the case for active global equity management · source: walter scott, macquarie, msci. based on the...

The Case for Active Global Equity Management

Francis SempillInvestment ManagerWalter Scott & PartnersNovember / December 2010

*

Overview

*As at 31 October 2010

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The case for active global equity management

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Why equities?

�A “dead asset class”

�In our view, remains the best asset class for capturing future growth

�Long term historic returns from equities will likely be matched by long term future returns

�Last decade disappointing for equities but unsurprising due to valuation ten years ago

�On valuation alone, prospects for equities over next ten years are much better

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Average annual returns after inflation

1900-2010

%

1950-2010

%

1950s

%

1960s

%

1970s

%

1980s

%

1990s

%

2000-2010

%

Real bond returns 1.7 3.3 -0.3 0.7 1.5 6.5 6.7 5.3

Real equity total returns 5.4 7.1 18.2 5.4 0.8 13.5 7.9 -1.6

Real equity capital gains 1.2 3.7 12.8 1.9 -3.1 9.7 5.6 -3.6

Income compounding effect 4.2 3.4 5.4 3.5 3.9 3.8 2.3 2.0

Source: Credit Suisse / London Business School : ‘Global Investment Returns Yearbook 2010’.

World long term returns

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Average annual returns after inflation

World

%

Australia

%

Canada

%

USA

%

UK

%

Real bond returns 5.3 3.6 5.6 5.0 2.2

Real equity total returns -1.6 5.5 3.5 -2.7 -1.0

Real equity capital gains -3.6 1.4 1.3 -4.3 -4.2

Income compounding effect 2.0 4.1 2.2 1.6 3.2

Source: Credit Suisse / London Business School :‘Global Investment Returns Yearbook 2010’

Long term returns 2000 - 2010

Price / earnings

Price /

book value

Price /

cash earningsYield

US 10 year

treasury yields

October 2010 16.4 1.8 8.9 2.5 2.6

February 2009 9.6 1.2 5.4 4.3 3.0

2008 11.0 1.4 6.1 3.9 2.2

2007 15.7 2.5 10.6 2.3 4.0

2003 22.4 2.5 11.2 2.0 4.2

1998 29.0 3.4 14.2 1.6 4.6

1988 18.1 2.4 7.6 2.4 9.1

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Figures from MSCI World Index

Source: Walter Scott, MSCI

World equity valuations

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US Shiller P/E and ten year S&P returns

Source: http://www.econ.yale.edu/~shiller/data.htm

Why global?

Diversification

�The world’s best companies are global

�Correlation of indices is such that we are witness to global economics

�This requires a global mindset

� Autos

�Technology

�Consumer brands

Comparative advantage

�Japan

�USA

�Europe

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Population GDP Market capitalisation

Much greater opportunity set outside Australia – only 49 of 1,936 companies with market capital > $5 billion are Australian

World

2.8% Australia

World

4% Australia

World

0.3% Australia

Source: Bloomberg, MSCI, Walter Scott

Australia on the world stage

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INDIA Population 1.2 billion

one per cent automobile penetration

three per cent computer penetration

29 per cent cell phone penetration

Source: IMF, World Bank, Walter Scott

CHINA Population 1.3 billion

three per cent automobile penetration

six per cent computer penetration


USA Population 307 million

81 per cent automobile penetration

81 per cent computer penetration


914 million

880 million

564 million

1.0 billion

992 million

514 million

POTENTIAL FOR:

Increased consumption

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GOOGLE – Overseas Revenues: 52 per cent

CANON – Overseas Revenues: 78 per centNIKE – Overseas Revenues: 58 per cent

NESTLÉ – Overseas Revenues: 79 per cent

Source: Google, Nestle, Nike and Canon company accounts as at November 2010

Global companies

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� Global ETF is not the answer – in our view the market will not reward you

� Savings objectives may not be met by beating a benchmark

� Benchmark is a good guide to the past and not the future

� A successful investor will invest in the 2020 benchmark not 2010 benchmark

� Active managers take advantage of changing dynamics in the world

� Correlation of markets

Why active?

