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This document is confidential and intended solely for the use of the person to whom it is given or sent
and may not be reproduced, copied or given, in whole or in part, to any other person.
European Equities
September 2013
Niall Gallagher Investment Director
For Professional Clients Only
This document is confidential and intended solely for the use of the person to whom it is given or sent
and may not be reproduced, copied or given, in whole or in part, to any other person.
Performance and process
Introduction
● 15 years experience investing in equities
Strategy managed Dates managed
BlackRock Global & European Teams –
various analytical & funds responsibilities Jan 98 – Sep 03
BlackRock European Dynamic Fund Sep 03 – Oct 06
BlackRock European Growth Fund May 05 – Oct 06
T. Rowe Price Europe ex UK Fund Mar 07 – May 09
T. Rowe Price European Fund Mar 07 – May 09
GAM European Equities Since Nov 09
GAM Star
Continental
Europe Equity
EUR 462.2m
GAM Star
European
Equity
EUR 61.6m
GAM European Equities: EUR 523.8m
GAM Assets under Management:
Source: GAM as at 30 Aug 2013 3
GAM Star Continental European Equity – EUR Performance from 30 Nov 2009 to 30 Aug 2013
Presented as supplemental information only. Please refer to the relevant GIPS compliant report and the GIPS supplemental text.
Past performance is not indicative of future performance. Performance is provided net of fees.
Source: GAM, MSCI 4 4
GAM Star European Equity – EUR Performance from 30 Nov 2009 to 30 Aug 2013
Presented as supplemental information only. Please refer to the relevant GIPS compliant report and the GIPS supplemental text.
Past performance is not indicative of future performance. Performance is provided net of fees.
Source: GAM, MSCI 5
Process overview
● Bottom up unconstrained approach
– Primarily large cap investor with some exposure to mid caps
● Aim for detailed understanding of each position
– High conviction research driven stock selection
– Focused portfolio of 30 – 50 stocks
– Long-term (3 – 5 year) investment horizon
● Absolute, cash-flow based valuation approach augmented by a range of
multiples incorporating entire capital structure
– Free Cash Flow Equity / Enterprise Value %
– EV/Sales
– EV/CE
– EV/EBIT
– Analysis of all metrics vs. long-term historical range
● Embedded ‘bias’
– Preference for High Return on Capital Employed businesses
– Preference for strong Free Cash Flow generation
– Requirement for ‘appropriate’ balance sheets
– No preference for structural, defensive or quality over cyclical
● Portfolio construction techniques aim to maximise risk-adjusted returns and
reduce risk concentrations
Return target (net) Benchmark + 300 – 400bps pa
Typical tracking error 4 – 6% pa
Implied information
ratio 0.75
Active Share >85%
Peer group comparison Achieve first quartile ranking
6
High conviction, fundamentally driven investing
Source: GAM
There is no guarantee that targets will be achieved.
Allocations and holdings are subject to change.
Process snapshot
GAM
Star Continental
European
Equity
Active
Sh
are
Tracking Error
Low
High Low
Hig
h
0
0
Diversified
stock picks
Closet
indexing
Factor
Bets
Concentrated
stock picks
Pure indexing
A fully active style:
• Bottom up, totally unconstrained stock
picking approach
• Fundamentally driven stock selection
with a high emphasis on
diversification
• Produces a concentrated but
diversified portfolio with high active
share and medium tracking error
indicating a true stock- specific, non-
thematic style of investing
Medium
Mediu
m
Views are those expressed by the manager at the time of writing
Source: GAM 7
8
Investment team Managing Pan European and Continental European long-only strategies
James Davidson
Head of Investment
Administration
– 24 years’ experience
– Joined GAM in 1997
John Paul Hodder-Williams
Head Dealer
– 12 years’ experience
– Joined GAM in 2004
Supported by two additional members of the dealing team
Trading and Administration
Niall Gallagher
Investment Director
– 15 years’ experience
– Joined GAM in 2009
– Responsible for all portfolio decisions
James Wigley
Investment Analyst
– 11 years’ experience
– Joined GAM in 2010
Source: GAM as at 28 Jun 2013
Swetha Ramachandran
Investment Analyst
– 13 years’
experience
– Joined GAM
in 2012
Jessica Williams
Investment Analyst
– 1 years’
experience
– Joined GAM
in 2009
8
This document is confidential and intended solely for the use of the person to whom it is given or sent
and may not be reproduced, copied or given, in whole or in part, to any other person.
