishNeutralBullishExtremely bullish

Where would you place yourself on the bear-bull spectrum for the 2016 performance of equity

markets you follow/invest in?


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Bearish across indices, with Euro Stoxx most affected

23 2930 35

47

34

43 3837

35

41

29 28 2519

80

100

60

40

20

0

S&P 500

1

1

Hang Seng Index

(%)

FTSE 100

1

1

0

0

Nikkei 225

0

0

Euro Stoxx 50

2

1

Source: 2016 BCG Investor Survey.Note: Because of rounding, percentages may not add up to 100.

Extremely bearishBullish Neutral BearishExtremely bullish

Where would you place yourself on the bear-bull spectrum for the 2016 performance of equity

markets you follow/invest in?


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Bearish sentiment for 2016 is driven by emerging market

investors – more bullish outlook for next 3 years

Bearish sentiment

in the short term

Particular concentration

in developing countries

However, more than half

bullish about 2018

30

37

30

% 100

80

60

40

20

0

2016

2

1

16

33

48

0

3

2018

27 2736

3935

38 3933

3441

34 32 3024

18

5

%

Other1

1

Asia

1

2

Global

0

2

US

1

1

Europe

1

1

Extremely bearishNeutral

BearishBullish

Extremely bullish

Source: 2016 BCG Investor Survey.Note: Survey question: "Where would you place yourself on the bear-bull spectrum for the remainder of 2016 (/over the next 3 years) performance of the equity markets you follow / invest in (using today as the starting point)?" Because of rounding, percentages may not add up to 100.1. Africa, Australia and New Zealand, Middle East, South America


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Main concerns around China and other emerging markets, but

some investors encouraged by valuations and US economy

-75 -50 -25 0 25 50 75

19%

Respondents (%)

US presidential election 4% 11%

Global political climate 5%25%

Public sector debt and spending 5%20%

Demographics and migration 6%8%

Other EM economic growth 10%34%

Foreign exchange rates 10%28%

Other commodity prices 11%27%

China economic growth 12%72%

Momentum since start of 2016 21%31%

Interest rate development 24%23%

EU economic growth 27%

Priv. sector demand/consumption 30%25%

Oil prices 37%47%

US economic growth 44%30%

Stock market valuations 67%41%


Why are you ______ on equity markets for the remainder of 2016?

.. Bearish .. .. Bullish ..

Diverse picture reflects current uncertainty in market

26%

14%

10%

5%

8%

1%

10%

60%

16%

18%

24%

2%

15%

20%

7%

Net


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Deep dive: Investors expect a moderate impact of interest

rate increases, regardless of time horizon

11

31

39

18

1

0

10

20

30

40

50

Respondents (%)

No impactSome

impact

Moderate

impact

Substantial

impact

Massive

impact

Source: BCG investor survey conducted in Q1 2016

13

24

41

19

2

0

10

20

30

40

50

No impactSome

impact

Moderate

impact

Substantial

impact

Massive

impact

Respondents (%)

What impact do you expect the recent rise in US Federal Reserve

interest rates will have on global equity market returns....

... in 2016? ... over the next 3 years (2016–2018)?


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Industry expectations: Recent top performers (HC, tech) and

bottom-of-cycle industries (oil, mining) to outperform

78

77

73

70

65

59

56

52

51

48

47

47

47

46

10050050

Insurance 19

Consumer Non-Durables 11

Banks 24

Communication 20

Transportation & Logistic 21

Aerospace & Defense 22

Mining 34

Building Materials 12

Travel & Tourism 7

Oil 22

Technology 7

Health Care 5

Medical Technology 3

Biopharma 9 43

43

42

40

40

38

36

36

35

33

30

28

28

50050

Machinery 29

Automotive OEMs 27

Multibusiness / Conglomerates

18

Metals 27

14

Forest Products 22

Media & Publishing 28

Retail 22

Automotive Components 25

Fashion & Luxury 26

Power & Gas Utilities 28

Construction 13

Consumer Durables 14

Chemicals

How do you expect the industries/sectors that you primarily invest in/cover to perform over the

next three years, relative to the general market?


