AROUND THE UK Equities WORLD Threadneedle IN 80 MINUTES For professional advisers only Agenda The bigger picture Strategies to take advantage of the environment Three ways to profit 1 THE BIGGER PICTURE How much have we borrowed? 3 Up, up and up again – household, corporate and government debt change by decade, % GDP That 1930s feeling – US debt / GDP across non-financial sectors 350 Portugal Italy Belgium Spain Greece Japan UK France Wtd average 300 250 200 Finland Netherlands Sweden US 150 100 Australia Germany Canada Austria 50 0 1916 -30% 1926 1935 1945 Household 1954 1964 Corporate 1973 1982 Government 1992 2001 2011 GSE Source: CIRA, Citi Investment Research & Analysis as at 30 September 2011 More debt in more sectors in more countries than ever 0% 30% 60% 1980–1990 90% 120% 150% 180% 210% 240% 1990–2000 2000–2010 Source: OECD, national data, BIS, Citi Investment Research & Analysis as at 30 September 2011 No more Mr NICE guy Global Sovereign Inflation slowdown debt contagion Monetary Fiscal UK policy policy economy 4 Coalition Double dip recession Crisis critical Promised land Although we have now become global investors UK companies overseas earnings split (%) Australia / NZ 2% Japan 2% Asia Pacific 12% UK 30% LatAm 3% N.America 24% CEEMEA 6% Source: Citigroup, October 2011 Europe ex UK 21% 5 5 UK equity market valuation 6 …not expensive Trend P/E 1973 – 2012 28 26 24 22 Trend P/E (x) 20 18 16 14 12 10 8 6 4 2 Trend P/E (7% p.a. growth, Apr. '78 base) Source: Mirabaud Securities Ave. post -73 + 1 SD -1 SD Corporate balance sheets 7 In much better position than 2008 So dividend yields are better indicator of value Ex-financials debt to equity (%) 150 15 100 10 % 50 5 0 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Cash on Balance Sheet Cash/ Market cap (RHS) Source: Morgan Stanley Research, 31 December 2011 forecasts 80 70 60 50 40 30 08 09 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012e UK buybacks 90 07 1982 Source: Morgan Stanley Research, 13 January 2012 % of companies to raise DPS 06 forecasts 60 50 40 30 20 10 0 10 11 Source: Morgan Stanley Research, 13 January 2012 All data above based on companies within the MSCI UK Index 12 13 Rolling 12m aggregate UK buybacks £bn £Bn Cash on balance sheets 40 30 20 10 0 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Source: Morgan Stanley Research, 31 December 2011 Jul10 Jan11 Jul11 Dividends – A key part of the total returns 8 In the long-run (reinvested) dividends boost equity returns by around 4% In a lower growth world, dividends and their reinvestment could account for an even greater percentage of real returns than the historic 80% 1400 1200 1000 800 600 400 200 0 86 87 88 89 90 91 92 93 94 95 96 97 FTSE All Share (capital growth only) Source: Datastream as at 31 December 2011 98 99 00 01 02 03 04 05 06 07 FTSE All Share (with income reinvested) 08 09 10 11 Volatility 9 9 Volatility – part of everyday life? 10 10 8 9 7 8 6 7 5 6 4 5 3 4 3 2 2 1 1 Dividend Cover Dividend Yield FTSE All Share Dividend Yield % and UK Equity Market Dividend Cover 0 69 70 72 74 75 77 78 80 82 83 85 87 FTSE All Share Dividend Yield % 88 90 92 93 95 97 98 00 01 03 05 06 08 10 11 FTSE All Share Dividend Cover Source: Thomson Datastream If dividend cover were to normalize, then the yield jumps to nearly 5% theoretically. But companies are wisely retaining more profits for a rainy day! Markets do not go up in straight lines Decade Annualised market period return 1900s 4.90% 1910s -3.80% 1920s 7.80% 1930s 4.30% 1940s 3.80% 1950s 12.90% 1960s 4.40% 1970s -2.30% 1980s 15.60% 1990s 10.70% 2000s -1.20% Positive vs. negative return years Source: Equity Gilt Study of 10 February 2011. UK real returns on equities – gross income reinvested. Average annual rates of return between year ends 11 Volatility is not something new 12 Distribution of real annual equity returns 9 Frequency (number of years) 8 7 6 5 4 3 2 1 0 -50 -40 -30 -20 -10 0 10 Annual return (%) Source: Equity Gilt