The Case for Europe
10
Europe over the past 3 years
● Low economic growth for region as a whole
– Moderate growth in northern & central Europe
– Significant contraction in economies of southern & peripheral Europe
● Significant sovereign and financial sector stresses
– Balance of payment ‘sudden stops’ across southern & peripheral Eurozone
– Multiple sovereign and financial sector bail outs
● Weak policymaking infrastructure, particularly during early part of period
– Earlier generation of policymakers were unaware of full extent of crises
– Denial and consistently inadequate responses
● Unquantifiable tail risks, principally Eurozone break- up
– Concerns fuelled by many of the worlds most “prestigious” (??) economists
– Not helped by poor and inconsistent policymaking
European equities were considered uninvestable
Views are those expressed by the manager at the time of writing
Source: GAM
0
100
200
300
400
500
600
03 04 05 06 07 08 09 10 11 12 13
US investors remain under positioned in European equities Cumulative purchases of European equities since 2003 (US$ bn)
Source: US Treasury, Haver, Datastream, Goldman Sachs Global ECS Research
Actual US cumulative buying of
European shares since 2003
Buying based on trend
1978-2008
Buying based on trend
2003-08
11
12
2012 confounded expectations
● Eurozone did not fall apart
– Many Anglo- Saxon commentators significantly underestimated economic, cultural and
historic commitment to a common currency
● Significant improvement in policymaking
– Change in ECB management and board
– Greater engagement from Angela Merkel (the most important policymaker in Europe)
● Banking system did not collapse or experience significant convulsions
– Stronger banks boosted capital through strong profitability and retained earnings
– Many peripheral banks raised equity and diversified funding
– ECB provided significant assistance to banking sector (LTRO, OMT)
● Significant bounce in European equities
– Starting levels were heavily oversold
– Asset class is heavily misunderstood
Views are those expressed by the manager at the time of writing
Source: GAM
13
2013 continues to surprise
● Economists expectations for the region have been proved wrong (again)
● Economic growth is re-accelerating in core
● Signs of ‘inflection’ in southern & peripheral economies
– Shorter term cyclical indicators are turning positive
– Longer- term structural indicators have improved significantly
● Policymaking remains focused and adept
● Economic data confirms what we have been hearing from companies “bottom- up”
– From May onwards increasing signs and commentary that activity across many sectors and
domestic economies have bottomed
● Need to maintain perspective
– Activity is bottoming and starting to expand from very low levels
– This is not a vigorous economic environment
● So far this is primarily an ‘expectational adjustment’
14
Northern and central Eurozone / Europe
● Northern and central Europe are heavily exposed to global trends
– Strong export sectors and core competitive advantage
– Stronger fiscal positions
● This creates virtuous feedback loops
– Record levels of employment → decent wage growth
Source: Citigroup August 2013 Global Economic Outlook and Strategy
2012 2013 2014 2015 2016
Eurozone -3.7 -2.9 -2.5 -1.9 -1.6
Germany 0.2 -0.1 0.3 0.5 0.5
Switzerland 0.5 0.7 0.9 0.8 0.8
Sweden -0.6 -1.5 -1.5 -0.4 0.7
Denmark -4.3 -2.0 -1.5 -1.0 0.5
Netherlands -4.1 -3.9 -3.4 -2.9 -2.3
France -4.8 -3.8 -3.2 -2.8 -2.4
Italy -3.0 -3.5 -3.0 -2.8 -2.7
Spain -10.6 -6.5 -5.9 -4.6 -3.7
Portugal -10.6 -9.8 -9.2
Greece -10.0 -5.3 -4.9 -3.7 -2.4
Ireland -7.6 -8.2 -5.4 -3.4 -2.7
US -8.1 -4.8 -4.3 -3.8 -3.8
UK -6.3 -6.9 -5.8 -4.7 -2.8
Select primary fiscal accounts as % of GDP
Source: UBS Global Economics, Eurostat/Haver
Primary budget balance, % of GDP
-12
-10
-8
-6
-4
-2
0
2
4
6
8
2005 2006 2007 2008 2009 2010 2011 2012 2013