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MSCI indices

Source: MSCI

MSCI Indices 1999 to 2009 US$Total return net dividends re -invested

10

100

1,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

World EAFE Europe USA Japan

-------

World EAFE Europe USA Japan

MSCI Indices 1989 to 1999 US$Total return net dividends re -invested

10

100

1,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

-

USA Japan

--

1 month %

3 months %

1 year %

3 years p.a. %

5 years p.a. %

Since incept p.a. %

Walter Scott Global Equity Fund

2.1 1.5 4.1 -3.0 0.4 2.4

MSCI World (ex-Aus) 2.5 0.7 3.9 -9.9 -3.1 -1.2

Excess return after fees -0.4 0.8 0.2 6.9 3.5 3.6

Performance to 31 October 2010Source: Macquarie, MSCI

Performance after fees with dividends reinvestedInception date – 18 March 2005

Past performance is not a reliable indicator of future performance.


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Walter Scott USD composite performance schedule

PeriodQuarter

%

One year

%

Three years

%

Five years

%

Ten years

%

Fifteen years

%

Walter Scott Global Equities 12.3 9.9 -0.4 6.3 6.5 10.1

MSCI World 13.8 6.8 -8.3 1.3 0.8 5.2

Walter Scott claims compliance with the Global Investment Performance Standards (GIPS®). Performance is shown gross of investment management fees; Past performance is not a guide to future performance.

As of 30 September 2010. Percentage returns, annualised from two years onwards

Source: Walter Scott, MSCI. Performance history includes representative carve-out returns. Full details are given in the Appendix. MSCI indices are shown on a total return, net dividends reinvested basis unless otherwise stated

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�Consistency of approach – philosophy and process remained the same since 1983

�Long term view - compound growth requires time

�Focused research leads to understanding the business

�Stress test businesses vigorously

�Entire research team’s experience is put to bear on investment ideas

�Conviction of research ideas

�Stock picking works

Walter Scott: what differentiates us

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Sector distribution

Portfolio MSCI World ex Aus Difference% % %

Information technology 22.7 12.3 10.3

Healthcare 13.0 10.2 2.8

Consumer staples 16.1 9.9 6.2

Energy 11.3 10.5 0.8

Industrials 10.7 11.3 -0.6

Consumer discretionary 9.4 10.6 -1.2

Utilities 2.9 4.4 -1.4

Telecommunication services 1.5 7.0 -5.5

Materials 1.8 4.6 -2.8

Financials 6.8 19.3 -12.4

Liquidity 3.8 3.8

Sector

Source: Walter Scott, Macquarie, MSCI. Based on the Walter Scott Global Equity Fund. Please note that the above data may not add to 100% exactly due to rounding. Sector and regional distribution are subject to change and may not be representative of future portfolio composition. Please refer to the Appendix for important information.

As of 31 October 2010

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Regional distribution

Portfolio MSCI World ex Aus Difference% % %

Japan 19.1 10.0 9.1

Emerging Markets 5.5 0.0 5.5

Asia Pacific ex Japan 6.6 2.5 4.1

UK 11.4 10.4 1.0

Rest of World 0.0 0.3 -0.3

Canada 1.8 5.3 -3.5

Europe ex UK 14.2 21.1 -6.9

United States 37.6 50.6 -13.0

Liquidity 3.8 3.8

Region

Source: Walter Scott, Macquarie, MSCI. Based on the Walter Scott Global Equity Fund. Please note that the above data may not add to 100% exactly due to rounding. Sector and regional distribution are subject to change and may not be representative of future portfolio composition. Please refer to the Appendix for important information.


