breakout 4 - quality equities - w lock m naylor l bottega ......(2) years of investment experience /...
TRANSCRIPT
For Exclusive Use at the Ideas 2013 Conference – 26th February 2013
William Lock, Co-Head of International Equity & Global FranchiseLaura Bottega, Portfolio Specialist, International Equity TeamMaggie Naylor, Portfolio Specialist, International Equity Team
Quality Equities
2For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Portfolio Management TeamAs of January 1, 2013
(1) AUM data as of December 31, 2012. The assets under management figures include assets managed globally under this strategy within a number of separate products, jurisdictions and mandates. Team as of December 31, 2012.
(2) Years of investment experience / Years on International Equity Team. (3) Years of investment experience (7 years as a consultant, 12 years in financial services) / Years on International Equity Team. (4) Years of investment experience / Years with the Firm. Team members may change from time to time.
Boutique within Morgan Stanley Investment Management
Senior portfolio managers have worked together since 1996
Team combines fundamental research with portfolio management
Portfolio specialists link portfolio team to client
John GoodacreExecutive Director
(12/10 years)
Vladimir DemineExecutive Director
(11/4 years)
Marcus WatsonSenior Associate
(5/5 years)
Alex GabrieleSenior Associate(4/1 year)
Christian DeroldManaging Director
(21/7 years)
Yiwen Li Associate (4/1 year)
Bruno Paulson (3)
Managing Director (19/4 years)
William Lock – Co-HeadManaging Director (21/19 years)
Peter Wright – Co-HeadManaging Director (26/17 years)
Portfolio Management Team (2)
Portfolio SpecialistsLaura Bottega
Executive Director (15/7 years) (4)
Monica CartaVice President (7/11 years) (4)
Cathy ColecchiManaging Director (17/14 years) (2)
Munenori YoshimiExecutive Director (19/14years) (4)
Global Franchise PortfolioUS$15.6Bn Assets Under
Management (1)
Portfolio SpecialistsCathy Colecchi
Managing Director (17/14 years) (2)
Nancy Jean NortonExecutive Director (30/10 years) (4)
Allison ScholarVice President (17/17 years) (2)
Sean McDermottVice President (9/1 year) (2)
International Equity PortfolioUS$18.3bn Assets Under
Management (1)
Portfolio Specialists (4)
Maggie NaylorManaging Director (24/26 years)
Alistair Corden-LloydExecutive Director (12/16 years)
Anna BaronSenior Associate (12/12 years)
Global Quality
3For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Primary Research ResponsibilitiesAs of January 1, 2013
(1) Dual coverage by Peter Wright and Christian Derold.(2) Dual coverage by William Lock and Vladimir Demine.(3) Dual coverage by John Goodacre and Bruno Paulson.(4) Dual coverage by Peter Wright and John Goodacre.
Generalist stock pickers with sector responsibilities
Sector rather than geographic coverage
Chart denotes primary responsibilities but high degree of cross coverage and overlapping responsibility
Identify and leverage best external resources
Peter Wright
Valuation ScreensSell-Side Analysts
Industry Consultants
External Resources
TradingGlobal Fixed Income
Morgan Stanley Offices
Internal Resources
William Lock Christian Derold John Goodacre Vladimir DemineBruno Paulson Marcus Watson
Other Consumer
Discretionary
Telecoms
Energy (4)
Materials (1)
Consumer Staples (2)
Media Utilities
Financials (3)
Retailing
Health CareConsumer Staples (2)Financials (3)
Technology
Energy (4)
Industrials
Materials (1)
Autos
4For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Franchise Strategy
A concentrated high quality global portfolio of companies with sustainable high ROIC from dominant “intangible assets” such as brands
…companies with shareholder-friendly managementswho will allocate capital to help protect the franchises
… purchased at the right priceOur cash flow-driven valuation means we are less likely to overpay for stocks
…a strategy that is managed by a disciplined, stable and experienced investment team with the AUM and relationships that help ensure access to company management
Key Highlights
Source:Morgan Stanley Investment Management. There is no guarantee that the strategy will achieve its benchmark. Past performance is no guarantee of future results.
Key benefit of our robust bottom up, research based process has beenstrong historic long-term returns, and a measure of downside protection relative to the index / benchmark
5For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
How We Find Compounders
Definitions: ROIC= EBIT / PPE + trade working capital. Free cash flow = operating cash flow minus capital spending, working capital growth, interest and taxes
Intangible assets – portfolio of strong brands, copyrights, licenses or networks Dominant market shares helping to protect against new entrants Stable sales – often through repeat business driving recurring revenues Geographic spread Steady organic growth
2. Make Sure Returns can be Sustained
High and unlevered returns on invested capital (ROIC) High gross margins (pricing power) Capital-light business models driving free cash flow (FCF) generation Balance sheet strength
1. Find High Return Companies
Committed to innovation and investment in brands Focus on returns on capital rather than sales or EPS growth Capital discipline (reinvest FCF at a sustainably high ROIC or return the
excess capital to shareholders) Wary of “strategic” acquisitions and incentives unaligned with shareholders
3. Check Management Looking to Sustain
Returns
6For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
0%
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4%
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1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 20110%
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6%
8%
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16%
Nestlé’s Economic Performance Looks Boring…
Organic Growth
Data as of December 31, 2011. Source: From 1989 to 2010 RBS / from 2011 onwards Nestle Annual Report. Data shown is for a 22 year period from 1989 to 2011. This example is provided for illustrative purposes only. This should not be construed as a recommendation, but as an illustration of a broader theme. Past performance is no guarantee of future results. Within an investment portfolio, this security would be one of many holdings and is not representative of how all holdings in a portfolio would have, or will, perform. The portfolio did not hold this security during the entire time period reflected above and may have bought and sold the security (at a gain or loss) at various points thorough this period. There is no guarantee securities will perform well and compound shareholder returns over time.
Nestle economics have been very stable over the last two decades
Organic sales growth generally 4 – 7%. No year saw a fall in organic sales
Slow but steady rise in trading margin from 11% to 15% and minimal volatility in face of economic cycles and input price spikes
Importantly, steady progress has been at sustained high ROIC
Trading Margin
Organic Growth Trading Margin
7For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
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…But Compounding Has Driven Very Strong NestléShareholder ReturnsCumulative Returns – Dividends Reinvested
Source:From 1989 to 2010 RBS / from 2011 onwards Nestle Annual Report. Data shown is for a 22 -year period from 1989 to 2011. This example is provided for illustrative purposes only. This should not be construed as a recommendation, but as an illustration of a broader theme. Past performance is no guarantee of future results. Within an investment portfolio, this security would be one of many holdings and is not representative of how all holdings in a portfolio would have, or will, perform. The portfolio did not hold this security during the entire time period reflected above and may have bought and sold the security (at a gain or loss) at various points thorough this period. There is no guarantee securities will perform well and compound shareholder returns over time.Data as of 31st December 2011
(1) TSR is Total Shareholder Return.