Greece
Spain
Portugal
France
Ireland
Germany
19
Select unit labour costs
Source: UBS European Economics Team, Haver
Unit labour costs, Q1 2000 = 100
France
Italy
Ireland
Greece
Portugal
Spain
Germany
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Q1-2000 Q1-2003 Q1-2006 Q1-2009 Q1-2012
20
21
European equities remain cheap on ‘normalised’ metrics
● Cyclically Adjusted Price Earnings ratio (CAPE / Shiller PE)
– Current valuation of 13.5x
– 32 year average value of 17.5x implies a 22% discount to ‘normal’
– 40% discount to the US CAPE vs. a 32 year average discount of 14%
● Other ‘normalised’ metrics reach conclusion
● Not all of the difference is pure valuation
– ‘Normalised’ profitability in US is closer to peak
– ‘Normalised’ profitability in Europe is closer to trough
– Some of the profit destruction in Europe is permanent; Telecoms, Utilities, Banks
Source: Morgan Stanley (European Strategy Team) as at 31 Dec 2012
Shiller PE Late 1979 to summer 2013
Note: European inflation data is based on market cap weighted aggregation of constituent country inflation rates
Past performance is not indicative of future performance.
Source: MSCI, OECD, various national sources, Haver, Morgan Stanley Research - European Strategy Team, Source: MSCI, OECD, various national sources, Haver, Morgan Stanley Research -
European Strategy Team
22
Shiller PE Europe vs US
22
Alternative valuation metrics
Source: MSCI, Morgan Stanley Research
Note : Average relative valuation across PB, PD, PCE. Sector neutral valuation assumes
European Valuation Premium / Discount Relative to USA, %
-50
-40
-30
-20
-10
0
10
75 80 85 90 95 00 05 10
23
Sector Neutral Premium /
Discount %
Premium / Discount %
Europe vs. USA profitability
Source: MSCI, Morgan Stanley Research
European vs USA ROE %
6
8
10
12
14
16
18
20
75 80 85 90 95 00 05 10 USA
Europe
24
25
Some important context on European equities
● European equities are global not local
– 50% of revenues are from outside of Europe
– 30% of revenues are from emerging markets
– Significantly less exposure to € currency than assumed
● European equity market is not homogeneous
– Significant divergences in ‘geographic exposures’ within the market
– Some sectors / stocks are almost completely global
– Some sectors / stocks are almost completely local
● In many industries European companies are the global leaders
Europe is not a good proxy for European equities
Views are those expressed by the manager at the time of writing
1: Established in 1983, GAM delivers active investment management to private clients, institutions and intermediaries. All GAM's assets are included in the GIPS definition of the firm, except for clients who set up separately-managed accounts which are administered by an independent third party for their fixed income hedge strategy and/or currency hedge strategy.
2: GAM claims compliance with the Global Investment Performance Standards ('GIPS®') and has prepared and presented this report in compliance with the GIPS standards. GAM has been independently verified from 1 January 1996 through 31 December 2011. In May 2009, GAM acquired Augustus Asset Managers Limited ('Augustus') and subsequently claims compliance for a single firm representing the combined business. Having determined that the GIPS portability criteria were satisfied, the pre and post acquisition performance records of Augustus are linked. Augustus has been subject to independent verification testing from 1 January 2000, the date from which Augustus performance results are first displayed. The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.
3: The composite consists of actively managed portfolios of European equities (excluding the United Kingdom). Mid to large capitalisation stocks are selected from attractive sectors based on existence of or potential for above average Cash Flow Return on Investment.