Study of 10 February 2011 20 30 40 50 60 STRATEGIES TO TAKE ADVANTAGE UK Equities Team – Investment process Idea generation Experience Company meetings External research Broad macroeconomic, thematic and sector views Company research Rigorous fundamental analysis Evaluation of stock in cycle Collaboration and discussion Valuation assessment Analysts grade stocks Portfolio construction Stock conviction Individual stock risk Sector / thematic stance Competition for capital 14 Monitoring and risk control Analysis of downside stock risk Daily risk reports External checks and analytics We have increased our resource base to stay close to companies Leigh Harrison Head of Equities 28 years’ experience Simon Brazier Head of UK Equities 13 years’ experience Richard Colwell Jonathan Barber Dan Vaughan Stephen Thornber1 Healthcare, Media 21 years’ experience Utilities, Property, Chemicals 21 years’ experience Small Caps 17 years’ experience Global Oil 24 years’ experience Aamod Mishra Daniel Belchers2 Tobacco 1 year’s experience Mining 9 years’ experience James Thorne Small Caps 13 years’ experience Chris Kinder Banks, Oil Services, Aerospace 10 years’ experience Mark Westwood Simon Haines Blake Hutchins Stacey Cassidy Travel & Leisure, Telecoms and Food Retailers 13 years’ experience Construction, Other Financials, Housebuilders, Industrials 13 years’ experience Insurance, Consumer Staples, Media 4 years’ experience Mid Cap Oil, General Retailers, Technology 3 years’ experience Neil Finlay Investment Specialist 10 years’ experience Benjamin Malone Dedicated UK Trader 19 years’ experience Christopher Fox Dedicated UK Trader 14 years’ experience Cathrine de Coninck-Smith Governance & SRI Analyst 3 years’ experience Fionnuala O’Grady Junior Governance & SRI Analyst Source: Threadneedle as of January 2012 1 Stephen is attached to the Global Equity Team 2 Daniel is attached to the Commodities Team Support services and Industrials are split between fund managers 15 Valuation analysis has enabled us to invest at the right price 16 Stock performance versus index Stock performance versus index Stock performance versus index 2-year relative performance 2-year relative performance 2-year relative performance We bought here Source: Datastream as at 31 January 2012, in local currency We bought here Source: Datastream as at 31 January 2012, in local currency We bought here Source: Datastream as at 31 January 2012, in local currency Lessons from football transfer market! Buy players with personal problems at a discount Unilever Eric Cantona Reed Elsevier Wolseley Paulo Di Canio 17 Restructuring / recovery 18 Wolseley Performance relative to FTSE All Share Index Building material and lumber product distributor in the US, UK and France 2-year performance 2009 was a very tough year as end markets collapsed and the company needed to rebuild its balance sheet with a rights issue 150 With a rebuilt balance sheet, Wolseley is now a turnaround story with a focus on improving margins and returns on capital. It is not a call on US construction recovery 130 Management is undertaking action to refocus the group on high return areas and to improve low return areas for eventual sale Exiting the downturn Wolseley should demonstrate high operational gearing and strong cash generation Rebased = 100 140 120 110 100 90 80 Jan 10 Jul 10 Jan 11 Jul 11 Source: Datastream as at 31 January 2012, in local currency Jan 12 Lessons from football transfer market! Identify and abandon ‘sight-based prejudices’ Is BAE the next Peter Crouch?! BT Chris Waddle L&G AstraZeneca Peter Crouch He’ll never go anywhere because he doesn’t look like a league ball player” Michael Lewis, ‘Moneyball’ 19 BT 20 Performance relative to FTSE All Share Index Self-help story, with the potential for uncorrelated returns and earnings enhancing net cost savings for many years to come 2 year performance 140 Market has been overly concerned about pension deficit, Global Services outlook and fixed line