Cazenove capital management

OPPORTUNITIES IN UK EQUITY INCOME

Matt Hudson, Fund Manager Cazenove UK Equity Income Fund

For professional advisers only

Citywire Wealth Manager Retreat October 2012

Agenda

• UK market overview

• The business cycle in 2012

• Key themes

• Portfolio activity

• Current portfolio positioning

• Outlook

- 1 -

• Challenging background;

low growth, austerity,

overleverage

• Fear of tail risks high

• Political interventions

have increased investor

uncertainty but…

• …UK equities now lowly

rated vs trend

- 2 -

UK market overview – 1970’s all over again

Source: Mirabaud at 30/06/12

UK Market: Trend P/E, 1973-2012

2

4

6

8

10

12

14

16

18

20

22

24

26

28

Jan-

73

Jan-

75

Jan-

77

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Tre

nd P

/E (

x)

Trend P/E (7% p.a. growth, Apr. '78 base) Ave. post-73 + 1 SD -1 SD

UK market price earnings multiple based on long-term trend earnings growth

UK equities have de-rated

Business cycle in theory

Slowdown

Recession Recovery

Expansion Expansion Slowdown

- 3 -

The business cycle is alive and well

Source: Cazenove Capital at 11/10/12

*Performance relative to FTSE 350 at 30/09/12

Business cycle in reality

Global industrial production - % change year on year

Business cycle style groupings Performance

year-to-date*

Commodity Cyclicals -12.2%

Industrial Cyclicals +9.7%

Consumer Cyclicals +20.2%

Financials +11.8%

Growth +4.5%

Growth Defensives +2.6%

Value Defensives -1.1% 90

95

100

105

110

115

120

125 UK market relative returns year to date

FTSE 100 +3.4%

FTSE 250 +17.1%

FTSE All-Share +5.6%

- 4 -

Where are we in the business cycle?

UK Markit Manufacturing PMI US ISM Manufacturing PMI

China Markit Manufacturing PMI

Source: Markit & Thomson Datastream at 28/09/12

Euro-area Markit Manufacturing PMI

- 5 -

Theme 1 – the bubble in security

Source: Morgan Stanley, Cazenove Capital at 26/09/12

• “Nifty Fifty”, a lesson from history

• Secure growth has re-rated over deep cyclicals/value stocks from 2007

• Driven by the search for safety…

• …and emerging market growth over developed market maturity

The “Nifty Fifty” beat the market by c.15% pa for 8 years Unilever price, relative performance and 2013 earnings forecasts

Theme 2 – yield at a premium

- 6 -

Source: Mirabaud at 31/08/12

Se

ve

rn T

ren

t (V

alu

e D

efe

ns

ive

)

Ba

rcla

ys

(F

ina

nc

ial)

• “High volatility” stock de-rated is

the opposite side of the trade

• Value opportunities

• Investors mistaking “low volatility”

for growth

• “Secure” dividend stocks squeezed

upwards

• Value traps

Trend P/E relative

Average

+SD

-SD

- 7 -

Theme 3 – a preference for consumer cyclicals

UK corporate margins near record levels Credit easing for consumers

12

14

16

18

20

22

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12E13E

Market ex Financials ex Commodities - EBITDA Margin

Source: Citigroup at 31/12/11, Deutsche Bank at 24/09/12

• Further margin gains more challenging… • Outlook for consumers improving

Theme 4 - dividend recovery

• Dividend recovery underway

• UK dividend growth 2012 / 2013 circa

6-7%

• Dividend growth stocks re-rating

• Special dividend enhancements

- 8 -

Dividend surprises performance

Source: MSDW/Datastream, FTSE, Global Financial Data, Morgan Stanley Research, Shore Capital at 30/05/12

-30

-20

-10

0

10

20

30

40

Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09

FTSE All Share - DPS Growth (YoY %)

Portfolio strategy – activity in 2012

• Preference for Consumer Cyclicals with

pricing power – added to Easyjet,

Howden Joinery

• Leading indicators turning up – new

holdings in early-cycle Industrial

Cyclicals – GKN, Premier Farnell

• Policy action (OMT, QE3) prompts move

towards neutral in Financials, increased

exposure in Life Assurance and Other

Financials (Aviva, Jupiter)

