Liontrust

Professional Investors and Advisers only

Themes for Tomorrow

Jan VH Luthman

2

1. Global Health

3 3

Pharmaceuticals

– Mature markets

– Political interference

– High litigation risk

– Low growth

– No pricing power

– Costs & risks of R&D

Market perception

4 4

Pharmaceuticals

Reality

– Global population is expanding

– Everyone will get sick, grow old and die

– More and more can afford access to medicines

– Pharmaceutical companies refocusing on emerging markets, lifestyle, over-the-counter, branded generics – growth, pricing power, less political interference, less litigation risk

5 5

Pharmaceuticals

Research and Development

– NCATS - National Centre for Advancing Translational Sciences

– Will work with pharmaceutical industry

– R&D more efficient, more effective, less financially risky

6 6

Pharmaceuticals

How big a theme?

We have all seen a similar transformation of business model and investor perceptions

Macro Equity Income Fund Weighting

GlaxoSmithKline 4.3%

AstraZeneca 3.0%

Bristol-Myers Squibb 2.8%

Pfizer 3.7%

Merck 3.1%

Shire 2.1%

Vectura 0.7%

Source: Liontrust Fund Partners LLP. Data as at 31.12.2012.

7 7

Pharmaceuticals

Tobacco 2004

– Mature markets

– Low growth



– Litigation risk

Pharmaceuticals 2012

– Mature markets

– Low growth



– Litigation risk

8 8

Pharmaceuticals

Compare the performance of the Tobacco sector with two infamously powerful sectors – Mines and Banks

9 9

-100%

0%

100%

200%

300%

400%

500%

600%

May

-92

Ap

r-9

3

Mar

-94

Feb

-95

Feb

-96

Jan

-97

Dec

-97

No

v-9

8

No

v-9

9

Oct

-00

Sep

-01

Sep

-02

Au

g-0

3

Jul-

04

Jun

-05

Jun

-06

May

-07

Ap

r-0

8

Mar

-09

Mar

-10

Feb

-11

Jan

-12

Dec

-12

FTSE 350 Index Mining TR in GB FTSE 350 Index Banks TR in GB FTSE All Share TR in GB

Pharmaceuticals

Source: Financial Express as at 31.12.2012.

Mines & Banks (relative to FTSE All-Share)

10 10

-100%

0%

100%

200%

300%

400%

500%

600%

May

-92

Ap

r-9

3

Mar

-94

Feb

-95

Feb

-96

Jan

-97

Dec

-97

No

v-9

8

No

v-9

9

Oct

-00

Sep

-01

Sep

-02

Au

g-0

3

Jul-

04

Jun

-05

Jun

-06

May

-07

Ap

r-0

8

Mar

-09

Mar

-10

Feb

-11

Jan

-12

Dec

-12

FTSE 350 Index Tobacco TR in GB FTSE 350 Index Mining TR in GB

FTSE 350 Index Banks TR in GB FTSE All Share TR in GB

Pharmaceuticals


Tobacco eclipses Mines & Banks

Mines, Banks – and Tobacco (relative to FTSE All-share)

11 11

-100%

0%

100%

200%

300%

400%

500%

600%

May

-92

Ap

r-9

3

Mar

-94

Feb

-95

Feb

-96

Jan

-97

Dec

-97

No

v-9

8

No

v-9

9

Oct

-00

Sep

-01

Sep

-02

Au

g-0

3

Jul-

04

Jun

-05

Jun

-06

May

-07

Ap

r-0

8

Mar

-09

Mar

-10

Feb

-11

Jan

-12

Dec

-12

FTSE 350 Index Tobacco TR in GB FTSE 350 Index Mining TR in GBFTSE 350 Index Pharmaceuticals & Biotechnology TR in GB FTSE 350 Index Banks TR in GBFTSE All Share TR in GB

Pharmaceuticals


Re-rating of Pharmaceuticals has barely begun

12 12

Pharmaceuticals

Tobacco re-orientated to new geographic markets

Pharmaceuticals are re-orientating to new geographic markets, to new product markets and to a lower risk business model

Transformation of investor rating of pharmaceuticals could be even more powerful than that of tobacco

13

2. UK Utilities

14 14

UK Utilities

Priced as growth stocks

But...

Austerity & low economic growth

No growth in industrial power demand

Falling real wages & rising utility bills

No growth in retail power consumption


Weighting to Utilities

Liontrust Macro Equity Income Fund 0.0%

FTSE 100 Index 4.3%

FTSE All-Share Index 3.9%

15 15

UK Utilities

Valuations depend on dividend yield premium

BoE may abandon inflation target

Broader ‘economic health’ remit

Inflation expectations rise

Interest rates rise

Dividend yield premium shrinks

Undermines utilities’ valuations

16 16

UK Utilities

And finally...

Renewables obligations – who will pay?

Investment in 30 new gas power stations

Requires long-term institutional funding

But, if interest rates are rising

What return on capital will be required?

Implications for power prices & profits?

17 17

Utilities relative to the FTSE All-Share

0.90

0.95

1.00

1.05

1.10

1.15

Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12

Utilities GWM

Source: Bloomberg. Data from 31.12.2011 – 19.12.2012

18

3. Asset Managers

19 19

Asset Managers

Economic recovery

Improving corporate earnings

Rising equity valuations

Investor confidence returns

Rising bond yields

Falling bond prices

Switch from bonds to higher-fee equities

Rising inflows, rising fees & fee rates


Aberdeen 5.0%

Invesco 0.8%

Hargreaves Lansdown 2.4%

Polar Capital 1.4%

Henderson 0.8%

London Stock Exchange 0.8%


20 20

Aberdeen relative to the FTSE All-Share

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60


Aberdeen FTSE All-Share


21

4. Global Readjustment of Currencies and Wages

22 22

Global Readjustment of Currencies and Wages

We live in a globalising, competitive world

Over the long term, unit costs of production will trend towards approximate, risk-adjusted parity

This trend will follow different paths in different parts of the world


Unilever 4.7%

Reckitt Benckiser 4.6%

Heinz 2.1%

Kimberly Clark 0.8%

Pepsico 0.9%


23 23


We are all human

We like wage increases

We don’t like wage cuts

24 24


High-cost economies

– Prefer lower currencies, not wages

Low-cost economies

– Prefer higher wages, not currencies

25 25


China 12th Five Year Plan

– Commitment to expand domestic consumption

– Sustained, accelerated rises in minimum wage (13%pa)

– Major expansion of welfare and healthcare programmes

– Less need to save (savings ratio currently 30%)

– Greater freedom to spend

26 26


High cost economies

– Sustained imported inflation

– Slow wage growth

– Depressed consumer consumption

Low cost economies

– Accelerated growth in capacity – and inclination – to spend

– Particularly amongst low and middle income earners

27 27

Unilever relative to the FTSE All-Share

0.85

0.90

0.95

1.00

1.05

1.10


Unilever FTSE All-Share


28 28

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Documents

cost economies

financial express

pricing power

long term

litigation risk

low growth

geographic markets

confidential material