Of 12.5% annualised TSR, 1 – 2% from rerating. Other 11 – 12% from compounding
Annualised TSR (1) = 12.5% (in Swiss Francs)
8For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
How We Avoid Paying Too Much
Source:MSIM / Internal firm reports as o January 29th,, 2013. Forecasts / estimates are based on current market conditions, subject to change, and may not necessarily come to pass
Two routes to permanent loss of capital:1) Permanent disappearance
of free cash flows2) Permanent disappearance
of multiples
We try to avoid both forms of permanent loss
Focus on free cash flow rather than earnings Free cash flow pays for dividends and buy-backs Non-cash earnings often a danger signal
Reluctant to pay too high a multiple of free-cash flow Share prices over 20 times free cash-flow assume fast growth Disappointments on future growth can permanently hit share prices
Portfolio currently priced at 16 times 2014 Free Cash Flow or 6.2% FCF yield vs. 2.0% for U.S. government bonds
9For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
We Worry About Permanent Loss of Capital
Franchise vulnerable to disruption New or better mousetrap Patent or license expiry Dependence on single brand or product Lack of recurring revenues Top-line demand macro sensitive
Regulatory risk Governments attacking monopoly positions Very profitable companies a natural target
Management risk Insufficient innovation / A&P (1) spend Poor pricing policies Failing to focus investment on high ROIC areas ‘Strategic’ M&A / EPS targets at expense of ROIC Management remuneration
Overpaying
Risks We Worry About
Tracking error Missing out on latest investment trend Short term macro noise
Risks We don’t
(1) Advertising and Promotion
10For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
68.8
15.0
4.7
4.3
2.9
0.8
0.0
0.0
0.0
0.0
3.5
10.6
11.9
10.5
11.0
20.3
11.1
10.3
7.0
3.8
3.5
Consumer Staples
Information Technology
Health Care
Industrials
Financials
Consumer Discretionary
Energy
Materials
Telecommunication Services
Utilities
Cash
No Benchmark Hugging Here!Concentration Reflects Scarcity of Companies that Meet Philosophy Criteria
Sector Weightings (1)
Global Franchise Representative Account
Source:Morgan Stanley Investment Management Limited
(1) Data as of December 31, 2012. Sector Weightings are provided for informational purposes only and should not be deemed as a recommendation to buy or sell securities within the sectors mentioned. Up to the three largest holdings are stated for each sector. Holdings and weightings are subject to change. Each portfolio may differ due to specific investment restrictions and guidelines.Individual results will vary.
(2) The views and opinions expressed herein are those of Morgan Stanley Investment Management Limited.This information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
Sector weights driven by bottom-up stock selection
Capital intensive or strongly cyclical businesses (e.g., Materials, Energy, Utilities, Telecoms) do not ordinarily generate sustainably high ROIC
Financials generally have low unleveraged returns (2)
Technology and Healthcare may be subject to rapid product obsolescence or patent expiry (2)
Global Franchise Representative Account MSCI World
Nestle, British American Tobacco, Unilever
Accenture, Microsoft, SAP
Legrand, Experian, Kone
Sanofi
Moody’s, Admiral
Nike
11For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Top Ten Equity HoldingsMorgan Stanley Global Franchise Representative Account
Top ten holdings illustrate companies with: Dominant intangibles Historically high return, repeat
businesses Portfolio concentration
Data as of December 31, 2012
4.5United StatesAccentureAccenture
4.7FranceLantus, Fluzone, PENTAct-HIB – DTP, Frontline, AllegraSanofi
9.6SwitzerlandNestlé, Nescafe, Maggi, Nesquik, Gerber, Milo, FriskiesNestlé
6.0United KingdomRizla, West, Lambert & Butler, Fortuna, Gauloises Blondes, Richmond, DavidoffImperial Tobacco
9.5United KingdomDunhill, Pall Mall, Kent, Lucky Strike, RothmansBritish American Tobacco
4.2United StatesPampers, Gillette, Olay, Crest, ArielProcter and Gamble
Security Name Intangible Assets Country (%)
Unilever Dove, Lux, Axe, Hellmans, Knorr, Lipton, Omo United Kingdom 7.1
Reckitt Benckiser Airwick, Calgon / Finish, Dettol / Lysol, Spray'n'Wash, Vanish, Veet, Woolite United Kingdom 6.7
Philip Morris Intl Marlboro, Chesterfield, L&M, Philip Morris United States 4.5
Microsoft Office, Windows, Xbox, Skype United States 4.2
Total: 61.0
Source:Morgan Stanley Investment Management LimitedInformation shown is based on the strategy's representative account. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities referenced or securities within the countries shown. Holdings and weightings are subject to change. Each portfolio may differ due to specific investment restrictions and guidelines. Portfolios are actively managed, therefore, the holdings listed may or may not be currently represented in each portfolio. This information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
12For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Significant Movements in the PortfolioMorgan Stanley Global Franchise Representative Account
Major Transactions: January 1, 2012 to December 31, 2012 (1)
Scotts Miracle-GroKoneUnileverDiageo
Dr Pepper Snapple
KelloggVisaSAPSanofi
NovartisLegrandKraft (2)Nike
Initial Purchases Additions Reductions Final Sales
Imperial Tobacco Philip Morris Intl Hillshire Brands (3)
Swedish Match Admiral
Source:Morgan Stanley Investment Management Limited
(1) All information is provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned. Morgan Stanley Global Franchise Representative Account. There is no guarantee that the securities shown, or holdings in general, will perform well. Holdings are subject to change.
(2) Kraft split into Mondelez and Kraft Foods. We continue to own both stocks.(3) Sara Lee split into DE Master Blenders and Hilshire Brands. DE Master Blenders is still in the portfolio. We sold our position in
Hillshire Brands.
13For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Pharmaceuticals – More Investible Today
Some companies are also diversifying into longer duration franchises: consumer health (strong brands), animal health and vaccines (where manufacturing complexity is a barrier to entry)
Growth contribution from Emerging Markets to Global Pharma Market expected to be >70%
Stock selection remains critical: Sanofi passes through the trough of “patent cliff” this year, and has a leading position in emerging markets, a diversified mix of consumer health, animal health and vaccines, and excellent diabetes franchise with market leading Lantus
Pharma is high ROIC, high gross margin, low capital intensity, low leverage – but patent expiry raises questions about sustainability of returns…the key reason we haven’t invested in the sector to date
Much anticipated industry “patent cliff” (2010 – 2014) has seen the sector derate from 30x PE in late 90s to recent lows of 10x. Through the patent cliff we see another 10 – 12 year window of renewed visibility with an opportunity for strong revenues, profits, cash flows and dividends. We expect pharma companies to rerate
94 96 98 00 02 04 06 08 10
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40Pharmaceuticals Biotechnology & Life Sciences Industry Group
MSCI Industry ValuationThe World Index: Price to Earnings - LTM High: 38.7May 31, 1994 - Jul 31, 2012 Low: 12.4
Last: 16.8
Chart Source: FactSet Chart Date: July 31, 2012
Source:Sanofi company presentation, June 1, 2012Past performance should not be construed as a guarantee of future performanceFor illustrative purposes only. Forecasts / estimates are subject to change and may not necessarily come to pass. (Consider alsoupdating data, which is from July 31, 2012). The views and opinions are those of the portfolio management team as of the date of this presentation and are subject to change at any time due to market or economic conditions.
