Download - Jupiter Conference 2014

September 2014
 
Alpha generation in European equities:
today’s challenges for a long-term investor
Cédric de Fonclare
Fund manager, European equities
JUPITER INVESTMENT CONFERENCE
FOR PROFESSIONAL AUDIENCES ONLY. NOT FOR RETAIL INVESTORS.
2
  Today’s challenges for longer-term investors
  An absence of earnings growth
  Are European equities fully priced?
  The economic recovery is still fragile
  Central bank action: a prerequisite for further recovery
  A rally driven by companies with weak balance sheets
  Significant currency headwinds
  Bank deleveraging is ongoing
The views expressed are those of the fund manager at the time of presenting and may change in the future.
3
  An absence of earnings growth
  2013 equity returns by source
Earnings growth
Multiple expansion
Dividends
  Returns in Europe in 2013
were almost entirely down
to multiple expansion
50%
Total return
40%
  But over the long run, the
bulk of equity returns
come from dividends and
earnings growth
30%
20%
10%
  Multiple expansion
over the long run is
market noise
0%
-10%
Japan
US
Europe ex-UK
UK
Emerging
markets
Earnings growth is now essential to future returns
Source: Thomson Reuters, MSCI and BlackRock Investment Institute, November 2013. Historic example for illustrative purposes only.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
4
  Are European equities fully priced?
  P/B MSCI Europe
  P/B S&P 500
3.0
3.0
2.8
2.8
2.6
2.6
2.4
2.4
2.2
2.2
2.0
2.0
1.8
1.8
Average
1.6
1.6
1.4
1.4
1.2
1.2
1.0
Aug-07
Average
Dec-08
May-10
Oct-11
Mar-13
Aug-14
1.0
Aug-07
Jan-09
European equities have rerated to recent P/B average
Source: MSCI, Bloomberg, September 2014. Displayed averages are the average value over the period displayed.
Jun-10
Nov-11
Apr-13
Sep-14
5
  The economic recovery is still fragile
  Markit Headline Manufacturing PMI*
US
France
China
Eurozone
Germany
  Eurozone annualised inflation**
1.4
1.2
60
58
1.0
56
54
0.8
52
0.6
50
48
0.4
46
44
0.2
42
40
Aug-13
Nov-13
Jan-14
Apr-14
Jun-14
Aug-14
0.0
Aug-13
Nov-13
Jan-14
Fiscal and monetary policies matter
* Source: Bloomberg / Markit, 31.08.14. ‘Markit’ and ‘PMI’ are marks of Markit Economics Limited or its affiliate and have been licensed for use by Bloomberg
Finance L.P. and its affiliates.
** Source: Thomson Reuters, EUZ, Consumer Prices, All Items, Chg Y/Y, Total, 31.08.14.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
Apr-14
Jun-14
Aug-14
6
  Central bank action: a prerequisite for further recovery
  Italian and Spanish spreads to bunds
Italy 10Y vs Germany 10YY
Spain 10Y vs Germany 10Y
700
600
500
400
300
200
100
0
Sep-09
Feb-10
Aug-10
Jan-11
Jul-11
Dec-11
Jun-12
Stimulus showing no signs of weakening yet
Source: Bloomberg, September 2014.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
Nov-12
Apr-13
Oct-13
Mar-14
Sep-14
7
  A rally driven by companies with weak balance sheets
  Returns for different kinds of company
Companies with a ratio of net debt to EBITDA over 3x
The top quartile of companies in the MSCI Europe index ranked by ROCE
30
25
20
15
10
5
0
-5
Aug-13
Sep-13
Oct-13
Nov-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
An unsustainable state of affairs
Source: Bloomberg, 31.08.14. Universe: MSCI Europe. ‘Low quality’ defined as companies with a ratio of net debt to EBITDA over 3x. ‘High quality’ defined as
the top quartile of companies ranked by ROCE (return on capital employed). MSCI Europe is used for illustrative purposes and is not the fund’s benchmark.
The fund’s benchmark is FTSE World Europe. The views expressed are those of the fund manager at the time of presenting and may change in the future.
Jul-14
Aug-14
8
  Significant currency headwinds
  Euro trade-weighted index