competition Fibre roll-out and ability to bundle dramatically improving competitive position Strong dividend yield with the potential for further growth 120 Rebased = 100 Current valuation still overly depressed as a result and, whilst performance has improved, does not yet fully reflect management’s successful cost cutting program and BT’s pricing power 130 110 100 90 80 70 Jan 10 Jul 10 Jan 11 Jul 11 Source: Datastream as at 31 January 2012, in local currency Jan 12 THREE WAYS TO PROFIT Threadneedle UK Fund Investment philosophy Aim First quartile over rolling three year periods Risk and reward drives all investment decisions Philosophy Reward derived from valuation and profit opportunity Focus on low business risk rather than index risk Portfolio risk reduced by diversification Index unaware Characteristics Stocks across the market capitalisation spectrum Maximise the Threadneedle research advantage 22 UK Fund performance 23 23 Performance relative to FTSE All Share index 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% May 10 June 10 2.0% Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 1.5% 1.2% 1.0% 1.0% 0.5% Jan 12 1.8% 0.8% 0.7% 0.6% 0.9% 0.5% 0.2% 0.8% 0.7% 0.5% 0.4% 0.0% 0.0% -0.2% -0.5% -0.3% -0.4% -0.4% Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 -0.4% -0.4% -0.3% -1.0% May 10 Jun 10 Jul 10 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Source: Threadneedle as at 31 January 2012. Performance is in £. Fund data For OEICS from 01.04.2010 fund returns are calculated in FactSet using daily official Global Close valuations and daily cash flows. From 01.01.08 until 31.03.2010 returns are based on Global Close (prior to this date official noon prices have been used). Fund data is gross of tax and T.E.R to facilitate comparison with the indices. Fund managed by Simon Brazier from 30 April 2010 Consistent monthly returns UK Income investment approach Yield greater than 110% of FTSE All Share yield Objective Steadily growing distribution Capital growth Plain vanilla Philosophy Manage for total return Construct yield at portfolio level Diversification to manage risk Focus on effective combination of top down and bottom up Characteristics Search for durable investment themes Fundamentally based stock views Invest with conviction, not index constrained 24 Performance overview 25 Threadneedle UK Equity Income Fund Performance of Threadneedle UK Equity Income Fund since inception 35 30.0 30 25 20 % 22.2 22.2 17.2 17.8 15 10.8 10 5 2.5 2.5 2.7 4.2 0.6 0 -0.3 -5 2012 YTD 1 year Threadneedle UK Equity Income Fund 2 years Peer group median Since inception* FTSE All Share Index Source: Morningstar as at 31 January 2012. Benchmark quoted is UK IMA Universe peer group median. Fund data is in £ and is quoted on a bid to bid basis with net income reinvested at bid. Fund data is net of fees. *Since Fund Manager Inception: 28 February 2006 UK Absolute Alpha fund performance – net of fees 27 9% return since inception Fund price vs. FTSE All Share Index 115 110 105 100 95 90 4 Oct 10 17 Nov 10 31 Dec 10 13 Feb 11 29 Mar 11 12 May 11 FTSE All Share (total return) 25 Jun 11 8 Aug 11 21 Sep 11 Threadneedle UK Absolute Alpha Source: Threadneedle as at 31 January 2012. Fund price based on retail net accumulation units 4 Nov 11 18 Dec 11 31 Jan 12 Short stock opportunity – car insurance company Claims inflation finally beginning to impact combined ratio Governmental investigation into industry business practices could undermine supernormal profits Balance sheet does not have resilience due to historic policy of over-distribution Failure in overseas markets and price comparison websites ignored Persistent market share gainer with excellent historic track record Financial metrics consistently better than industry competitors Charismatic CEO 28 Earnings estimate revisions 1.00 140 120 0.75 100 80 0.50 60 40 0.25 20 0.00 0 Dec 11 Sep 11 Jun 11 Mar 11 Dec 10 Sep 10 Jun 10 Mar 10 Dec 09 Sep 09 Jun 09 Mar 09 Dec 08 Source: Mirabaud