14For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Plain Packaging in Australia: Not a Game Changer
1976 1989 1989 1991 1994 1996 2004 2006 2007 2010
TV/Radio banned
Outdoor ads banned
Printmediaban
POSban
Increasedsize of Govt healthwarning
Sponsor-ship ceases
Start of outdoor smoking bans
Graphic health warnings
Indoorsmoking bans
Start of retail display bans25% adhocexcise increase
Industry Net Turnover Aus $m Volumes Billion Sticks
1976 1989 1989 1991 1994 1996 2004 2006 2007 2010
TV/Radio banned
Outdoor ads banned
Printmediaban
POSban
Increasedsize of Govt healthwarning
Sponsor-ship ceases
Start of outdoor smoking bans
Graphic health warnings
Indoorsmoking bans
Start of retail display bans25% adhocexcise increase
Industry Net Turnover Aus $m Volumes Billion Sticks
Source:BAT, Jefferies
(1) Date: May 2012. The views and opinions are those of the portfolio management team as of the date of this presentation and are subject to change at any time due to market or economic conditions. Most recent data available used. Past performance should not be construed as a guarantee of future performance. For illustrative purposes only.
Tobacco Sales Continued to Grow Despite Increasing Restrictions
15For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Country Weightings
What a company does and where it does business is more important than where it is listed
Country weights are a residual of our search for great businesses
Currency hedging may be utilized for defensive purposes only
Source:Morgan Stanley Investment ManagementData as of December 31, 2012. Each portfolio may differ due to specific investment restrictions and guidelines. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell securities within the regions and countries shown. Holdings and weightings are subject to change.This information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
0.1 0.0 Ireland
Region Global Franchise Representative Account (1) (%) MSCI World Net Index (1) (%)
North AmericaUnited States 33.3 52.5 Canada 0.0 4.9
Total 33.3 57.4Europe non-Euro
United Kingdom 35.5 9.6 Switzerland 9.6 3.7 Sweden 3.6 1.4 Denmark 0.0 0.5 Norway 0.0 0.4
Total 48.7 15.6Europe Euro
France 6.3 4.0Germany 4.0 3.8 Spain 0.0 1.3 Netherlands 1.9 1.1 Italy 1.1 1.0Belgium 0.0 0.5 Finland 1.2 0.3 Austria 0.0 0.1
Portugal 0.0 0.1 Greece 0.0 0.0
Total 14.5 12.3Asia / Pacific
Japan 0.0 8.5 Australia 0.0 3.8 Hong Kong 0.0 1.3 Singapore 0.0 0.8 New Zealand 0.0 0.1
Total 0.0 14.5Africa / Mideast
Israel 0.0 0.2 Total 0.0 0.2
Cash 3.5 0.0
16For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Indirect Exposure to Emerging Markets, Without Overpaying for it
Weighted Regional Exposure – Percentage of Company Sales (1)
Representative Account
29%
2%
32%
5%
32%
Selected Company EM Exposure BAT 68% Herbalife 53% Mead Johnson 51% Unilever 50% Philip Morris 49% Nestlé 40% Legrand 35% Procter and Gamble 34%
North America
Western EuropeJapan
Other Developed Markets
Emerging Markets
Source:MSCI and FactSet
(1) This is a representative account of the Global Franchise Strategy. Each portfolio may differ due to specific investment restrictions and guidelines. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell securities mentioned and securities in the countries shown. Holdings and weightings are subject to change.
(2) Securities shown are for illustrative purposes only and percentages represent the weighted average based on revenues from emerging market sales.This information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
17For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
13.88
6.87
12.3514.58
15.83
6.93
(1.18)
7.515.21
16.26
(4.00)(2.00)0.002.004.006.008.00
10.0012.0014.0016.0018.00
1-Year 3 Years 5 Years 10 Years Since inception
ReturnsMorgan Stanley Global Franchise Composite (1)
Average Annual Returns for period ending December 31, 2012 – Presented in US$ Terms(%)
Source:Morgan Stanley Investment Management Limited
(1) Past performance should not be construed as a guarantee of future performance. Performance returns reflect the average annual rates of return. Periods less than 1-year are not annualized. Please refer to the Global Franchise Composite Disclosure document for additional information. The composite results shown are NET of investment advisory / management fees, are quoted in US$ and include the reinvestment of dividends and income. The comparison index is the MSCI World Index with Net dividends reinvested. The inception date of the Global Franchise Composite is March 31, 1996. Individual results will vary.The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
Global Franchise Composite MSCI World
18For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
100
1,000
Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
The Power of Compounding...Morgan Stanley Global Franchise Composite (1) – US$ Terms
[ ]
($)
$100 invested in the portfolio since inception, worth $981 as of December 31, 2012, vs. $234 invested in the index
200
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600
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Global Franchise Composite Cumulative MSCI World Index Rebased to 100
MSCI World Index
Global Franchise
Source:MSCI, Morgan Stanley Investment Management
(1) The portfolio returns represent the Morgan Stanley Global Franchise Composite and is provided for solely to illustrate the long track record of the team. Please refer to the Global Franchise Composite Disclosure for additional information. The composite results shown are GROSS of investment advisory / management fees, are quoted in US$ and include the reinvestment of dividends and income. If fees had been applied returns would have been lower. Each portfolio may differ due to specific investment restrictions and guidelines. Accordingly, individual results will vary. The comparison index is the MSCI World Index with Net dividends reinvested. The inception date of the Global Franchise Composite is March 31, 1996. The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
19For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
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31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 31/12/2006 31/12/2007 31/12/2008 31/12/2009 31/12/2010 31/12/2011 31/12/2012
…Based on Compounding EarningsTrailing 12 Months Earnings Morgan Stanley Global Franchise Representative Account (1) vs. MSCI World
[ ] Global Franchise earnings growth (dividends reinvested) has outpaced that of MSCI World, compounding at 14% over the last decade with stable growth vs. 12% for the MSCI World
Global Franchise Representative Account
MSCI World Index Earnings data rebased to 100 at 31/12/2001
($)
Source:Factset, MSCI, Morgan Stanley Investment Management