  US Dollars per Euro
12 %
Q2 2014E
1.40
8%
1.38
4%
0%
-4%
-8%
Q2 2013
Q2 2011
Q2 2009
Q2 2007
Q2 2005
Q2 2003
Q2 2001
Q2 1999
-12%
Q4 2014
Assuming flat
from today
1.36
Q1 euro headwind: 7% Tailwind by Q4?
Q2 euro headwind: 5%
1.34
1.32
1.30
1.28
Sep-13
Dec-13
Now-receding headwinds have masked potential growth
Source: UBS, September 2014.
* Source: FactSet / WMR, bid-to-bid, September 2014.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
Mar-14
Jun-14
Sep-14
9
  Bank deleveraging is ongoing
  Key risk indicators for European Union banks: % of sample meeting threshold
Core tier 1 >10%
Return on equity >8%
Loan-deposit <100%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Dec-09
Apr-10
Aug-10
Jan-11
May-11
Sep-11
Feb-12
Jun-12
Oct-12
Mar-13
The cost of recapitalising has taken its toll on ROE
Source: European Banking Authority, Q1 2014 Risk Dashboard. Sample size varies from 49‒56 banks by quarter. Core tier1 = tier 1 minus hybrid instruments.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
Jul-13
Nov-13
10
  How to generate alpha in European equities
  Stock-picking is key
  Do not compromise on quality
  Valuation discipline
  The potential benefits of diversification
The views expressed are those of the fund manager at the time of presenting and may change in the future.
11
  Stock-picking is key
  Holt market-implied discount rate for Spain since 1994
Spain 5.08%
Median 5.08%
8%
7%
6%
5%
4%
3%
2%
May-94
Mar-96
Jan-98
Nov-99
Sep-01
Jul-03
Apr-05
Feb-07
Dec-08
Value opportunities have disappeared from peripheral markets
Source: Holt, May 2014. Data shows discount rate implied by market by reversing market CFROI into current market level.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
Oct-10
Aug-12
May-14
12
  Stock-picking is key
Jupiter European Special Situations Fund average active share: 77.6%
  Top 10 active positions
Name
  Market cap split
Active weight (%)
ING Groep
2.6
Pandora
2.4
Ryanair Holdings
2.2
Nordea Bank
1.9
Aryzta
1.7
UniCredit
1.7
Swatch Group
1.7
Safran
1.6
Zodiac Aerospace
1.6
Gerresheimer AG
1.6
Portfolio weight
Benchmark weight
60
50
40
30
20
10
0
30 Bn +
15 - 30 Bn
Outperformance depends on taking active positions
Source: FactSet, 29.08.14. Cash not shown. Market caps are calculated in euro, firstly from IDC / Exshare if available, then from FTSE, then from MSCI.
Average active share is the average active share between 29.08.12 and 29.08.14.
1 - 15 Bn
< 5 Bn
13
  Do not compromise on quality – structural growth
  Development of dialysis patient numbers (actual and estimated)
4.0
3.5
3.0
Millions
2.5
CAGR 2013‒2020
%
North America
4.5
EMEA
4.4
Latin America
5.2
Asia Pacific
8.4
CAGR 6.3%
CAGR 6.8%
2.0
1.5
1.0
0.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
2019E
2020E
0.5
Investing in companies with exposure to growing markets
Source: Fresenius Medical Care, 2014.
Any stock examples are used for illustrative purposes only and should not be viewed as investment advice.
14
  Do not compromise on quality – structural growth
  Fresenius Medical Care
  Relative performance: Fresenius
  Price to book
Medical Care / FTSE World Europe
120
  YoY estimated sales
growth (%)
2.9
14
2.8
12
110
2.7
10
100
2.6
2.5
8
2.4
6
90
80
2.3
4
2.2
70
2
2.1
60
2
Sep-11
Sep-12
Sep-13
Sep-14
Sep-11
At time of initial 2014 purchase: price €50.13, P/B 2.2
0
Sep-12
Sep-13
Sep-14
Dec-12A Dec-13A Dec-14E Dec-15E
Relative underperformance provided entry points
Relative performance and P/B source: Bloomberg, September 2014. Sales growth source: FactSet, September 2014.
Any stock examples are used for illustrative purposes only and should not be viewed as investment advice. Past performance is no guide to the future.
15
  Do not compromise on quality – cyclical industries
 