• Reduced highly-rated Growth Defensives

and “Safety” stocks – exited United

Utilities, Diageo

- 9 -

Source: Thomson Reuters Datastream at 28/09/12

Aviva (Financial) performance relative to FTSE All-Share

Diageo (Growth Defensive) performance relative to

FTSE All-Share

Buying

Sold

- 10 -

Portfolio strategy – active positions

Source: Cazenove Capital Management at 05/10/12

Market Cap Exposures (%) Index Portfolio

FTSE 100 84.7% 61.8%

FTSE 250 13.0% 30.4%

FTSE Small Cap 2.2% 1.4%

AIM - 0.3%

Ex Index - 1.9%

Cash - 4.2%

Portfolio Risk

Predicted Tracking error p.a. 4.5%

Beta 0.9

# of stocks 56

Underweight Market Overweight

-6.16% HSBC

-4.74% BP

-4.55% Royal Dutch Shell A

-3.34% Royal Dutch Shell B

-2.59% Diageo

-1.59% Unilever

-1.48% SAB Miller

-1.47% Tesco

-1.57% Standard Chartered

-2.32% BHP Billiton

easyJet +1.77%

Legal & General +1.67%

Hargreaves Lansdown +1.67%

BT Group +1.66%

WPP +1.66%

Resolution +1.65%

Jupiter +1.64%

Elementis 1.51%

Barclays +1.50%

Imperial Tobacco +1.49%

- 11 -

Change over 12

months vs FTSE

All-share

Fund % Index % Key income portfolio

holdings

Commodity Cyclicals -6.0% 26.2 Rio Tinto

Consumer Cyclicals +19.5% 5.2 easyJet

Industrial Cyclicals +21.2% 5.9 Melrose

Financials +8.2% 17.8 Aviva

Other/Cash/ Unallocated = 4.2 Cineworld

Growth +2.0% 4.3 Sage

Growth Defensives +8.4% 9.2 Babcock

Value Defensives -6.3% 27.3 GlaxoSmithKline

13.7

8.1

11.7

16.8

8.4

2.9

31.9

Portfolio strategy – business cycle style tilts

Overweight Underweight Neutral / NA

6.5

Source: Cazenove Capital Management 05/10/12

Summary and outlook

• Despite abundant liquidity, growth

still weak and volatile…

• …but leading indicators and

economic surprise indicators

improving

• UK market attractively valued on PE

and yield with dividend growth

robust

• Overall portfolio balanced position,

preference for Consumer Cyclicals

and adding to Financials

- 12 -

Source: MSDW/Datastream, FTSE, Global Financial Data, Morgan Stanley Research, Shore Capital,

BofA Merril Lynch Global Equity Strategy, Bloomberg at 01/09/2012

Central bank liquidity versus US GDP

Appendix

- 14 -

Fund – dividends and income returns

Year Dividend distributions

(net)

2007 4.39p

2008 5.12p

2009 4.84p

2010 4.55p

2011 4.86p

Source: Cazenove Capital Management

Fund income return

5 yrs cumulative

FTSE All-Share return

5 yrs cumulative

24.4% 19.71%

5 years ended 31 December 2011 (B Income class)

Cazenove UK Equity Income Fund

Share Class Bloomberg

Ticker Lipper Codes

A Inc CAZUEAI LN 65000477

B Inc CAZUEBI LN 65000481

X Inc CAZUKEX LN 65000480

X Acc CAZUKXA LN 68150522

- 15 -

The Cazenove UK Equity Income Fund – summary

Internal Performance Objective:

“The Fund aims to outperform by 1.5% over rolling 3 year periods and achieve a minimum yield

of 110% of the benchmark yield”

Benchmark FTSE All-Share Index

Number of stocks Current 56, minimum 35

Portfolio Restrictions

(Rel to FTAS)

Stock +5% / No minimum

Sector +10 / No minimum

50% max weight in mid-cap,10% max in

small/ AIM/ other

(+ minimum 80% in UK Equities)

Tracking Risk 4-8% target range, current 4.5%

Launch Date 6 May 2005

Fund Size £133m

Structure UK Domiciled, UCITS III

Base Currency £ (Sterling)

Historic Yield 3.9%

• Pragmatic income

• Income and Capital returns

• Business cycle approach

• Focused portfolio

• Top decile 1, 3 and 5 years*

*Source. Cazenove Capital Management, fund ranking in Lipper UK Equity Income universe as at 24/09/12

- 16 -

Income strategy – through the cycle

Market yield &

dividend growth Dividend growth

Slowdown Recession Recovery Expansion

High yield Low / no yield,

high capital growth

Stock:

Delivers:

Cycle:

- 17 -

Source: Cazenove Capital, Datastream

• 3 “cogs”, portfolio allocations change through the cycle to deliver income and capital returns