(1) As of December 31, 2012. Past performance should not be construed as a guarantee of future performance. Trailing earnings calculated as Portfolio Returns divided by trailing Price Earnings Ratio. The portfolio returns represent the Morgan Stanley Global Franchise Representative Account. The representative account results shown are NET of investment advisory / management fees, are quoted in US$ and include the reinvestment of dividends and income. The inception date of the MS Global Franchise Rep Account is October 30, 2000. The comparison index is the MSCI World Index with Net dividends reinvested. ach portfolio may differ due to specific investment restrictions and guidelines. Accordingly. individual results will vary. The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
20For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
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Record of Outperforming in Tough TimesMorgan Stanley Global Franchise Composite (1) – US$
Rolling 3-Year Periods Since Inception Through December 31, 2012Quarterly Data
This strategy has historically matched the index in strong return years
Most significant outperformance concentrated in down markets when it’s needed most
MSCI World Index Returns (%)
Dec 2012
Source:Morgan Stanley Investment Management Limited
(1) Past performance should not be construed as a guarantee of future performance. The portfolio returns represent the Morgan Stanley Global Franchise Representative Account. The Global Franchise Representative Account represents the longest track record available for this strategy. Each portfolio’s characteristics may differ due to specific investment restrictions and guidelines. Accordingly, individual results will vary. Performance figures are presented GROSS of investment advisory / management fees , are quoted in US$ and include the reinvestment of dividends and income. If fees had been applied, returns would have been lower. Theinception date of the Morgan Stanley Global Franchise Representative Account is October 30, 2000. The comparison index for the Morgan Stanley Global Franchise Representative Account is the MSCI World Index with Net dividends reinvested.The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
Global Franchise Returns (%)
21For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
12 Months Performance AttributionMorgan Stanley Global Franchise Representative Account – US$
Rolling 12 Months Cumulative Returns to December 31, 2012 (1) (2) (3) (4)
Sector Performance Average Sector Weightings Performance AttributionPortfolio (%) Index (%) Portfolio (%) Index (%) Selection (%) Allocation (%) Total (%)
Information Technology 28.33 13.30 14.74 12.49 1.92 0.03 1.96
Energy – 1.87 – 10.93 – 1.48 1.48
Industrials 33.68 16.02 7.18 10.94 1.19 (0.08) 1.12
Utilities – 1.82 – 3.64 – 0.55 0.55
Telecommunication Services – 6.37 – 4.05 – 0.40 0.40
Health Care 24.36 17.54 1.97 10.46 0.53 (0.20) 0.33
Materials (17.17) 11.29 0.56 7.00 (0.14) 0.26 0.11
Consumer Discretionary 8.46 24.31 0.12 10.79 0.04 (0.75) (0.71)
Financials 53.67 29.36 3.13 18.86 0.66 (1.89) (1.23)
Consumer Staples 11.02 13.36 69.08 10.83 (1.34) (1.58) (2.92)
Cash 1.75 – 3.22 – – (0.51) (0.51)
Total 16.39 15.83 100.00 100.00 2.86 (2.30) 0.57 Other (2.34) 0.00 (2.34)
Total Returns 14.05 15.83 (1.78)
Source:Morgan Stanley Investment Management and Factset
(1) Portfolio weight is an average for the period from January 1, 2012 through December 31, 2012.(2) Attribution total return may differ from reported total return due to differing methodologies. Total returns are calculated NET of fees.(3) Index MSCI World Net Index weight is an average for the period from January 1, 2012 through December 31, 2012.(4) Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy the
securities mentioned or securities in the industries shown above. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
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12 Months Absolute Stock AttributionMorgan Stanley Global Franchise Representative Account – US$
Key Contributors (1): Year to Date as of December 31, 2012
+180 bpsReckitt Benckiser
+155 bpsNestlé+132 bpsVisa+132 bpsAccenture+116 bpsKone
• Stock selection in Information Technology, Industrials and Health Care• Zero weight in Energy, Utilities and Telecommunication Services
Top Five ContributorsPositives
-73 bpsHerbalife-8 bpsScotts Miracle-Gro-6 bpsSara Lee-5 bpsSwedish Match -5 bpsKellogg
• Overweight and stock selection in Consumer Staples • Underweight in Financials and Consumer Discretionary
Top Five DetractorsNegatives
Source:Morgan Stanley SICAV Global Brands and Factset
(1) Past performance is no guarantee of future results. Information shown is based on gross-of-fees performance, quoted in USD terms, and include the reinvestment of all dividends and income. Each portfolio may differ due to specific investment restrictions and guidelines. Each portfolio is actively managed; therefore, holdings referenced may or may not be currently represented in each portfolio. Individual results will vary.Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned orsecurities in the sectors shown. To obtain the methodology of the return attribution analysis, a list showing every holding’s contribution to the overall performance during the measurement periods, and/or if you have any questions, please contact your Morgan Stanley representative. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients.
23For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Nestlé Equity Doesn’t Look Demanding vs. Its Bonds
Nestlé: Bond Yields vs. Dividend Yield Drive for quality means that Nestlé five year Swiss Franc bonds yielding 42bp
Nestlé equity has trailing dividend yield of 3.0%. Given quality of company, dividend should grow steadily from here
Bond coupons will be flat in nominal terms and falling in real terms. We expect Nestle dividend to grow in real terms as well as providing inflation protection
0.42
1.43
3.03
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3.00
3.50
5-Year Swiss France BondYTM
5-Year U.S. Bond YTM Trailing Dividend Yield
Source:Bloomberg, MSIM. Data as of January 29, 2013Note: Trailing Dividend is dividend for 2011 announced in February 2012 Bond yields are yields to maturity on CHF Bond maturing 2/2018 x US bond maturing 1/2018.Past performance is not indicative of future results. Provided for illustrative purposes only and is not a recommendation to buy or sell any security referenced herein. When comparing asset classes, keep in mind that each has differences and that all investments involve risks, including the possible loss of principal. Equities are more volatile than other securities. . International investments are subject to additional currency, political, and economic risks, as are currencies which entail additional significant risks, such as global events, government actions, market risks, potential lack of liquidity and price volatility. U.S. government bonds and fixed income investments are guaranteed by the issuer as to the timeliness of the payment of principal and interest and pay a fixed rate of interest. Foreign fixed income securities may involve greater risks than those issued by U.S. companies or the U.S. government. Economic, political and other events unique to a country or region will affect those markets and their issuers, but may not affect the U.S. market or similar U.S. issuers.