Forecast average semiconductor content
per light vehicle
 
Estimated automotive electronics cost
as percentage of total car cost
60
$390
$380
50
$370
40
$360
$350
$340
$330
33%
30
Level by which the
2012 EU average CO2
emissions need to be
reduced by 2021
20
10
$320
$310
Jan-12
0
Dec-12
Dec-13
Jan-15
Jan-16
Jan-17
1950 1960 1970 1980 1990 2000 2010 2020 2030
Automotive components and tyres: products of a high-tech industry
Source: Dassault Systèmes, PwC, Redburn, September 2014.
16
  Do not compromise on quality – cyclical industries
 
Peugeot CFROI and rel. return
vs. MSCI Europe
 
CFROI
Forecast CFROI
Discount rate
Market implied CFROI
CFROI used in valuation
Economic return (CFROI%)
Economic return (CFROI%)
CFROI
Forecast CFROI
Discount rate
Market implied CFROI
CFROI used in valuation
10
8
6
4
2
0
-2
-4
FY 2012/13
1993
1996
1999
2002
2005
2008
2011
2014
2017
15
12
9
6
3
0
-3
FY 2012/13
1993
Relative to MSCI Europe Index
1996
1999
2002
2005
2008
2011
2005
2008
2011
2014
2017
Relative to MSCI Europe Index
1,030
TSR relative to index
TSR relative to index
Continental CFROI and rel. return
vs. MSCI Europe
258
130
66
34
1993
1996
1999
2002
2005
2008
2011
2014
2017
518
262
134
70
38
1993
1996
Quality cyclicals can provide stable growth
Source: Holt May, 2014. Any stock examples are used for illustrative purposes only and should not be viewed as investment advice.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
1999
2002
2014
2017
17
  Valuation discipline
  Growth characteristics of the Fund and its benchmark
Jupiter European Special Situations
FTSE World Europe ex UK
16
14
12
10
8
6
4
2
0
-2
Historical 3year sales
growth
Historical 3year earnings
growth
Return on
assets
Estimated 3-5
year earnings
growth *
*FactSet, First Call, I/B/
E/S Consensus and
Reuters provide FactSet
with a pre-calculated
mean long-term EPS
growth rate estimate,
which is calculated using
each individual broker’s
methodology and
applied here.
Diversified active exposure
Source: FactSet / MSCI as at 29.08.14. Weighted averages of constituents in euro, ex cash. Based on data availability of between 93.3% and 98.3% for the
Fund and between 87.1% and 100.0% for the benchmark. Past performance is no guide to the future.
18
  Valuation discipline
  Return on Equity
  Price to Earnings (FY 2014)
  PEG (FY 2014)
15.0
18.5
4
14.5
18.0
3
14.0
17.5
2
13.5
17.0
1
16.5
13.0
Jupiter
European
Special
Situations
FTSE World
Europe ex UK
0
Jupiter
European
Special
Situations
FTSE World
Europe ex UK
Jupiter
European
Special
Situations
Avoiding overpaying for growth
Source: FactSet / MSCI, 29.08.14. Weighted averages of constituents in euro, ex cash. Based on data availability of between 93.3% and 97.0% for the Fund
and between 80.2% and 99.0% for the benchmark. Past performance is no guide to the future.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
FTSE World
Europe ex UK
19
  The potential benefits of diversification
4%
4%
3%
2%
2%
International reach with reduced political risk
Source: Jupiter, FactSet. Average over 1 month period to 31.08.14.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
Excludes: Austria, Bermuda, Czech Republic, Greece, Hungary, Poland, Portugal, Turkey and US.
Switzerland
Spain
Belgium
Norway
Finland
Italy
Sweden
France
Oil & Gas
Financials
Utilities
Consumer Goods
Telecoms
Industrials
-3%
Basic Materials
−8%
Technology
-2%
Consumer Services
−6%
Germany
-1%
Netherlands
−4%
0%
Ireland
−2%
1%
Luxembourg
0%
Denmark
Average weight
6%
Health Care
Average weight
  Sector and country weightings relative to FTSE World Europe
20
  The potential benefits of diversification