4: Derivatives may be used in the portfolios to gain market exposure as well as for hedging purposes. Further details are available on request in the relevant product documentation. 5: Composite results are presented gross of investment management fees and net of trading expenses and net of withholding taxes on dividends, capital gains and interest. Benchmarks are gross of withholding taxes on
dividends. 6: The composite was created in Nov 2002 and applied retrospectively. 7: The maximum investment management fee for accounts is 1.5% per annum. Management fees may vary by product and jurisdiction. 8: High and low returns (for those constituents present in the composite throughout each period) are presented above to demonstrate dispersion within the composite. Dispersion information is only required by GIPS where there
are 6 or more portfolios in the composite. 9: From 01 Dec 2009 Niall Gallagher took over as manager from John Bennett. 10: The benchmark shown is MSCI Europe ex UK Index. 11: DEX - The reporting currency for this composite is EUR. Prior to Dec 1998, this composite was denominated in DEM. 12: Policies for valuing portfolios, calculating performance and preparing compliant presentations are available on request. 13: In 2005 GAM changed its methodology for calculating its Total Firm Assets (TFA) to follow the principles and guidelines of FINMA, resulting in TFA as of Nov 2005 increasing by 38%. In May 2009, GAM acquired Augustus
resulting in an increase of 22% in TFA and a change in the Firm definition to incorporate an exclusion of certain assets as detailed above. Current data is as at 30 June 2013. 14: FX rates used for valuation of funds and portfolios within the composite are those at 23:00 hours GMT. FX rates for benchmark and composition calculation are those at 16:00 hours GMT. 15: Where there are fewer than 36 monthly returns for the Composite, Standard Deviation 3Yr% is shown as ‘N/A’ for both the Composite and the Benchmark.
1: Established in 1983, GAM delivers active investment management to private clients, institutions and intermediaries. All GAM's assets are included in the GIPS definition of the firm, except for clients who set up separately-managed accounts which are administered by an independent third party for their fixed income hedge strategy and/or currency hedge strategy.
2: GAM claims compliance with the Global Investment Performance Standards ('GIPS®') and has prepared and presented this report in compliance with the GIPS standards. GAM has been independently verified from 1 January 1996 through 31 December 2011. In May 2009, GAM acquired Augustus Asset Managers Limited ('Augustus') and subsequently claims compliance for a single firm representing the combined business. Having determined that the GIPS portability criteria were satisfied, the pre and post acquisition performance records of Augustus are linked. Augustus has been subject to independent verification testing from 1 January 2000, the date from which Augustus performance results are first displayed. The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.
3: The composite consists of actively managed portfolios of European equities (including the United Kingdom). Stocks are selected from attractive sectors primarily on a cash-flow based valuation approach and the fundamental long- term growth prospects of the business.
4: Derivatives may be used in the portfolios within the composite to gain market exposure as well as for hedging purposes. Please note that further detail is available on request. 5: Composite results are presented gross of investment management fees and net of trading expenses and net of withholding taxes on dividends, capital gains and interest. Benchmarks are gross of withholding taxes on
dividends. 6: The maximum investment management fee for accounts is 1.5% per annum. Management fees may vary by product and jurisdiction. 7: The composite was created in Nov 2002 and applied retrospectively. 8: High and low returns (for those constituents present in the composite throughout each period) are presented above to demonstrate dispersion within the composite. Dispersion information is only required by GIPS where there
are 6 or more portfolios in the composite. 9: From 01 Dec 2009 Niall Gallagher took over as manager from John Bennett. 10: The benchmark shown is MSCI Europe Index. 11: DEX - The reporting currency for this composite is EUR. Prior to Dec 1998, this composite was denominated in DEM. 12: Policies for valuing portfolios, calculating performance and preparing compliant presentations are available on request. 13: In 2005 GAM changed its methodology for calculating its Total Firm Assets (TFA) to follow the principles and guidelines of FINMA, resulting in TFA as of Nov 2005 increasing by 38%. In May 2009, GAM acquired Augustus
resulting in an increase of 22% in TFA and a change in the Firm definition to incorporate an exclusion of certain assets as detailed above. Current data is as at 30 June 2013. 14: FX rates used for valuation of funds and portfolios within the composite are those at 23:00 hours GMT. FX rates for benchmark and composition calculation are those at 16:00 hours GMT. 15: Where there are fewer than 36 monthly returns for the Composite, Standard Deviation 3Yr% is shown as ‘N/A’ for both the Composite and the Benchmark.
GAM has prepared and presented this report
in compliance with the Global Investment
Performance Standards (GIPS®). A
complete list and description of composites is
available on request.
Source: GAM as at 31 Aug 2013
* The benchmark shown is for comparative
purposes only. The composite is not
managed to a specific benchmark.