24For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Trailing PE: Quality of Earnings Justifies some Premium …
Trailing Price / Earnings: Morgan Stanley Global Franchise Representative Account
0
5
10
15
20
25
30
35
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Source:MSIM
(1) As of December 31, 2012. Trailing PE is calculated by dividing current stock price by the trailing EPS for the past 12 months. The portfolio returns represent the Global Franchise Representative Account The Morgan Stanley Representative Account results shown are NET of investment advisory fees, are quoted in US$ and include the reinvestment of dividends and income. The inception date of the Morgan Stanley Representative Account is October 30, 2000. The comparison index is the MSCI World Index with Net dividends reinvested. Past performance should not be construed as a guarantee of future performance. The views and opinions expressed herein are those of portfolio management team, are not necessarily those of Morgan Stanley, and are subject to change based on market, economic and other conditions.The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
Global Franchise Representative Account MSCI World
25For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
… Especially Given Historically Robustness of Earnings in Downturns
Trailing Earnings Morgan Stanley Global Franchise Representative Account vs. MSCI World Index (Dec 01 = 100, Divs Reinvested)
0
50
100
150
200
250
300
350
400
450
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Global Franchise Representative Account MSCI World Index Earnings Data Rebased to 100 at 31/12/2001
Source:MSIM
(1) As of December 31, 2012. Trailing earnings calculated as Portfolio Returns divided by trailing Price Earnings Ratio. The portfolio returns represent the Morgan Stanley Global Franchise Representative Account. Morgan Stanley Global Franchise Representative Account results shown are NET of investment advisory / management fees, are quoted in US$ and include the reinvestment of dividends and income. Each portfolio may differ due to specific investment restrictions and guidelines. Accordingly, individual results may vary. The inception date of the Morgan Stanley Global Franchise Representative Account is October 30, 2000. The comparison index is the MSCI World Index with Net dividends reinvested. Past performance should not be construed as a guaranteed of future performance. The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
26For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
High Quality Valuations Not Stretched Relative to History
S&P 500 High vs. Low Quality Indices
Source:S&P, Bloomberg
(1) Data at December 31, 2012. Past performance is no guarantee of future results.
S&P awards all equities a quality rating based around sustainability and robustness of earnings and balance sheets
High and low quality indices for top and bottom quality tranches of S&P 500 were established in 2010 dating back to 1997
High quality rerated in 2000-2 and 2008-9, but in general the last decade has seen a relative derating of quality. Current relative rating of high quality to low quality is close to 2000 and 2008 lows
60
70
80
90
100
110
120
130
140
150
Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
High quality derates in run-up to crisis
No net re-rating 2008 – 11
Relative Perf High Qual index / Low Qual Index
27For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Compounding Has Helped Protect the Portfolio Despite High Quality Stocks Derating
Morgan Stanley Global Franchise Composite Relative Performance vs. Quality Rerating (3-Year Annualised)
Morgan Stanley Global Franchise Composite has outperformed MSCI World strongly at times where quality rerated (2002-3, 2008-9)
Morgan Stanley Global Franchise Composite also managed to beat the index (by a smaller margin) in the face of a major derating of quality in 2004-8
We believe the portfolio looks well positioned given current lowly relative rating of high quality stocks
(20)
(10)
0
10
20
30
40
Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Quality Rerating (3 Year Annualised) GF Relative Outperformance
GF Portfolio Relative Performance* vs. MSCI World Index
Net Quality Rerating
(%)
Source:S&P, MSIMData as of December 31, 2012Past performance is no guarantee of future results. Portfolio information is based on the strategy's representative account and the quality rerating information is based on the S&P. The Global Franchise Representative Account returns are calculated NET of investment advisory / management fees and quoted in US$ and include the reinvestment of dividends and income. Each portfolio maydiffer due to specific investment restrictions and guidelines. Accordingly, individual results will vary. The inception date of the Global Franchise Representative Account is October 30, 2000. The comparison index is the MSCI World Index with Net Dividends reinvested. Each portfolio may differ due to specific investment restrictions and guidelines. For illustrative purposes only.The information shown herein represents supplemental information, which supplements the Global Franchise Composite presentation in the Appendix.
28For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Outlook
Households, Governments and Financial Sector all continue to de-leverage in the developed world
Fiscal drag may ease slightly in Europe but could increase in the U.S. potentially offsetting housing recovery
Consensus expects Euro zone and Japan to emerge from recession and growth to accelerate in U.S. but overall activity remains well below trend
Beware growing imbalances in some Emerging Markets
Euro-zone tail risk reduced for time being. Merkel wants no drama before German elections in September but another crisis is always lurking just around the corner
The views and opinions expressed are those of the portfolio management team, are not necessarily those of Morgan Stanley, and are subject to change based on market, economic, and other conditions.
29For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Strategy
We will continue to seek companies demonstrating exceptional quality and compelling value – strong business franchises built on dominant and durable intangible assets which possess pricing power and low capital intensity
This involves investing in well-run companies that have capitalized on their intangible assets to compound shareholder wealth at an attractive rate over the long-term
The portfolio’s asymmetric profile means it is likely to underperform sharply rising markets and provide a measure of downside protection relative to the benchmark / index in weaker markets
There is no guarantee that the strategy will achieve its objectives.
The Investment Philosophy and Process Remains Unchanged
30For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
26.3 28.5
2.0
10.9
30.323.0
10.9
31.7
15.210.39.0
15.8
24.3 24.9
(13.2)(16.8)
(19.9)
9.5
(40.7)
(5.5)
15.817.7
12.6 12.7
(28.3)
16.314.8
25.6
11.8
30.0
20.1
9.014.7
33.1
(50.0)
(40.0)
(30.0)
(20.0)
(10.0)
0.0
10.0
20.0
30.0
40.0
50.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Morgan Stanley Global Franchise CompositePresented in US$ Terms (Since Inception to December 31, 2012)
Calendar Year Performance Returns (1)
The inception date of the Morgan Stanley Global Franchise Composite is March 31, 1996 (%)
Morgan Stanley Composite MSCI World Net Index
(1) Past performance should not be construed as a guarantee of future performance. Performance returns reflect the average annual rates of return. Periods less than 1 year are not annualized. Please refer to the Global Franchise Composite Disclosure document for additional information. The composite results shown are GROSS and NET of investment advisory fees, are quoted in US$ and includethe reinvestment of dividends and income. The comparison index is the MSCI World Index with Net dividends reinvested. The inception date of the Global Franchise Composite is March 31, 1996. Individual results will vary.
(2) Returns from March 31, 1996 through December 31, 1996.