  10-year risk / performance
Jupiter European Special Situations
Annualised performance Aug-04‒Aug-14
16%
14%
FTSE World Europe EX UK Index
12%
10%
8%
IMA Europe Excluding UK
6%
4%
15%
16%
17%
18%
19%
20%
Annualised volatility Aug-04‒Aug-14
A strategy that has outperformed the market over time
Source: FE, bid to bid, net income reinvested, in GBP, 31.08.04‒31.08.14. Past performance is no guide to the future.
The views expressed are those of the fund manager at the time of presenting and may change in the future.
21%
22%
23%
21
  Seeking to generate alpha in European equities
  A consistent approach
Jupiter European Special Situations 190.9%
FTSE World Europe ex UK Index 145.2%
IMA Europe ex UK 133.8%
220%
200%
180%
160%
  Bottom-up stock picking
Growth
140%
120%
100%
  Targeting quality companies
with visible growth
80%
  Strict valuation discipline
40%
  Broad diversification, with
rigorous risk controls
60%
20%
0%
Aug-04
Mar-07
Aug-09
A consistent approach
Source: FE, bid to bid, net income reinvested, in GBP, 31.08.04‒31.08.14.
Past performance is no guide to the future. The views expressed are those of the fund manager at the time of presenting and may change in the future.
Feb-12
Aug-14
22
  How to generate alpha in European equities
Any questions?
23
  Disclosure
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: 1 Grosvenor Place,
London SW1X 7JJ are authorised and regulated by the Financial Conduct Authority whose address is 25 The North Colonnade, Canary
Wharf, London E14 5HS.
This presentation is intended for investment professionals and not for the benefit of private retail investors. However anyone attending the
presentation or who has the opportunity to view the accompanying slides should bear in mind that the value of an investment in a unit trust
and the income from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount
invested. Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the shorter term. Quoted
yields are not guaranteed. Past performance should not be seen as a guide to future performance.
Jupiter European Special Situations: This Fund can invest more than 35% of its value in securities issued or guaranteed by an EEA
state. The Key Investor Information Document (KIID), Supplementary Information Document (SID) and Scheme Particulars are available
from Jupiter on request.
This document contains information based on the FTSE World Europe ex-UK Index. ‘FTSE®’ is a trade mark owned by the London Stock
Exchange Plc. and is used by FTSE International Limited (‘FTSE’) under license. The FTSE World Europe ex-UK Index is calculated by
FTSE. FTSE does not sponsor, endorse or promote the product referred to in this document and is not in any way connected to it and does
not accept any liability in relation to its issue, operation and trading. All copyright and database rights in the index values and constituent
list vest in FTSE.
This document contains information based on the MSCI Europe Index. Neither MSCI nor any other party involved in or related to compiling,
computing or creating the MSCI 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
MSCI, 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 MSCI data is permitted without MSCI’s express written consent.
For your security we may record or randomly monitor all telephone calls. If you are unsure of the suitability of an investment please contact
your financial advisor. Any data or views given should not be construed as investment advice. Every effort is made to ensure the accuracy
of the information but no assurance or warranties are given.
8950_UT_EUR SS_JIC

Download Report