Underperform the overall marketOutperform the overall market

Respondents (%)


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Agenda








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5.5

6.56.57.1

6.67.1

7.5

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016

TSR (%)

10.1

TSR

expectations

as of Q1 of

each year1

S&P 500 long-

term average2

TSR expectations at historically low level

~1% of TSR expected to come from stock price

appreciation, with rest from cash yields

-3.0

-1.9-0.6

-0.2-1.1

1.3

2

1

0

-1

-2

-3

20162015

-1.1

20142013201220112010

4.1

4.55.0

4.03.94.24.1

0

2

4

6

2010 201620152014201320122011

Estimated impact of P/E Multiple adjustment

2.5

1.9

0

1

2

3

2010 201620152014201320122011

Expected buyback yield1 3Expected dividend yield 1

Earn

ing

s

gro

wth

(%

) P

/E M

ult

iple

(%

)D

iv. &

Bu

yb

ack

pre

dic

tio

ns (

%)

1

2

3

TSR expectations: Bearish market sentiment drops 3-year

outlook to 5.5% annually, lowest in Investor Survey history

Annualized earnings growth expectations for next 3 years1

Sources: BCG Investor Surveys 2010–2016.1. Expectations calculated as weighted average of midpoints of answer choice interval, weighted by distribution of responses. 2. Market-capitalization-weighted average yield for S&P 500 companies, 1926–2014. 3. 2010–2014 survey data based on all respondents (80+% most familiar with S&P 500); 2015–2016 survey data based solely on respondents most familiar with S&P 500. 4. Calculated by subtracting estimated earnings growth, dividends, and buyback yields from estimated TSR.

Based on TSR predictions4


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ed.Earnings growth: expect ~ 4%

contribution to TSR

Investors expect 5.5% TSR in 2016

Dividend and repurchase yields

expected to contribute ~4%

3527

139

180

20

40

TSR expectation (%)>1210-128-106-84-62-40-2

4

<0

3

2

13

40

32

11

2

0

10

20

30

40

0-2<0 >86-84-62-4

Respondents (%)

Backup: Earnings growth, dividends, and repurchases

expected to be the largest drivers of TSR

571316

2517

97

0

30

>3.53.0-

3.5

2.5-

3.0

2.0-

2.5

1.5-

2.0

1.0-

1.5

0.5-

1.0

<0.5

261416

40

1840

0

30

60

>4.03.5-

4.0

3.0-

3.5

2.5-

3.0

2.0-

2.5

1.5-

2.0

1-

1.5

<1

Dividend yield expectation (%)

Respondents (%)

Respondents (%)

f

P/E Multiple contraction :

Implied decrease of (3%)

Earnings growth expectation (%)

Net repurchase yield2 expectation (%)



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-1.1% 0%

Lower TSR expectations despite similar net income growth

and above-average payout yields

Percentage point change from the

five-year average1-1.7%2+0.6%

5.5

4.1

-4

-2

0

2

4

6

Estimated TSR and sources (%)

Implied multiple

compression3

-3.0

Dividend yield and

share repurchases

4.3

Earnings growthTSR

Source: 2016 BCG Investor Survey.1. For S&P 500 only. 2. Based off deviance from implied average historical multiple - Calculated by subtracting historical averages of estimated earnings growth, dividends + buyback yields from estimated TSR.


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Valuation deep-dive: Investors remain concerned

Source: 2016 BCG Investor Survey.1. Survey question was asked based on index preference; results were combined for all indexes. 2. Average percentage points by which investors believe the index they are most familiar with is overvalued or undervalued. Expectations calculated as weighted average of midpoints of answer choice intervals, over 60% deemed as 65%. 3. Median for all companies in index . 4. As of 3/3/2016. Low points were – 677 for S&P, 3,512 for FTSE, 1,810 for EuroStoxx, 7,055 for Nikkei and 11,016 for Hang Seng.

By how many

percentage points?2

+17

1731 31 29

50

0

50

Undervalued

Overvalued

2016

27

2015

11

2014

6

2013

27

7

2012

33

What is your opinion of the current valuation level of the index you are most familiar with?