(2)
For Exclusive Use at the Ideas 2013 Conference – 26th February 2013
Quality Is Not an Act, It Is a Habit
Aristotle
32For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
We Are Undertaking a Strategy Extension: Global Quality
Long standing clients have asked us: To provide a more diversified extension of Global Franchise To leverage the team’s established stock picking skills and focus on
quality globally
We continue to believe that: High quality equities are the best route to compounding over the long-term Current markets provide an attractive entry point
Only incremental expansion in stock coverage: ~9 new names in the portfolio A new home for existing research work
33For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Quality Fits Within Our Existing Strategies
Current Holdings – Margin Stability vs. Operational ROIC (1) (2) (3)
10-Year Margin Stability (%)
60
70
80
90
0 10 20 30 40 50 60 70 80
Global Quality Model Portfolio (3)
MSCI World Index
Global Franchise (3)
MSCI EAFE Index
International Equity (3)
5-Year Operational ROIC (%)
Higher Quality
Lower Quality
Source:FactSet, Morgan Stanley Investment Management. Data from January 1, 2007 to December 31, 2011Data as of December 31, 2012
(1) Weighted averages: portfolios by position size, indices by market cap.(2) ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) + trade working capital (excludes goodwill).
5-Year EBIT margin stability is (1-(std deviation) / mean)) : Min 0%, Max 100%.(3) Current holdings are based on the holdings in the International Equity and Global Franchise representative accounts and the Global
Quality Model Portfolio as of September 30, 2012. Information shown is subject to change and is provided for informational purposes only. Information herein is provided for illustrative purposes only. Past performance is no guarantee of future results. Each portfolio may differ due to specific investment restrictions and guidelines. This chart is not intended to depict how the actual strategies would have or have performed. The information shown herein for the Global Franchise and International Equity Strategies supplements the Global Franchise Composite and International Equity Strategy presented in the appendix.
34For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Quality Fits Within Our Existing Strategies (1) (2) (3)
Global Franchise
Ultra high quality companies
Target 100% compounders (2)
No compromise: Minimal cyclicality Very strong balance sheets Significant capital returns
Global Quality
High quality companies
Target 100% compounders (2)
Some flexibility: Moderate cyclicality Balance sheet / financials Capital allocation
International Equity
Quality bias
25% – 30% compounders
Unconstrained
81524Tobacco (%)12185Healthcare (%)
0.93718
257428
Current holdings (1):
53Financials (%)
0.720
69 2764
0.832
433853
Estimated Current Beta (4):Cyclicals (ex Financials) (%)
Consumer Staples (%)Number of Stocks:ROIC (%) (3)
The Global Quality strategy was created in response to client requests for a global portfolio that: Offers less concentration at
the stock and sector level than Global Franchise (1)
Leverages the team’s stock picking skills
Source:FactSet. Data as of December 31, 2012.
(1) Current holdings (Weighted average) are based on the Global Franchise strategy, the International Equity Strategy and the Global Quality model portfolio as of December 31, 2012.
(2) Companies that can deliver steady earnings and dividend growth with minimal capital intensity whilst maintaining or growing high ROIC. (3) ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) + trade working capital (excludes goodwill) – 5-year average
2007 – 2011. (4) MSCI local beta.
Information herein is provided for illustrative and informational purposes only. Past performance is no guarantee of future results. Each portfolio may differ due to specific investment restrictions and guidelines. Forecasts / estimates are subject to change and may not necessarily come to pass. The information shown herein for the Global Franchise and International Equity Strategies supplements the Global Franchise Composite and International Equity Strategy presented in the appendix.
35For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Quality: Incremental Expansion in Stock CoverageMorgan Stanley Global Quality Model Portfolio
80.629In GF or IE
GQ Weights(%)
GQNames
57.317In IE
64.721In GF
16.89Unique to GQ
Global Quality= 38 holdings
International Equity= 74 holdings
Global Franchise= 27 holdings
56
12 8
9
5 1
9
Total Stocks = 100
Current holdings in the Global Quality Model Portfolio, the Global Franchise Representative Account and the International EquityRepresentative Account as of December 31, 2012. Subject to change daily. Provided for informational purposes only. Each portfolio may differ due to specific investment restrictions and guidelines. Thus, individual results could vary. The information shown herein for the Global Franchise and International Equity Strategies supplements the Global Franchise Composite and International Equity Strategy presented in the appendix.
36For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Investment Philosophy – No Change
We Believe:
The best route to long-term returns is through compounding and capital preservation
High quality businesses can generate attractive returns for their owners over the long-term
Our Goal (1):
To outperform MSCI World over a full market cycle while providing: Attractive upside capture A measure of downside protection relative to the index / benchmark (1)
Quality and Compounding at the Right Price
Source:Morgan Stanley Investment Management Limited
(1) This goal is a target only and no guarantee is made that it will be achieved. A full market cycle is generally 3 – 5 years. MSCI World Index is a reporting benchmark.
37For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
How Quality Works – the Engine of Compounding
Few companies can consistently compound shareholder wealth at attractive rates of return over the long-term
These are the rare companies that we define as ‘high quality’
Source:Morgan Stanley Investment Management. ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) + trade working capital (excludes goodwill). Free cash flow = operating cash flow minus capital spending, working capital growth, interest and tax
Dominant market position / powerful intangible assets
Pricing powerHigh gross
margins
Robust profits at low capital intensity
(high ROIC)
Re-investment in innovation
and advertising
Strong free cash flow
Strong management
driving resilience
Dividends /buy-backs
38For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Reckitt Benckiser
Source:FactSet. Data as of December 31, 2012. CAGR = Compound annual growth rate
(1) ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) + trade working capital (excludes goodwill). EBIT margin stability is (1-(std deviation) / mean)). Five year averages.
(2) Available company data available 1999 to 2011.Past performance is no guarantee of future results. Provided for illustrative purposes only. This holding was 5.5% of the Global Quality Model Portfolio as of December 31, 2012.
A Superb Innovator and Brand Extender
59.2Gross Margin (1):
129.6ROIC (1):
(%)
7.0Organic Sales Growth (2):
93.1Margin Stability (1):
2.9CAPEX / Sales (1):
Compounding Earnings + Steady Dividend Growth
Attractive Total Returns
0
100
200
300
400
500
600
700
800
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
=
Indexed
Earnings Per ShareDividend Per Share
12.6%16.7%Reckitt Benckiser Earnings CAGR
Reckitt Benckiser Dividends CAGR
0
100
200
300
400
500
600
700
800
900
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Indexed
0.9%18.9%Reckitt Benckiser Total Return CAGR
MSCI World Total Return CAGR
Reckitt BenckiserMSCI World Index
39For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
3M
Source:FactSet. Data as of December 31, 2012. CAGR = Compound annual growth rate
(1) ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) + trade working capital (excludes goodwill). EBIT margin stability is (1-(std deviation) / mean)). Five year averages.
(2) MSIM data 1999 to 2011.Past performance is no guarantee of future results. Provided for illustrative purposes only. This holding was 2.5% of the Global Quality Model Portfolio as of December 31st, 2012. Reprinted with permission of 3M.
