Unconstrained Investment and
Portfolio Construction
Douglas McDowell
Head of Client Investment Strategies
THIS PRESENTATION IS NOT FOR RETAIL CLIENTS
GLOBAL STOCKMARKET RETURNS SINCE
THE START OF THE DECADE
300
250
MSCI EM Index
200
MSCI World Index
MSCI AC World Index
%
150
MSCI EAFE Index
MSCI Europe Index
FTSE 100
100
S&P 500
50
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg as at 31.01.2012. Past performance is not a guide to future performance. Neptune funds do not replicate a benchmark and holdings
may therefore vary from those in the index quoted. For the reason the above comparison index should be used for reference only.
TAKE A GLOBAL UNCONSTRAINED* APPROACH
•
•
•
Global sector research and understanding of the macro environment is
essential to identify future sector and stock opportunities
Exposure to both non-OECD and OECD economies allows better risk
management
Industry developments over the last 30 years and, in particular, the
craving for ‘measuring’ a manager’s output has led to them, and all those
offering, chasing short-term relative return by constructing sub-optimal
portfolios based on indices or benchmarks and thereby putting an
unnecessary cap on the generation of long-term absolute return
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any
change of our views. *Subject to prescribed regulatory limits.
UNCONSTRAINED* INVESTMENT BASED ON
CONVICTION
•
Investing in best ideas, holding the stocks you want, in the quantities you
want, based on your conviction
•
The resulting increase in active risk may increase expected return
•
Strategic risk is the permanent loss of capital
•
•
Active risk is the short-term volatility around an index or benchmark
Accepting greater active risk (higher volatility) can lead to higher return (and a lowering
of strategic risk)
•
Allows you to take a pragmatic view of absolute diversification
•
It allows you to take a long-term view
*Subject to prescribed regulatory limits. These are Neptune’s views and as such this document is deemed to be impartial research.
We do not undertake to advise you as to any change of our views.
A DIFFERENT APPROACH TO INVESTING
•
•
•
•
•
Global equities are arguably best viewed on a sectoral basis
Fundamental research focused on identifying the ‘winners’ in each
industry
Investors must understand the outlook for global sectors/industries, their
key influences and likely development before assessing an individual
company’s likely operational performance vs. other potential investments,
both inside and outside that sector
It is unlikely that any company, however well managed, can perform well
vs. all other potential investments in an industry whose background is
poor
Without a clear understanding of the industry in which it operates, it is
impossible to fully understand the prospects of a company operating
within it
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any
change of our views.
A SECTOR BASED APPROACH
•
•
•
•
Sector allocation is the key determinant of portfolio construction and, as a
by-product, regional allocation
Sectoral reviews identify their current structure, prevailing 3-5 year trends
and global opportunities
Within the most promising sectors, it is the global companies that tend to
dominate and investors should seek to add value by detailed analysis at
the stock level to identify the most suitable investments.
The aim of individual company research is to find those companies most
likely to benefit from the sector/industry trends identified in sector
research
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any
change of our views.
PORTFOLIO CONSTRUCTION AND THE REAL WORLD
•
Beware of country-based benchmarking
•
•
•
•
•
Too much attention to benchmarks can constrain idea generation and performance
National or regional silos can give you a narrow, historically-based focus
Sector-based research is essential with increasingly ‘globalised’,
interrelated economies
A thorough understanding of global growth drivers alongside industry
dynamics leads to real understanding
Real understanding leads to real conviction
•
Meaningful positions based on knowledge of the company, its peers and its
industry
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any
change of our views.