Income investing – focus on total returns

Premium

Income

Capital

Returns

Superior Dividend

Growth

- 18 -

Cazenove UK Equity Income Fund – portfolio through the cycle

December

2005

December

2006

December

2007

December

2008*

December

2009

December

2010

December

2011

Premium real yields 44 49 68 86 60 54 55

Superior dividend growth 37 30 21 6 10 20 30

Capital Returns 19 21 11 8 30 26 15

No of stocks 69 78 58 51 68 57 52

Source: Cazenove Capital Management at 31/07/12

*cash 4.7% at year end 2008

0

5

10

15

20

25

30

35

40

Acti

ve w

eig

ht

(%)

Business cycle (+ve) active weights for Cazenove UK Equity Income

Commodity Cyclical Consumer Cyclical Financial Growth

Growth Defensive Industrial Cyclical Value Defensive

-40

-35

-30

-25

-20

-15

-10

-5

0

Acti

ve w

eig

ht

(%)

Business cycle (-ve) active weights for Cazenove UK Equity Income

Commodity Cyclical Consumer Cyclical Financial Growth

Growth Defensive Industrial Cyclical Value Defensive

Total returns – the power of compounding

0.86

0.42

-0.70

5.51

4.03

2.67

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00Capital Return % (Annualised)

Total Return % (Annualised)

FTSE All-Share

*Source: Cazenove Capital 24.09.2012

**Source: Lipper, Dec 2005 – July 2012

Annualised returns**

?

• Interim 2012 dividend + 6% year on year

Cazenove UK Equity

Income B Inc IMA UK Equity

Income Sector

What we know - income reinvested outperforms

over the long term*

- 19 -

- 20 -

Fund manager: Matt Hudson

MATTHEW HUDSON joined Cazenove in 2001. He is a member of the Pan-European equity team with responsibility for

equity income portfolios. He is manager of the Cazenove UK Equity Income Fund and The Equity Income Trust for

Charities, a UK authorised Common Investment Fund and he is responsible for the following UK sectors: Banks,

Construction & Materials, Gas Water & Multi Utilities, Mining and Electricity. Matthew joined from AIB Govett Investment

Management where he was a UK equity fund manager. Prior to this he was a chartered accountant at

PricewaterhouseCoopers in the financial services division. Matthew graduated from Cambridge University with a degree in

History. Matthew has 13 years of investment experience

Source: Citywire at 28/09/12

- 21 -

Pan-European Equity Team

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 Europe

Steve Cordell (UK Absolute)

Julie Dean (UK Equity)

Matthew Hudson (UK Equity Income)

Paul Marriage (UK Smaller Companies)

John Warren (UK Smaller Companies)

David Docherty (UK Equity)

Wade Pollard (UK Equity)

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)

UK equities research responsibilities

- 22 -

Steve Cordell

• Technology Hardware

Julie Dean

• General Financial

• Healthcare Equipment

• Life Insurance

• Non-Life Insurance

• Pharmaceuticals & Biotechnology

• Software & Computer Services

David Docherty

• Aerospace & Defence

• Automobile & Parts

• Electronic & Electrical Equipment

• Forestry & Paper

• General Industrials

• Industrial Engineering

• Industrial Metals

• Oil & Gas Producers

• Oil Equipment & Services

Charlotte Morrish

• Beverages

• Food & Drug Retailers

• Food Producers

• General Retailers

• Household Goods - Personal

• Media

• Personal Goods

• Travel & Leisure

John Warren

• Support Services – ex FTSE 100

• Travel & Leisure

Paul Marriage

• Smaller Companies

Wade Pollard

• Household Goods - Housebuilders

• Industrial Transportation

• Real Estate

• Support Services – FTSE 100

• Telecoms

• Tobacco

Matthew Hudson

• Banks

• Chemicals

• Construction & Materials

• Electricity

• Gas, Water & Multi-Utilities

• Mining

• Software & Computer Services

• Sector market divides are not homogenous. They do not necessarily help us determine the

behaviour of these stocks within the cycle.