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Top ten holdings

Company Sector Country

Hutchison Whampoa Ltd Industrials Hong Kong

Fanuc Ltd Industrials Japan

Novo Nordisk A/S Health Care Denmark

BG Group PLC Energy United Kingdom

CNOOC Ltd Energy China

L'Oreal SA Consumer Staples France

Honda Motor Co Ltd Consumer Discretionary Japan

Precision Castparts Corp Industrials United States

Google Inc Information Technology United States

Nestle SA Consumer Staples Switzerland

Based on the Walter Scott Global Equity FundThe table shows the top ten holdings by weight in the portfolioSource: Walter Scott. Please refer to the Appendix for important information.


Thank you

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1 month %

3 months %

1 year %

3 years p.a. %

5 years p.a. %

Since incept p.a. %


2.1 1.5 4.1 -3.0 0.4 2.4

MSCI World (ex-Aus) 2.5 0.7 3.9 -9.9 -3.1 -1.2

Excess return after fees -0.4 0.8 0.2 6.9 3.5 3.6


Performance after fees with dividends reinvestedInception date – 18 March 2005



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1 month %

3 months %

1 Year %

2 Years p.a. %

Since incept p.a. %

Walter Scott Global Equity Fund (Hedged)

2.4 7.5 12.2 15.5 2.3

MSCI World (ex-Aus) Hedged 3.2 7.1 14.7 13.5 -2.2

Excess return after fees -0.8 0.4 -2.5 2.0 4.5


Performance after fees - with dividend reinvestmentInception date – 20 March 2008


Walter Scott Global Equity Fund (Hedged)

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Platform Availability

Walter Scott Global Equity Fund Ratings and availability

�Mac Wrap

�BT Wrap (Investment)

�MasterKey Custom - NAB/MLC

�Skandia

�Asgard

�Navigator

�Avanteos (Legacy)

�Aust Executor Trustee (GPL)

�Austchoice (SMF)

�Beacon

�ING (Portfolio One)

�IOOF

�Netwealth

�Portfolio Advantage (GSJBW)

�Symmetry

�Strategy (Oasis)

�Synergy

�Dominion (Oasis)

Research Ratings

LonsecHighly

Recommended

Standard & Poor’s

Five Stars

van Eyk A~

ZenithHighly

Recommended

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Disclaimer

Investments in the Walter Scott Global Equity Fund (ARSN 112 828 136) and Walter Scott Global Equity Fund (Hedged) (ARSN 129 574 447) (“Funds”) are offered by Macquarie Investment Management Limited ABN 66 002 867 003 AFSL No. 237492 (“MIML”).

In deciding whether to acquire or continue to hold an investment in the Funds, investors should consider the current Product Disclosure Statement (PDS) which is available from us. Applications can only be made on the application form contained in the current PDS.

The information in this presentation is provided for the use of asset consultants, research companies and licensed financial advisers only. This information must not be passed on to retail clients for the purposes of recommending an investment in the Fund or anyother financial product or class of products.

Investments in the Funds are not deposits with or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or of anyother Macquarie Group company and are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Neither MBL nor any other member company of the Macquarie Group guarantees the performance of the Funds or the repayment of capital from the Funds or any particular rate of return.

Except for MBL, any Macquarie entity referred to in this presentation is not an authorised deposit-taking institution for the purpose of the Banking Act 1959 (Cth). That entity’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.

Past performance is not a reliable indicator of future performance. You should not base your decision to invest solely upon pastperformance information.

®Macquarie Professional Series is a registered trademark of Macquarie Bank Limited.

* Finalist 2010. Winner 2007, 2008, 2009: International Equities - Developed Markets . Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au.

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Research ratings

van Eyk: ~van Eyk Research Pty Limited (ABN 99 010 664 632 AFSL 237917) (van Eyk) rates investment management capabilities rather than individual products. This rating is valid as at October 2010 but can change or cease at anytime and should not be relied upon without referring to the meaning of the rating, as well as the full manager report, available to subscribers at www.irate.vaneyk.com.au. van Eyk has not directed the publication of Walter Scott & Partners’s ratings. Past performance information is given for illustrative purposes only and should not be relied upon as it is not an indication of future performance. The rating is not intended to influence you and your client's investment decision in relation to any products managed by Walter Scott & Partners and does not take into account your client's individual financial situation, needs or objectives. We recommend that you and your client do not rely on this rating in making an investment decision and instead you seek advice from an appropriate investment adviser and read the product disclosure statement before making such a decision.