as at 13 December 2011 Deteriorating Overloved SHORT 1000 600 Nov 11 Aug 11 May 11 Feb 11 Nov 10 Source: Datastream as at 31 December 2011 Aug 10 May 10 Feb 10 Nov 09 Aug 09 May 09 Stock was on 20x peak EPS when position was initiated High dividend yield will prove to be unsustainable Insurance companies have historically traded on low valuations 1400 Feb 09 1800 Nov 08 Expensive Share price (p) Share price UK Equity Team – performance Asset class and IMA sector Fund name 29 29 Quartile performance1 1 year 3 years 5 years Since FM start Threadneedle UK Fund 1 2 1 1 30.04.10 Threadneedle UK Extended Alpha 1 3 1 1 30.11.10 Threadneedle UK Select Fund 1 3 1 1 31.10.06 Threadneedle UK Mid 250 Fund 2 1 1 1 31.01.05 Threadneedle UK Growth & Income 1 2 1 1 31.12.09 Threadneedle UK Smaller Companies Fund 1 2 2 2 30.04.10 Threadneedle UK Equity Alpha Income Fund 1 3 1 1 31.05.06 Threadneedle UK Equity Income Fund 1 3 1 1 28.02.06 Threadneedle UK Monthly Income Fund 1 3 1 2 28.06.02 UK Equity and Bond Income Threadneedle Monthly Extra Income Fund 1 1 1 1 31.12.09 Absolute Returns Threadneedle UK Absolute Alpha Fund 1 - - 1 29.10.10 UK All Companies UK Smaller Companies UK Equity Income Source: Morningstar as at 29 February 2012. Fund data is bid to bid and net of basic rate tax. All fund returns are based in £ 1 Quartile ranks of all funds are shown within their respective peer group sector from within the UK Unit Trust / OEICs Universe Strong performance across a full range of products Important information 30 For Investment Professionals use only, not to be relied upon by private investors. Past performance is not a guide to future performance. The value of investments and any income from them can go down as well as up. Threadneedle Investment Funds ICVC (“TIF”) and Threadneedle Specialist Investment Funds ICVC (“TSIF”) are open-ended investment companies structured as umbrella companies, incorporated in England and Wales, authorised and regulated in the UK by the Financial Services Authority (FSA) as a UCITS scheme. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document or Simplified Prospectus, as well as the latest annual or interim reports, which can be obtained free of charge on request, and the applicable Terms & Conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The following key risks apply to the equity funds: Market Risk: The value of investments can fall as well as rise and investors might not get back the sum originally invested, especially if investments are not held for the long term Currency risk: Where investments are made in assets that are denominated in foreign currency, changes in exchange rates may affect the value of the investments. Volatility risk: The fund may exhibit significant price volatility. In addition, the following key risks apply to the Threadneedle UK Smaller Companies Fund and Threadneedle UK Absolute Alpha Fund: Liquidity risk: The fund invests in assets that are not always readily saleable without suffering a discount to fair value. The portfolio may have to lower the selling price, sell other investments or forego another, more appealing investment opportunity. No capital guarantee: Positive returns are not guaranteed and no form of capital protection applies. Important information cont. 31 The research and analysis included in this document has been produced by Threadneedle for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Any opinions expressed are made as at the date of publication but are subject to change without notice. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The information provided in this presentation is for the sole use of those intermediaries attending the presentation. It may not be reproduced in any form without the express permission of Threadneedle and to the extent that it is passed on, care must be taken to ensure that this is in a form that accurately reflects the information presented here. 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