All

Indexes1

-16

3737

100

50

0

50

Undervalued

Overvalued

Hang Seng

53

12

Nikkei 225

100

0

Euro Stoxx 50

52

12

FTSE 100

18

S&P 500

16

15.8 14.8 13.3 10.8 9.3Forward

looking P/E3

% up from GFC

low point4194 75 66 140 81


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Payout deep-dive: Highest yield expectations since survey

launch – uptick largest uptick for buyback expectations

2.2%2.3%2.2%2.8%

1.8%2.2%1.9% 2.1%

1.6%

2.3%

2.6%2.4%2.0%

0.0%

1.0%

2.0%

3.0%

%

20162015201220112010 20142013

Actual dividend yield

Expected dividend yield

2.0%

1.2%1.2%1.1%

1.6%

2.6%2.8%2.9%3.6%

2.5%

0.0%

1.0%

2.0%

3.0%

2015

%

201620142013

0.9%0.1%

20122011

1.8%

2010

Based only on S&P 500

Actual buyback yieldExpected buyback yield

Expected and actual dividend yields continue

be in alignment

However, buyback yields expectations are

higher, after consistent over-realization

3.0%

4.0%

0.0%

2011 2014

2.9%

2015

3.9%3.7%

%

3.5%3.4%

2012 20162010 2013

4.2%

2.0%

Cash yield expectations are at their highest point since the start of the survey

Source: BCG Investor Survey 2010-2016


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Agenda








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Investment criteria: Investors looking at management team

credibility and strategy – plus key TSR drivers

13141415

1616

19

27

29

323232

0%

5%

10%

15%

20%

25%

30%

35%

Near-term

EPS growth

EBITDA

margin

Dividend

yield

Potential

improvement

in ROIC level

Leverage

ratios

ROIC levelsFree Cash

Flow / Sales

FCF yield3-5 year

revenue

growth

Underv-

aluation,

potential

for P/E

rebound

Business

strategy /

vision

MGMT

credibility

& track

record

Please rank the three most important metrics or characteristics used to decide whether to invest in/give a buy

recommendation for when evaluating a financially healthy company over the next 12 to 18 months?1

Source: 2016 BCG Investor Survey.Note: Respondents were given 21 answer options; the top 12 responses, which are shown, were selected as number 1, 2, or 3 by more than 10% of respondents in 2016. Answer options that are not shown: change in gross margin percent, gross margin percent, M&A posture, credit rating or debt ratio, buyback approach, environmental & social sustainability, corporate governance and net income margin. ROIC = return on invested capital; EPS = earnings per share. Deviance from historical averages excluded due to added categories.1. Nine answer options selected by less than 10% of respondents are not shown.

Equity story TSR drivers

Less focus on

financial ratios


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Uses of cash: Investor focus on growth persists – less focus

on additional payouts vis-a-vis deleveraging

Growth focus Payout focus Balance sheet focusRespondents

who chose option

first or second (%) -3% +1%

Percentage

point change

from the

average since

start of survey

(2009)

Sources: BCG Investor Surveys, 2010–2016.1. Responses from "Pay Special Dividend" were excluded (9%) because this response was not offered in previous years.

15

2220

3741

65

16

35

17

26

48

58

0

20

40

60

80

Build cash on

balance sheet

Retirement

of debt

Stock repurchase

program

Increase

dividends

Strategic M&AStepped

up organic

investment

2016

2009-2015 avg

-9%-7% +7% +13%

Given your expectations, what do you think the optimal deployment of capital and free cash flow should be for healthy

companies that generate strong free cash flow beyond dividend and debt payment commitments? Rank your top 3 options.

Potential

reasoning

• Organic growth harder

• More attractive valuations

• Payouts & expectations

already record high

• Further rising interest

rates expected


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Deep dive: Less than 50% of investors believe share

buybacks are being done efficiently

Among the companies you invest in/follow, do you feel that, on average, management

teams are doing a good job of repurchasing shares when undervalued?


11

16

24

49

0

10

20

30

40

50Respondents

(%)

No, overspendingNo, wrong timing

& overspending

No, wrong timingYes, doing a good

job repurchasing

shares


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Management priorities: Room to improve long-term value

creation focus through innovation and portfolio shaping

0 1002020 806040

Divestitures 5 51 22

Marketing & Ads 1 12 46 5

Emerging markets 2 13 41 11

R&D 45 40

Short-term focused

(but should not be)4 12 38

Dedicated to TSR 1 9 48

24

M&A 12 46 16

11

Agree Strongly AgreeDisagreeStrongly Disagree

Should

invest

in...

Should

pursue..

Are..

How would you react to the following statements for companies with strong free cash flow and a

healthy balance sheet for the next 12–18 months?

