Walter Scott & Partners Limited
¾
Managed global shares for MLC since 2005.
¾
Manages $39 billion as at 31 December 2007.
¾
Over 25 years of funds management experience.
When hiring, Walter Scott often
prefer new graduates straight from
University before their minds
become “polluted” with short term
investment thinking.
Why has MLC selected Walter Scott & Partners Limited as a global
shares manager?
Walter Scott & Partners Limited (“Walter Scott”) has a strong focus on real returns which
differentiate them from many other investment managers. Walter Scott pay no attention to
indices, and practice a disciplined ‘buy and hold’ approach to stock picking. Part of their
competitive edge is they consider the value of stocks over a much longer timeframe than the
rest of the market. This results in unique portfolio of approximately 50 stocks which is
managed by a very close knit, stable team of investment professionals.
Philosophy on investing
Walter Scott’s core conviction is that the return to a shareholder can,
over the long term, be no more than the wealth generated by the
underlying business. Thus the heart of Walter Scott’s investment
process is research, to identify companies capable of sustained high
rates of wealth generation. This is the firm’s primary value-adding
activity. It recognises that the most important investment decision is
‘what to buy’.
Walter Scott’s portfolios are characterised by a long term ‘buy & hold’
approach to stock picking, resulting in low turnover. In this way the
ALAN McFARLANE
investment process largely ignores the input of ‘street’ research
Managing Director
which is often designed to generate turnover and commissions. The
resultant portfolios reflect the firm’s independent investment
judgement, directed by internal research. They are not in any way dictated by the structure of
indices.
Walter Scott undertakes detailed independent research to establish conviction whether a
particular firm will create value in the future. The research focus is on understanding the
drivers of growth.
Investment process
Walter Scott focuses its research on growth companies within various sectors. All stocks are
initially screened to meet certain criteria which helps concentrate the firm’s research efforts by
weeding out unsuitable companies early in the process. Analysis is compiled on historical
financial data as well as the preparation of detailed financial models and forecasts. Through
this Walter Scott seeks to answer the following fundamental questions; Can the business in
question continue to deliver god returns? Can management be trusted? This leads to a bias
away from IPO’s and companies that require a lot of “blue sky” to justify ratings.
A company that demonstrates the ability to sustain self-financed growth, among other things,
may be included in the index agnostic portfolio of around 50 stocks. For the stock to be
included it must receive unanimous support from the investment team.
There are weekly meetings focused on existing holdings and idea generation respectively. By
helping to identify the likely issues that are going to be raised with new ideas, such meetings
help optimise the research focus. Nevertheless, each individual in the team continues to be
personally responsible for a list of holdings continuous monitoring of these holdings is an
important part of their job.
As Walter Scott is insensitive to benchmark weights, holdings are fairly evenly weighted
throughout the portfolio. Holdings above 5% are trimmed and at 1% or lower, they are either
added to or sold. Each member of the team has the ability to influence the portfolio through
championing and successfully getting consensus buy-in on stocks. An investment policy
group oversees the portfolio and channels cash flows within the portfolio.
Investment people
The key people who make decisions on MLC’s portfolio:
Responsibilities
Total Years
Experience
Years
With
Firm
Name
Title
School
Degree
Dr Walter G Scott
Chairman
35
24
Cambridge
University
PhD Nuclear Physics
Alan McFarlane
Managing Director
27
5
Edinburgh University
MA Politics and
Modern History
Ian Clark
Director & Senior
Advisor
43
24
n/a
n/a
Dr Kenneth Lyall
Director
23
23
Edinburgh University
PhD Financial
Economics
Rodger Nisbet
Director
13
13
Dundee University
BA. Hons.
Environmental
Design
James Smith
Director
Centralized Dealing
23
23
Edinburgh University
MA. Hons.
Economics
Pamela J. M. White
Director
Client Administration
& Communications
25
20
Napier University
Computer Studies
Marilyn Harrison
Director
27
24
Glasgow University
Dip. Business Studies
Alistair Lyon-Dean
Chief Compliance
Officer & Company
Secretary
30
14
Edinburgh University
LLB
Charles Macquaker
Investment Manager
Europe
15
15
Buckingham
University
BSc. Econ. Hons.