Driving Innovation Through Technical Excellence
45.5Gross Margin (1):
49.6ROIC (1):
(%)
5.0Organic Sales Growth (2):
97.5Margin Stability (1):
4.9CAPEX / Sales (1):
Compounding Earnings + Steady Dividend Growth
Attractive Total Returns
80
100
120
140
160
180
200
220
240
260
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
=
Indexed
Earnings Per ShareDividends Per Share
5.8%8.8%3M Earnings CAGR
3M Dividends CAGR
40
70
100
130
160
190
220
250
280
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Indexed
0.9%7.6%3M Total Return CAGR
MSCI World Total Return CAGR
3MMSCI World Index
Probably one of the world's most extensive B-2-B networks
An enviable manufacturing heritage
40For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Quality Is High Quality
Source:FactSet, Worldscope.
(1) Global Quality is currently a Model Portfolio.(2) ROIC data as of December 31, 2012. ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) +
trade working capital (excludes goodwill). Margin stability data ran December 31, 2012. EBIT margin stability is 1-(std deviation) / mean)).Charts show 5-year ROIC and 5-year Margin Stability of the December 31, 2012 holdings from January 1, 2007 to December 31, 2011. It is not intended to depict how the actual strategy would have performed. Information is subject to change and is provided for informational purposes only. It should not be deemed a recommendation to buy or sell any securities within the sectors shown. Each portfolio may differ due to specific investment restrictions and guidelines. Thus, individual results could vary. MSCI World Index shown for comparative purposes only.
Morgan Stanley Global Quality Model Portfolio (1) (2)
High quality companies combine: High returns on invested capital Stable margins
Global Quality (1) is skewed towards high quality sectors
Global Quality (1) scores highly on both metrics in every sector
72%21%MSCI World 53%
ROIC (2)
85%
Margin Stability (2)
Global Quality (1)
[ ]5-Year ROIC %
[ ]5-Year Margin Stability (%)
53.4
2.321.0 20.2 28.0 36.4
54.5 56.432.2
9.325.0
112.0
43.856.438.451.7
24.7
0.0
50.0
100.0
150.0
Energy Materials Industrials ConsumerDiscretionary
Staples Healthcare IT Telco Utilities Average
84.272.0 69.3 73.0 70.486.4 81.6
67.578.2 76.9 75.684.6 82.2 87.9 86.6 78.2 88.4
0.025.050.0
75.0100.0
Energy Materials Industrials ConsumerDiscretionary
Staples Healthcare IT Telco Utilities Average
Global Quality Model Portfolio MSCI World Index
41For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Sector BreakdownMorgan Stanley Global Quality Model Portfolio
Sector Weightings (1)
42.2
18.1
12.2
12.8
0.0
0.0
5.6
1.1
0.0
5.2
2.8
10.6
10.5
11.0
11.9
3.5
3.8
11.2
7.0
10.3
20.3
0.0
Consumer Staples
Health Care
Industrials
Information Technology
Utilities
Telecommunication Services
Consumer Discretionary
Materials
Energy
Financials
Cash
Source:Morgan Stanley Investment Management Limited
(1) Data as of December 31, 2012. Sector Weightings are provided for informational purposes only and should not be deemed as a recommendation to buy or sell securities within the sectors mentioned. Each portfolio may differ due to specific investment restrictions and guidelines. Index shown for comparison purposes only.
(2) ROIC is Earnings Before Interest and Taxes (EBIT) / Property Plant and Equipment (PPE) + trade working capital (excludes goodwill).
(3) The views and opinions expressed herein are those of the strategy's portfolio management team.
Sector weights driven by bottom-up stock selection
Capital intensive or strongly cyclical businesses (e.g., Materials, Energy, Utilities, Telecoms) do not ordinarily generate sustainably high ROIC (2)
Financials generally have low unleveraged returns (3)
Global Quality Model Portfolio MSCI World
42For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
33%
31% 36%
Regional Breakdown
Source:FactSet, MSCI and Morgan Stanley Investment Management Limited. Data of at December 31, 2012
(1) Weighted regional exposure % of company salesThis is a model portfolio, which is shown for informational purposes only and should not be deemed a recommendation to buy or sell any security mentioned or securities within the regions shown. Percentages for economic exposure represent the weighted average based on revenues from emerging markets sales. Holdings and weightings are subject to change. Each portfolio may differ due to specific investment restrictions and guidelines. Thus, individual results could vary.
Listed Exposure Economic Exposure (1):Global Quality Model Portfolio Global Quality Model Portfolio
What a company does and where it does business is more important than where it is listed
Country weights are a residual of our search for quality businesses
Selected Company EM Exposure AIA 100% BAT 68% Aggreko 52% Mead Johnson 51% Unilever 50% Philip Morris 49% Nestle 40% Bayer 35% 3M 35% Procter & Gamble 34%
North AmericaU.K.
Europe ex-U.K.
24%6%
31%
3%6%
30%
North America
Europe ex-U.K.U.K.
Japan
Other Developed Markets
Emerging Markets
43For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
High “Quality” Valuations Are Not Extended
Source:FactSet. Data as of December 31, 2012
(1) 1.P/E = Price to Earnings (Next time measured). Past performance is no guarantee of future results. Provided for informational purposes only. Each portfolio may differ due to specific investment restrictions and guidelines. Thus, individual results could vary. MSCI World Index shown for comparative purposes only. Current Model or Actual Performance could be lower or higher than the figures shown above.
Historic P/E Profile of Today’s Global Quality Model PortfolioPE (x)
This chart shows the historic P/E (1) of the current names in the model portfolio
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
High Quality PE MSCI World Index
44For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Portfolio Management Team: Fully Resourced
(1) AUM data as of December 31, 2012. The assets under management figures include assets managed globally under this strategy withina number of separate products, jurisdictions and mandates.
(2) Years of investment experience / years on International Equity Team. (3) Years of investment experience (7 years as a consultant, 12 years in financial services) / years on International Equity Team. (4) Years of investment experience / years with the Firm.
Team members may change from time to time.