• Define the beta of stocks and allocate them to seven style groupings:

- 23 - - 23 -

Business cycle investing – market analysis

Commodity Cyclicals Growth Financials Growth Defensives

Consumer Cyclicals Value Defensives

Industrial Cyclicals

HIGHER BETA LOWER BETA

• Pragmatic approach combining top-down macro view with earnings based security selection

• Avoid permanent style / size bias

• Demand for products and services changes throughout the business cycle

• Operational gearing of companies impacts profitability of companies

- 24 - - 24 -

• Commodity Cyclicals – stocks whose revenues are linked either directly or indirectly to a

particular commodity product such as oil, steel, gas, mining, bulk chemicals e.g. BP, Rio Tinto

• Consumer Cyclicals – cyclical stocks which rely on consumer spending for their revenues e.g.

retailers, automotives, house builders, leisure, general retail e.g. Marks & Spencer, Easyjet

• Industrial Cyclicals – stocks which manufacture capital goods or which have revenues linked to

industrial production e.g. engineering, aerospace, construction e.g. GKN, Cookson

• Growth – stocks which grow revenues well in excess of GDP with a high degree of uncertainty or

volatility e.g. luxury goods, medical technology, IT e.g. Smith and Nephew, ARM Holdings

• Financials/Interest Rate Sensitive – stocks whose business depends on interest rate spreads,

financial markets and asset valuations e.g. banks, insurers, real estate e.g. Barclays, Land

Securities

• Growth Defensives – stocks which grow revenues in excess of GDP with a low volatility and

high visibility e.g. support services, food retailers e.g. Pearson, Compass group

• Value Defensives – stocks which grow revenues at or below GDP with low volatility and high

visibility e.g. telecommunications, pharmaceuticals, utilities, food producers, beverages, tobacco,

e.g. GlaxoSmithKline, Vodafone

Business cycle investing - seven style groupings

- 25 -

Business cycle investing - horses for courses

*Source: Thomson Datastream

Stock Sector Style

Performance relative to FTSE All-Share*

31/12/99 –

12/03/03

12/03/03 –

15/06/07

15/06/07 –

03/03/09

03/03/09 –

30/04/12

Morgan Crucible Electronic &

Electrical Cyclical -74% +272% -42% +129%

Bodycote Industrial

Engineering Cyclical -55% +114% -26% +120%

Cookson General Industrials Cyclical -80% +98% -78% +246%

Diageo Beverages Defensive +147% -17% +40% 19%

Unilever Food Producers Defensive +178% -35% +57% -2%

Reed Elsevier Media Defensive +72% -23% +43% -38%

- 26 - - 26 -

History and background

Cazenove played an important

part in most of the British

Government’s privatisation

issues. As the only major

independent firm in London, it

successfully built its business

both domestically and

internationally.

The fund management business

was separately incorporated in

1988.

By the 1940s the business had

become one of the City of

London’s pre-eminent

stockbroking partnerships.

Cazenove began investing on

behalf of pension funds and

private individuals in 1945.

1930s 1980s

The firm changed from a

partnership to corporate status

in April 2001.

In 2005 Cazenove and

JPMorgan formed a joint

venture with respect to their UK

investment banking activities.

Cazenove Capital Management

demerged from the Cazenove

Group to create an

independent asset

management business.

2000s

The origins of Cazenove can

be traced to the early

Huguenot financiers who left

France in the late

seventeenth century.

In 1819 Phillip Cazenove

joined the business of his

brother-in-law John Menet: in

1823 they became partners,

and the firm of Cazenove

was established.

1823

- 27 -

Funds under management - £15.9 billion

Investment Funds

Long only funds £3.3bn

Long/short funds £0.3bn

Sub-advisory £0.5bn

Wealth Management

Private Clients £8.6bn

Charities £3.2bn

TOTAL £4.1bn

TOTAL £11.8bn

As at 31/07/12

Equities £6.3bn

Cash & Bonds £3.5bn

Multi-Manager £4.5bn

Hedge Funds £1.3bn

Other Alternatives £0.3bn

TOTAL £15.9bn

Asset Class

Funds under management

Wealth management £11.8bn

Investments Funds £4.1bn

TOTAL £15.9bn

- 28 -

Company information

Fully diluted share capital

Employees under

Option 14.39%

Cazenove Capital Other

Other individual

holders 63.45%

Institutions

2.77%

Employees 19.39%

Source: Cazenove Capital Management, December 2011

- 29 - - 29 -

Issued by Cazenove Capital Management which is the name under which Cazenove Capital Management

Limited and Cazenove Investment Fund Management Limited both authorised and regulated by the Financial

Services Authority provide investment products and services. 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 originally invested and may be affected by fluctuations in

exchange rates. The levels and bases of tax assumptions may change. This document is for information

purposes only and does not constitute an offer to enter into any contract/agreement nor is it a solicitation to buy

or sell any investment or to provide any services referred to therein. This document is intended for Independent

Financial Advisers, Professional Intermediaries and non-private clients only.

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Regulatory information and risk warnings