There is no guarantee that targets will be
achieved.
63
Disclaimer
Source: GAM unless otherwise stated. (Unless otherwise noted, where shown, performance is shown net of fees, on a NAV to NAV basis). This material is confidential and is intended solely for the use of the person or persons to whom it is given or sent and may not be reproduced, copied or given, in whole or in part, to any other person. It is aimed at sophisticated, professional, eligible, institutional and/or qualified investors who have the knowledge and financial sophistication to understand and bear the risks associated with the investments described herein. This material is confidential and is intended solely for the use of the person or persons to whom it is given or sent and may not be reproduced, copied or given, in whole or in part, to any other person. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. It is not an invitation to subscribe and is by way of information only. The fund is a sub-fund of GAM Star Fund plc. GAM Star Fund plc is an umbrella fund with segregated liability between sub-funds. GAM Star Fund plc is authorised as a UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011 (S.I. No.352 of 2011) and is a recognised scheme under the Financial Services and Markets Act 2000. The fund is managed by GAM Fund Management Limited which is regulated by the Central Bank of Ireland. Subscriptions will only be received and shares or units (‘Shares’) issued on the basis of the current prospectus for the fund. Copies of the fund’s prospectus, key investor information document (KIID) and financial statements can be obtained free of charge from GAM Fund Management Limited, George’s Court, 54-62 Townsend Street, Dublin 2, from the centralising agent for France, BNP Paribas Securities Services, 66 rue de la Victoire, 75009 Paris, from its representative in Switzerland GAM Anlagefonds AG, Klausstrasse 10, CH - 8034 Zurich, from the information agent in Germany Bank Julius Baer Europe AG, An der Welle 1, D-60322 Frankfurt am Main ,from the information agent in Austria, UniCredit Bank Austria, Schottengasse 6 - 8, A-1010 Vienna. Paying Agent in Switzerland is State Street Bank GmbH, Zurich Branch, Beethovenstrasse 19, CH-8027 Zurich. Shares are not available for sale in any state or jurisdiction in which such sale would be prohibited. In Hong Kong, this material is restricted to professional investors (as defined in the Securities and Futures Ordinance (Cap 571)) only. In Singapore, this material is limited to institutional investors (as defined in the Securities and Futures Act (Cap. 289)) ('SFA') only. The fund is not authorised or recognised by the Monetary Authority of Singapore and Shares in the fund are not allowed to be offered to the retail public in Singapore; and any written material issued in connection with the offer is not a prospectus as defined in the SFA and, accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. In other countries in the Asia Pacific region, this document should only be distributed in accordance with the applicable laws in the relevant jurisdiction. In Japan, the fund mentioned herein shall not be disclosed publicly pursuant to the Financial Instruments and Exchange Law (the “FIEL”) nor registered for public sale or private placement pursuant to the Law on Investment Trusts and Investment Companies. Therefore, none of the shares of the fund mentioned herein may be solicited in Japan or to residents in Japan. This material is intended for circulation to professional, institutional and/or qualified investors only. Any person in receipt of this material is not allowed to distribute it to residents in Japan nor communicate to residents in Japan about the fund mentioned herein. The Shares of the fund have not been registered under the US Securities Act of 1933, as amended (the “Securities Act”), and the fund is not registered under the US Investment Company Act of 1940, as amended (the “Company Act”). Accordingly, unless an exemption is available, such shares may not be of fered, sold or distributed in the United States or to US persons. However, pursuant to an exemption from registration under the Securities Act and the Company Act, the shares may be sold or resold in the United States or to certain qualified US investors in transactions that do not constitute a public offering. The views expressed herein are those of the manager at the time and are subject to changes. The price of Shares may go down as well as up and the price will depend on fluctuations in financial markets outside GAM's control, as a result an investor may not get back the amount invested. Past performance is not indicative of future performance and reference to a security is not a recommendation to buy or sell that security. Prices quoted refer to accumulation Shares unless otherwise stated. Historic data may be subject to restatement from time to time. In the United Kingdom, this material has been issued and approved by GAM London Ltd, 12 St James's Place, London SW1A 1NX, authorised and regulated by the Financial Conduct Authority. Issued in Switzerland by GAM Anlagefonds AG.