IT’S NOT A BI-POLAR WORLD
•
Emerging markets (EM) vs. developed markets (DM) dichotomy is the
received wisdom
•
•
•
In reality EM/DM remain interconnected in complex ways
Emerging markets are a collection of vastly different economies
Developed economies’ growth is patchy, but there are some areas of
strength and they are still the home of many fast-growing global industry
leaders
Investing in emerging markets can involve a higher degree of risk. Less developed markets are generally less well regulated than the UK and do not
have the strict standards of accounting and transparency present in developed markets. Some emerging markets may have relatively unstable
governments, economies based on only a few industries and markets that trade only a limited number of securities. As a consequence, both the value
of investments made and the ease of which the underlying securities can be bought and sold may be adversely effected.
ECONOMIES ARE NOT MARKETS
•
•
OECD economies are predominantly
•
Domestic
•
Consumer-orientated
•
Net borrowers
OECD markets are predominantly
•
Global
•
Business-orientated
•
Net savers
Source: Google Images, July 2011.
INVESTMENT IN COMPANIES, NOT IN COUNTRIES
•
Japan’s business community ranked 1st overall (World Economic Forum
Report 9.10.10)
•
•
•
•
1st in 4/9 categories
Top 4 in three more
9th and 13th in the other two categories
Many Japanese firms:
•
•
•
•
Dominate their global sectors
Higher exposure to non-OECD markets vs. their US/EU rivals
Translational gains from yen weakness
Sales and operating profits derived from overseas (41% & 44% respectively).
Source: Neptune Research & Nikkei 225 Index as at 2010.
ASSESSING POTENTIAL GROWTH OPPORTUNITIES
•
•
•
•
Reflect the well-diversified and increasingly inter-dependant economic
growth across both developed and emerging markets
Understand both the drivers and distribution of future growth
Equally important to understand the varying stages of economic
growth of emerging markets…
…and their idiosyncrasies
•
The BRICs are not all same and they are often very different from countries on
the ‘frontier’
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any
change of our views.
STOCK SELECTION
•
•
•
•
Company analysis assesses the growth outlook over 3-5 years,
focusing on ROE and ROCE, margin history, balance sheet strength
and free cash-flow and management’s record in capital allocation
Those companies (potential investments) thus identified are then
subject to a proprietary valuation tool which is the prime determinate of
ultimate inclusion in a portfolio
The ultimate determinate of a holding’s size is the strength of
conviction
Aiming to buy strong companies within preferred sectors at good
valuations, coupled with the rigid sell discipline is the bottom-up
contributor to performance
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any
change of our views.
PORTFOLIO CONSTRUCTION AND CONTROLS
•
Truly unconstrained*, with a significant tracking error
•
Weightings not based on index weightings but on conviction
•
Entire process focused on portfolio risk
•
Sector constraints and guidelines
•
No geographic restrictions
•
Where a company is listed is largely an accident of history
*Subject to prescribed regulatory limits.
EMERGING MARKET OPPORTUNITIES
•
BRIC’s economic strength is dominating the outlook for global growth
•
•
•
We believe BRICs will account for two-thirds of global growth over the next 5 yrs
Economic outlook remains robust, especially when compared to
developed markets
•
•
•
Steep change in balance of economic power
No constraints from deleveraging → new credit cycle beginning
Rapidly reducing reliance on OECD for growth
Divergent emerging vs. developed market performance a reflection of
misunderstanding/distrust of Chinese economic policy
Source: Neptune Research, August 2012. These are Neptune’s views and as such this document is deemed to be impartial research. We do not
undertake to advise you as to any change of our views. Past performance is no guide to future performance. Investing in emerging markets can involve a
higher degree of risk. Less developed markets are generally less well regulated than the UK and do not have the strict standards of accounting and
transparency present in developed markets. Some emerging markets may have relatively unstable governments, economies based on only a few
industries and markets that trade only a limited number of securities. As a consequence, both the value of investments made and the ease of which the
underlying securities can be bought and sold may be adversely effected. Please remember that forecasts are not a reliable indicator of future
performance.