Zenith: Zenith’s ratings are prepared exclusively for clients of Zenith Investment Partners (Zenith). The rating is of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith rating or advice is appropriate to their situation before making an investment decision. The information contained in the rating is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in the rating. No part of this rating is to be construed as a solicitation to buy or sell any investment. Zenith usually receives a fee for rating the fund manager and product(s) against accepted criteria considered comprehensive and objective.

Lonsec: The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned January 2010) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria.

Standard & Poor’s: To the extent that any ratings, opinions or other information of Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) constitutes general advice, this advice has been prepared by Standard & Poor’s without taking into account any particular person’s financial or investment objectives, financial situation or needs. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Past performance is not a reliable indicator of future performance. Ratings can change or cease at any time and should not be relied upon without referring to the meaning of the rating. For more information regarding ratings please call S&P Customer Service on 1300 792 553 and also refer to Standard & Poor’s Financial Services Guide at www.fundsinsights.com. Each analytic product or service of Standard & Poor’s is based on information received by the analytic group responsible for such product or service. “S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc. 2010 Standard & Poor’s Information Services (Australia) Pty Limited.

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1. DEFINITION OF FIRMWalter Scott & Partners Limited (“Walter Scott”) is an investment management firm authorised and regulated in the United Kingdom by the Financial Services Authority in the conduct of investment business. Walter Scott is a wholly-owned subsidiary of The Bank of New York Mellon Corporation. Walter Scott is responsible for portfolios managed on behalf of pension plans, endowments and similar institutional investors. Total assets under management were US$32.1 billion as at 31 December 2009.2. EXPLANATORY NOTES2.1 Explanatory NotesComposite figures in this presentation are extracted from one or more of the composites reports prepared by Walter Scott in compliance with the Global Investment Performance Standards (GIPS). The effective date of compliance of the Firm with the GIPS standards is 1 January 1994. The firm’s Global, EAFE, Europe and Pacific Rim composites were first created in 1989. A complete list and description of composites is available on request.

2.2 Calculation MethodologyDetails specific to performance and composite calculations are set out below. Composites, which are expressed in US$ terms or other currencies as indicated, comprise all fee-paying, fully discretionary portfolios managed by Walter Scott within each investment strategy. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available on request.(a) Unless otherwise stated, performance results are calculated gross of investment management fees. The fee schedule is detailed below. Performance results net of fees are available on request.(b) Performance results are calculated on a total return basis and include all portfolio income, unrealised and realised capital gains, contributions and withdrawals and are geometrically linked. Cash and cash equivalents are included in total portfolio assets and in the return calculations. Trade date accounting is used for valuations. For periods less than one year, rates of return are not annualised.(c) The composite shown is an aggregation of funds representing a similar investment strategy. Composites are size-weighted using beginning of period values to weight portfolio returns. There is no minimum asset size below which portfolios are excluded from a composite. Accounts are included in a composite beginning with the first full month of performance and until the month immediately prior to termination of an account.(d) The Walter Scott US composite/representative return series consisted of a single US equity portfolio from April 2000 until November 2003 and from January 2007 has consisted of one or more US equity portfolios. GIPS compliance is claimed for these periods. Prior to April 2000 and between November 2003 and January 2007 the return data is the US equity performance (excluding cash) from a global portfolio. These returns are presented as supplementary and are verified as fairly stated by independent accountants, KPMG.