% (Strongly)

Agree

85

52

51

73

62

59

62

Change from

2015

-1

-3

+7

+6

-10

+2

n/a

Sources: BCG Investor Surveys , 2015, 2016. Note: Responses from "Pay Special Dividend" were excluded (9%) – this response was not offered in previous years

Respondents (%)


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33 3328 30 28 25 24 21 22

8 710 7

9 76 5 6

27

Financial

planning

3

22

4

Financial

reporting

5

27

Target

Setting

2

20

Forecasting

5

23

Value mgm’t

2

% o

f re

spondents

1

16

Comp &

Incentives

3

21

Risk mgm’t

3

16

Investor

comms

3

19

Strategy dev

and planning

2

14

Capital

Allocation

2

14

Management processes: Investors see most improvement

potential for strategic tools such as capital allocation

Source: 2016 BCG Investor Survey.1. Total for each improvement lever <100% because "Some improvement potential" responses not shown (~50% for most levers). 2. Value management consisting of metrics, target setting, planning, and incentive systems.

Very significant +

Significant

improvement

potential (%)

40 37 35 31 27 2641 38 35 29

To what degree do you believe the companies you invest in/follow can improve

the management processes below?

Strategic Operational

Significant improvement potential No improvement potentialLittle improvement potentialVery significant improvement potential


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Of the companies you follow or invest in, how well aligned

are their business, investor, and financial strategies?

57

43

0

20

40

60

Respondents (%)

Partly or poorlyHighly

Optimal

TSRInvestor

strategy• Capital structure

• Dividends and

buybacks

Business strategy

Growth, margins,

portfolio, targets, risk

Financial strategy

• Messaging• Transparency• Investor type

The majority of investors see room for improvement in

aligning corporate strategy to realize optimal TSR


Aligning business, investor, and financial strategies

is key to improving valuation and TSR

Optimal TSR can be achieved only by

aligning corporate strategy …

… but almost two-thirds of investors

see potential for improvement


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What steps can our clients take to weather the headwinds and

drive strong, sustainable TSR?

Take a balanced and realistic approach to TSR target setting and delivery

• All TSR drivers are important, given high valuation/multiples or margin levels

• Need to understand what TSR current plans can deliver and if that meets expectations

Develop a robust understanding of what drives differences in valuation multiples in a

given sector as a basis for defending (or extending) current valuation

Employ a disciplined approach to capital allocation aligned with "natural" investor type

• Trade off capital allocation options on the basis of their return profile, prioritizing highest-

return reinvestment organic or acquisitive growth opportunities

• Identify target investor type on the basis of growth and cash flow profiles

• Carefully develop a financial policy, focused on dividends as a catalyst or floor for valuation

multiple and opportunistic but prudent share buybacks

Focus core management processes on delivering aligned business and financial targets

• Strategy development and planning to clarify and storm-proof plans

• Investor communications to lay out TSR delivery model and roadmap

• Value management and ownership culture to align incentives across the organization

1

2

3

4

Source: BCG analysis.


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It is critical that companies align their business, financial,

and investor strategies

Investor

strategy• Messaging

• Transparency

• Investor type

Financial

strategy• Sources and uses

of cash and capital

• Dividends and

buybacks

Business strategy

Growth, margins,

portfolio, targets, risk

Optimal

TSR

• Investor segmentation

• Target investor mix

• Investor migration plan

• Investor communication

• Investor relations practices

• Multiple valuation

• Competitive advantage

• Portfolio strategy

• M&A and divestiture strategy

• Capital allocation

• Organic growth, margin, and

asset productivity initiatives

• Return cash to

shareholders

• Regular dividends

• Share buybacks

• Special dividend

• Leverage ratio and rating

aspirations

• Net-working-capital

management

Source: BCG analysis.


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Authors of the 2016 BCG Investor Survey Report

If you have questions or need further information about this work, please reach out to the

following people within BCG:

Jeffrey KotzenSenior Partner and Managing Director

New Jersey – USTel. +1 973 218 [email protected]

Jeff Kotzen

Tim NolanPartner and Managing Director

New York – USTel. +1 212 446 [email protected]

Frank J. PlaschkePartner and Managing Director

Munich – GermanyTel. +49 89 2317 4503 [email protected]

Tim Nolan

Frank J.

Plaschke

Julien

Ghesquieres Hady Farag

Julien GhesquieresPartner and Managing Director


Hady FaragPrincipal



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