THE WORLD OF EMERGING STOCKMARKETS 1991
Market capitalisation in US$ billions
Source: Emerging Stock Markets Factbook 2011
16
. . . AND 20 YEARS LATER
Emerging markets total market capitalisation in 2011
Poland, $212 bn
Czech Republic, $53 bn
Turkey, $282 bn
China, $3,768 bn
Russia,
$1,048 bn
Hungary, $33 bn
South Korea, $1,140 bn
Mexico, $458 bn
Morocco,
$66 bn
Taiwan, $875 bn
Peru, $91 bn
Malaysia, $435 bn
India,
$1,506 bn
Colombia, $212 bn
Chile, $337 bn
South Africa,
$515 bn
Brazil, $1,532 bn
Source: Bloomberg, June 2011
Egypt, $70 bn
Indonesia, $407 bn
Thailand,
$276 bn
NEPTUNE GLOBAL EQUITY FUND
ASSET ALLOCATION
Materials
10.8%
Industrials
14.7%
Cash
0.6%
Energy
14.5%
Consumer Staples
22.5%
Consumer Disc
16.2%
Telecoms
1.5%
Financials
4.9%
IT
14.3%
US
50.5%
UK
9.1%
China
10.9%
Russia
12.7%
Hong Kong
5.0%
Japan
3.3%
Norway
2.5%
France
2.3%
Switzerland
1.6%
Mexico
1.5%
Cash
0.6%
Research process leads to conviction in leading companies
Source: Neptune as at 30.09.12. This Fund may invest more than 35% in government and public securities in a number of jurisdictions.
For further details please see the Prospectus.
TOP DECILE IN 8/10 CALENDAR YEARS ENABLING
A RETURN OF 165% SINCE LAUNCH (4/91)
Period
To 30.09.12
Neptune Global Equity Fund
IMA Sector Average
MSCI World
% return
Quartile ranking
% return
% return
YTD
2.99
4
7.64
9.29
2011
-17.77
4
-9.58
-4.31
2010
22.43
1
16.41
15.87
2009
33.91
1
23.44
16.45
2008
-38.83
4
-24.24
-17.39
2007
29.85
1
10.42
7.72
2006
18.06
1
8.26
5.83
2005
56.66
1
26.61
23.04
2004
16.86
1
8.97
7.46
2003
31.44
1
21.78
20.29
2002
-15.45
1
-25.08
-27.26
Source: Lipper as at 30.09.12, A Accumulation share class performance, IMA Global sector, in sterling with net income reinvested and no initial charges. Calendar year performance as at the end of each year. The
performance of other share classes may differ. Launch date: 31.12.2002. This Fund may have a high historic volatility rating and past performance is not a guide to future performance. Investments in emerging markets
are higher risk and potentially more volatile than those in established markets. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients
may not get back the original amount invested. IMA sector averages and rankings may change at any time as a result of closure, movement between sectors or price amendments by competitor funds. The discrete
calendar year’s performance provided represents the Fund’s ranking at the close of that particular year. Neptune funds are not tied to replicating a benchmark and holdings can therefore vary from those in the index
quoted. For this reason the comparison index should be used for reference only.
NEPTUNE GLOBAL EQUITY FUND LONG-TERM
PERFORMANCE ATTRIBUTION
900
Global Equity EM carve out
800
Global Equity DM carve out
700
MSCI EM TR Index
600
MSCI World TR Index
500
% 400
300
200
100
0
Q4 01
Q4 02
Q4 03
Q4 04
Q4 05
Q4 06
Q4 07
Q4 08
Q4 09
Q4 10
Q4 11
Source: Neptune and Bloomberg as at 30.09.12 in local currency. This Fund may have a high historic volatility rating and past performance is not a
guide to future performance. Investments in emerging markets are higher risk and potentially more volatile than those in established markets. The value
of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the
original amount invested. Neptune funds are not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this
reason the comparison index should be used for reference only.