(e) Annualised return represents the level annual rate which, if earned each year in a multiple-year period, would produce the actual cumulative rate of return over the whole period and is presented gross of fees.(f) Composites are net of trading expenses, administrative fees and withholding taxes on dividends and interest. Withholding taxes vary depending upon the country of investment but range between 0% and 30%. Benchmark returns are net of withholding taxes on dividends.(g) The dispersion of annual returns is measured by the range between the highest and lowest performing portfolios in the composite. Past rates of return are not indicative of future rates of return and other calculation methods may produce different results.

2.3 Compliance StatementCommunication of performance figures reflected in this document must be on a one-on-one basis, private and of a confidential nature. They may not be disseminated to the public in any print, electronic or other medium, including a web-site or any database of general circulation. The following disclosures must be provided in writing when onwardly communicating these performance figures.1) Performance figures do not reflect the deduction of investment advisory fees.2) Returns will be reduced by investment advisory fees and any other expenses that may be incurred in the management of an account.

Appendix

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Appendix

3. IMPORTANT INFORMATION3.1 Walter Scott’s Investment ApproachThis presentation contains certain statements based on Walter Scott’s experience and expectations about the markets in which it invests its portfolios and about the methods by which it causes its portfolios to be invested in those markets. Those statements are not guaranties of future performance and are subject to many risks, uncertainties and assumptions that are difficult to predict. The information in this presentation is subject to change and Walter Scott has no obligation to revise or update any statement herein for any reason. The opinions expressed in this presentation are those of Walter Scott and should not be construed as investment advice. In addition the information should not be construed as a recommendation to buy or sell a security.

3.2 Portfolio Holdings and AllocationsTo derive ten largest holdings, characteristics, economic sector weightings, country weightings and portfolio holdings for presentation purposes, the portfolio manager has identified a representative institutional account to be used as a proxy for this strategy.

This portfolio data should not be relied upon as a complete listing of the portfolio’s holdings (or top holdings) as information on particular holdings may be withheld. Portfolio holdings are subject to change without notice and may not represent current or future portfolio composition. The portfolio date is ‘as of’ the date indicated.

The information provided in this document should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time this report is received or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings.

It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions Walter Scott make in the future will be profitable or will equal the investment performance of the securities discussed herein.

The allocation distribution and actual percentages may vary from time to time. The types of investments presented in the allocation chart will not always have the same comparable risks and returns. The actual performance of the portfolio will depend on the Investment Manager’s ability to identify and access appropriate investments, and balance assets to maximise return while minimising its risk. The actual investments in the portfolio may or may not be the same or in the same proportion as those shown above.

3.3 DefinitionsBeta = Portfolio Beta and is the measure of the sensitivity of rates of return to changes in the market return. R² = The R-Squared of a portfolio relative to the market and indicates the proportion of a security’s total variance explained by variations in the market.

3.4 Third Party SourcesSome information contained herein has been obtained from third-party sources that are believed to be reliable, but the information has not been independently verified by Walter Scott. Walter Scott makes no representations as to the accuracy or the completeness of such information and has no obligation to revise or update any statement herein for any reason.

3.5 Performance StatementPast performance is not a guide to future returns and the objective mentioned may not be reached. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested. The value of overseas securities will be influenced by fluctuations in exchange rates. This presentation may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

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Appendix

3.6 Performance IndicesComparisons to the indices have limitations because the volatility and material characteristics of the indices represented in this presentation may be materially different from that of the portfolio managed by the Investment Manager. Because of these differences, investors should carefully consider these limitations when evaluating the performance in comparison to benchmark data as provided herein. Where referencing MSCI or any other index performance figures: no party involved in or related to compiling, computing or creating the index data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall an index provider, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the index data is permitted without the provider’s express written consent. The indices do not incur expenses, are not available for investment and include reinvestment of dividends.

3.7 Benchmark DefinitionsMSCI WorldThe MSCI World index is a free float-adjusted market capitalisation weighted index that is designed to measure equity market performance of developed markets. As of August 2010, the MSCI World index consisted of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.

Macquarie Professional Series

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the case for active global equity management · source: walter scott, macquarie, msci. based on the...

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