1 - Around the World in 80 Minutes

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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.
Threadneedle Investment Services Limited,
60 St Mary Axe,
London EC3A 8JQ,
Registered no. 3701768.
Authorised and regulated in the UK by the Financial Services Authority.
Threadneedle is a brand name, and both the Threadneedle name and logo
are trademarks or registered trademarks of the Threadneedle group of
companies
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