Appendix
21
NEPTUNE INVESTMENT TEAM
Rob Burnett
Chris Taylor
Felix Wintle
Head of European Equities
Financials Sector
Head of Research
Head of US Equities
Healthcare Sector
Douglas Turnbull
George Boyd-Bowman
Ian Sealey
James Dowey
Chief Economist
Mark Martin
Thomas Barber
Paul Caruana-Galizia
Economist
Healthcare Sector
Financials Sector
Thomas Sinclair
William Rice
Ben Pennington
James Hackman
Leonard Cripps
Kate Trowbridge
David Nelson
Oil & Gas Sector
Ted Alexander
Kunal Desai
William Balfour
Technology & Telecoms Sector
Emma Stanford
Thomas Smith
Chemicals & Utilities Sector
Douglas McDowell
Head of
Client Investment Strategies
Consumer Sectors
Robin Geffen
CEO
Fund Manager, Global Equities
Rebecca Young
Scott MacLennan
Industrials Sector
Ewan Thompson
Head of EM Equities
Shelley McKeaveney
Ben Myers
Mining & Metals Sector
Alex Breese
Head of UK Equities
Industrials Sector
INVESTMENT PROCESS OVERVIEW
INVESTMENT
UNIVERSE
3 PARALLEL STREAMS
OF RESEARCH
PORTFOLIO
CONSTRUCTION
PORTFOLIO MONITORING
AND RISK CONTROL
•
•
•
•
•
Country Reviews
Global Sector
Matrix
Global Sector
Reports
Company Valuations
WEEKLY MEETING CYCLE
Common sense approach
Efficient Diversification
Concentrated portfolios
Investment restrictions
Pre-trade checks
GLOBAL PORTFOLIO
Highest Conviction
Stocks
•
•
•
•
•
Ongoing monitoring
Target prices
Sell discipline
Performance and risk analysis
Post-trade checks and review
CONTACT DETAILS
Neptune Investment Management Limited
3 Shortlands, London, W6 8DA
Tel: +44 (0)20 3249 0100
Fax: +44 (0)20 3249 0123
sales.enquiries@neptune-im.co.uk
www.neptunefunds.com
Phil Horton, Sales Manager, Nationals & Networks +44 (0)20 3249 0171
Catherine Ferguson, Sales Support
+44 (0)20 3249 0213
Calls may be recorded for monitoring and training purposes and for your protection
IMPORTANT INFORMATION
This document is issued by Neptune Investment Management Limited (“Neptune”), 3 Shortlands, London, W6 8DA which is authorised and regulated by the
Financial Services Authority, FSA number 416015. Details of Neptune's regulatory status and authorisation by regulators in other countries are available from us on
request. The Neptune web address is www.neptunefunds.com
Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or
completeness. These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of
Neptune's views. Neptune Investment Management Limited has not produced this report for Retail Clients. It is for private circulation to Investment Professionals
only and is not for onward distribution. All information is given in good faith but without any warranty.
Neptune Funds are available to any persons that may be marketed to under the Financial Services and Markets Act (Promotion of Collective Investment Schemes)
(Exemptions) Order 2001. Retail Clients should contact their Independent Financial Adviser or other authorised intermediary.
This communication is only intended for persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.
The provision of investment services may be restricted in certain jurisdictions. You are required to acquaint yourself with any local laws and restrictions on the
availability of any services described.
Please check whether such products are available in the country in which your clients are resident. None of the Neptune products are available to residents in the
United States.
Some Neptune funds may have a high historic volatility rating and past performance is not a guide to future performance. The value of an investment and any
income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. These funds
may invest more than 35% in government and public securities in a number of jurisdictions. Forecasts are not a reliable indicator of future performance. Investments
in emerging markets are potentially higher risk than those in developed markets.
The current Prospectus, Key Investor Information and Supplementary Information Documents and most recent annual and semi-annual reports can be obtained by
calling 0800 587 5051 or downloaded from www.neptunefunds.com.
Any past performance data that has not been shown is due to the information not being available. Neptune does not give investment advice and only provides
information on Neptune products.
25