European Studies
Anthony McDonnell
Investment Manager
Portfolio
Implementation &
Control
13
13
Edinburgh University
MSc. Geographical
Information Systems
Ian Howie
Investment Manager
North America
13
13
Heriot Watt
University
MBA
Jane Henderson
Investment Manager
North America
11
11
St Andrews
University
BSc. Hons. Marine/
Environmental
Biology
Roy Leckie
Investment Manager
Asia
11
11
Glasgow University
BSc. Hons. Statistics
Hilda West
Investment Manager
Europe
12
12
Napier University
BA Business Studies
Christel Brodie
Investment Manager
North America
10
6
Birmingham
Business School
MBA – International
Finance & Banking
Total Years
Experience
Years
With
Firm
Name
Title
Responsibilities
School
Degree
Russell Robles-Thome
Investment Manager
Asia
6
6
Edinburgh/ Heriot
Watt Universities
MSc. Financial
Mathematics
Dr Susannah Lindey
Investment Manager
Asia
4
4
Stirling University
MSc. Investment
Analytics
Jonathan Fu
Investment Manager
Emerging Markets
4
4
Heriot Watt
University
MSc. International
Accounting &
Finance
Keith Bilton
Investment Manager
Centralized Dealing
& Performance
Measurement
10
10
Napier University
BA Hons. Business
Studies
Jamie Mayer
Manager
Portfolio
Implementation &
Control
3
3
n/a
n/a
Brian Reid
Manager
Portfolio
Implementation &
Control
10
10
n/a
n/a
Steven Smith
Senior Manager
Client Accounting
9
7
n/a
n/a
Stuart Haddow
Senior Manager
Client Accounting
8
8
Napier University
HND Engineering
Mark Braid
Manager
Client Accounting
10
3
University of
Abertay
BA Hons. Economics
Kevin Smith
Client Accounting
3
3
Aberdeen University
MA Accounting &
Finance
Emily McDonald
Client Accounting
2
2
Aberdeen University
MSc. Business &
Management
Walter Scott & Partners Limited
Chairman
Dr Walter Scott
IPG
Managing Director
Alan McFarlane
IPG
Company Secretary
& Chief Compliance
Officer
Alistair Lyon-Dean
R&C
Compliance
Officer
Colin Wood
Compliance
Assistant
Carol-Ann Fraser
Company
Accountant
Elizabeth Pearston
Director
Marilyn Harrison
Investment Directors
John Clark
Dr Ken Lyall (R&C)
Rodger Nisbet
IPG
Assistant
Accountant
Joanna Crosby
Compliance/
Business
Continuity
Pamela Hicks
Dealing Director
Jimmy Smith
IPG
Dealing
Manager
Keith Bilton*
Secretarial Team
Sandra Boyle
Amanda Graham
Karen Scott
Robin Strathairn
Investment Team
Charles Macquaker IPG
Ian Howie IPG
Hilda West IPG, R&C
Roy Leckie IPG
Jane Henderson IPG
Russell Robles-Thomé
Christel Brodie
Francis Sempill
Dr Susannah Lindey
Jonathan Fu
Maxim Skorniakov
Jeremy Kitchen
Fraser Fox
Des Armstrong
Lindsay Scott
Yuanli Chen
Murdo MacLean
Alan Lander
Performance
Analysis
Paul Fairley
John Leburn
IPG: Investment Policy Group
R&C: Risk & Compliance Committee
*
Performance Analysis
Authorised and regulated by the Financial Services Authority
Client Accounting Director
Pamela White
Senior
Managers
Steven Smith
Stuart Haddow
Manager
Mark Braid
Client
Accountants
Kevin Smith
Emily McDonald
Trainee Client
Accountants
Claire McGaffin
Steven Gowrie
Chris Inglis
John Young
Scott Collington
Assistant Client
Accountant
Loren Turner
Client
Communications
Support
Camilla Lister
Ruth McMillan
Louise Bilton
Sam Park
Investment Manager Portfolio
Implementation
& Control
Tony McDonnell
IPG / R&C
Managers
Jamie Mayer
Brian Reid
Trainee
Paul Bilton
IT Manager
Hugh Livingston
Stock Story
GLAXOSMITHKLINE
Market Capitalisation:
Sales:
£80bn
£23bn
Balance Sheet as at 31 December 2006
£mn
13,966
3,321
Non-current Assets
Current Position
Shareholders’ Funds
Long Term Debt
Minority Interests
Provisions
17,287
£mn
9,386
4,772
262
2,867
17,287
RECORD
Year end 31 December
Sales
£mn
Operating Profit
Shareholders’ Funds
EPS
ROE
IRR
£
%
2006
23,225
7,808
9,386
2005
21,660
6,874
7,311
2004
19,986
5,756
5,724
2003
21,070
6,050
5,059
2002
21,212
5,680
6,581
0.95
57.4
38.2
0.82
64.1
44.5
0.68
68.3
38.8
0.72
83.0
50.9
0.66
59.7
51.2
BUSINESS & PROSPECTS
GlaxoSmithKline (GSK) is the fourth largest pharmaceutical company in the world.
Geographically, sales are split between the US (47%), Europe (33%) and the rest of the world
(20%). It was formed in December 2000 from the merger of GlaxoWellcome and SmithKline
Beecham. Since 2000, R&D has been restructured into seven Centres of Excellence for Drug
Discovery (CEDDs) which has resulted in dramatically increased productivity. GSK’s
impressive pipeline is now yielding results. Significant cost savings and synergies in
marketing and sales have been achieved since the merger.
Pharmaceuticals accounts for 86% of sales, consumer healthcare 14%. Blockbuster drugs
include Seretide/Advair for asthma, Avandia for Type II diabetes and the antidepressant
Wellbutrin.
Consumer healthcare brands include Ribena, Lucozade and Aquafresh
toothpaste.
GSK has been beset with patent challenges on many of its leading drugs in recent years
(much of which it has weathered extremely well due to product line extensions). The generic
issues are now receding and the focus will turn to the development of the promising pipeline.
INVESTMENT RATIONALE
•
•
•
•
•
•
Strong fundamentals: ROE 57%, IRR 38%, ROTA 52%, highly cash flow generative and
strong balance sheet.
Impressive pipeline, many compounds with blockbuster potential. Exposure to patent
expiry has reduced significantly.
Excellent management team that has successfully integrated two large pharmaceutical
companies.
A significant global sales and marketing force enables efficient distribution of GSK’s
products.
Compelling valuation of 15x 2006 earnings versus peer group average of 28x. It has a
dividend yield of 3.6% and is buying back about £2bn of shares per year – 2.5% of
market cap.
Attention is turning to the pipeline. Growth is expected to accelerate from 2008 onwards
which will lead to a re-rating on the company.
The information contained in this material has been prepared by MLC Limited (ABN 90 000 000 402) and MLC
Investments Limited (ABN 30 002 641 661) and is intended as general information only and is current as at 31 March
2007. It has not been prepared to take into account individual investment objectives, financial situation or investment
needs. Prior to making an investment decision, you should assess whether the information in this material is
appropriate to your particular investment objectives, financial situation or investment needs. It is recommended that
you obtain financial advice specific to your situation before making any financial investment or insurance decision.
Past performance is not indicative of future performance. The future value of your investment may rise and fall with
changes in the market.
An investment with MLC Limited or MLC Investments Limited does not represent a deposit with, or a liability of
National Australia Bank Limited (ABN 12 004 044 937) or other member company of the National group of
companies and is subject to investment risk including possible delays in repayment and loss of income and capital
invested.
None of MLC Limited or MLC Investments Limited or other member companies in the National Group of companies,
or appointed managers guarantee the capital value or performance of any specific investments selected by investors
except where specified in the current disclosure document.