Boutique within Morgan Stanley Investment Management
Compensation linked to economics of product with significant portion in units of funds under the firm’s compensation plan
Senior portfolio managers have worked together since 1996
Team combines fundamental research with portfolio management
Portfolio specialists link portfolio team to client
Portfolio Management Team (2)
Portfolio SpecialistsLaura Bottega
Executive Director (15/7 years) (4)
Monica CartaVice President (7/11 years) (4)
Cathy ColecchiManaging Director (17/14 years) (2)
Munenori YoshimiExecutive Director (19/14 years) (4)
Global Franchise US$15.6Bn Assets
Under Management (1)
Portfolio SpecialistsCathy Colecchi
Managing Director (17/14 years) (2)
Nancy Jean NortonExecutive Director (30/10 years) (4)
Allison ScholarVice President (17/17 years) (2)
Sean McDermottVice President (9/1 year) (2)
International Equity US$18.3Bn Assets
Under Management (1)
Portfolio Specialists
Maggie NaylorManaging Director (24/26 years) (4)
Alistair Corden-LloydExecutive Director (12/16 years) (4)
Anna BaronSenior Associate (12/12 years) (4)
Global Quality
John GoodacreExecutive Director
(12/10 years)
Vladimir DemineExecutive Director
(11/4 years)
Marcus WatsonSenior Associate
(5/5 years)
Alex GabrieleSenior Associate(4/1 year)
Christian DeroldManaging Director
(21/7 years)
Yiwen Li Associate (4/1 year)
Bruno Paulson (3)
Managing Director (19/4 years)
William Lock – Co-HeadManaging Director (21/19 years)
Peter Wright – Co-HeadManaging Director (26/17 years)
45For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Quality: A Strategy Extension
A concentrated, high quality, global portfolio of world class companies characterised by resilient high cross cycle returns on capital, primarily derived from dominant intangible assets
We seek companies (1): Run by strong management that allocates capital wisely, protecting and
developing the business to enhance shareholder returns That are attractively priced, based on fundamental cash flow analysis
The strategy is managed by a stable and experienced investment team with a history of providing strong, long-term, absolute and relative returns with a measure of downside protection relative to the benchmark
Key Highlights:
Source:Morgan Stanley Investment Management Limited
(1) There is no guarantee that the investment strategy will achieve its objectives. The performance information presented within this presentation is that of the Global Franchise and International Equity Strategies, and while these strategies are managed by the same portfolio management team as the Global Quality Strategy, the past performance of these strategies is not necessarily indicative of the performance (past or future) of the Global QualityStrategy. Past performance is no guarantee of future results.
46For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Portfolio Management Team
Peter Wright, CFAManaging Director
[email protected] is a portfolio manager and co-head of the London-based International Equity team. He joined Morgan Stanley in 1996 and has 26 years of investment experience. Prior to joining the firm, Peter worked for the State of Wisconsin Investment Board as an investment director and portfolio manager. Peter received a B.C.A. from Victoria University of Wellington, New Zealand. He is a member of the CFA Institute.
Christian DeroldManaging Director
[email protected] is a portfolio manager for the London-based International Equity team. He joined Morgan Stanley in 2006 and has 21 years of investment experience. Prior to joining the firm, Christian was director of research at MillgateCapital, a long short equity hedge fund. Prior to this, he worked at the State of Wisconsin Investment Board where he managed the Board’s international equity portfolio. Christian received an M.A. in business administration from the University of Economics and Business Administration in Vienna, Austria.
William LockManaging Director
[email protected] is a portfolio manager and co-head of the London-based International Equity team. He joined Morgan Stanley in 1994 and has 21 years of investment experience. Prior to joining the firm, he worked at Credit Suisse First Boston’s Corporate Finance Group, and was a management consultant with Arthur D. Little. William received a B.A. in modern history from Keble College, Oxford.
47For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Portfolio Management Team (cont’d)
Bruno PaulsonManaging Director
Vladimir Demine, CFAExecutive Director
John GoodacreExecutive Director
[email protected] is a portfolio manager for the London-based International Equity team. He joined Morgan Stanley in 2009 and has 11 years of investment management experience. Prior to joining the firm, Vladimir worked for UBS Global Asset Management in London, where he was an analyst responsible for stock selection of consumer staples holdings in key client mandates. Vladimir received an M.Sc. in investment management with Distinction from City University (CASS) Business School and a Master’s in finance with Distinction from St Petersburg State University of Economics and Finance.
[email protected] is a portfolio manager for the London-based International Equity team. He joined Morgan Stanley in 2009. Prior to joining the firm, Bruno worked for Sanford Bernstein in London, where he was a Senior Analyst covering the financial sector, particularly banks and insurers, for eight years. Previously, he was a manager at the Boston Consulting Group where he focused on the financial services industry. Bruno has an MBA from INSEAD where he received the Ford Prize for graduating top of class. He was also a Research Fellow in Political Economy at Nuffield College, Oxford, and received a B.A. in Politics, Philosophy and Economics with 1st Class Honors from Keble College, Oxford.
[email protected] is a portfolio manager for the London-based International Equity team. He joined Morgan Stanley in 2003 and has 12 years of investment management experience. Prior to joining the firm, John worked for BessentCapital as a managing director in risk management, and before that for Morgan Stanley Investment Management within the European Equity Growth and Core strategies. He also worked for BITA Plus Consultants as a senior developer. John received a B.Sc. in mathematics from Sussex University and an M.Sc. in computation from Oxford University.
48For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Portfolio Management Team (cont’d)
Marcus WatsonSenior Associate
Yiwen LiAssociate
Alex GabrieleSenior Associate
[email protected] is a member of the London-based International Equity team and joined Morgan Stanley in 2012. He has 4 years of investment experience at two London based hedge funds. He was previously responsible for stock selection in Technology, Media and Consumer sectors. Yiwen received a BSc. in Philosophy and Economics from the London School of Economics. He is fluent in Mandarin and Cantonese.
[email protected] is a portfolio manager for the London-based International Equity team. He joined Morgan Stanley in 2008. He received a B.Sc in psychology from the University of Newcastle Upon Tyne.
[email protected] is a member of the London-based International Equity team and joined Morgan Stanley in 2012. He has 4 years of investment experience from a London based hedge fund. Previously, Alex was responsible for stock selection across the cyclical universe, predominantly in Asia ex-Japan. Alex holds a B.A in Natural Sciences from Trinity College, Cambridge. He passed Level III of the CFA Program in 2012.
For Exclusive Use at the Ideas 2013 Conference – 26th February 2013
Appendix
50For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Global Franchise Composite DisclosurePresented in US$ Terms
0.4235.00.61,441420.4415.47(5.54)9.8010.2720110.7224.41.5934524.0518.3211.7614.6215.2020101.0207.41.1876521.7016.8429.9930.7931.7020090.3313.10.62,9861617.2613.15(40.71)(28.83)(28.33)20080.4505.90.53,320198.216.599.0410.3010.9120070.3463.20.52,103167.756.9320.0722.3722.9720060.5418.20.51,310139.8010.479.4912.0912.672005N/A415.01.0502614.9512.9914.7214.0914.7620040.2410.71.0163317.7013.5033.1129.4430.342003N/A372.30.8132316.9712.32(19.89)10.0910.892002
Average WeightedStandard Deviation
FirmAssets
($Bn)Percent of
Firm Assets
MarketValue ($MM)
Number ofAccounts
Index3-Year
StandardDeviation (%)
Composite3-Year
StandardDeviation (%)Index Return (%)
Net CompositeReturn (%)
Gross Composite Return (%)Year
Morgan Stanley Investment Management “MSIM” claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS® standards. MSIM has been independently verified for the periods January 1, 1994 through December 31, 2009. The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and presentperformance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.MSIM is the asset management business of Morgan Stanley. Assets are managed by teams representing different MSIM legal entities; portfolio management teams are primarily located in New York, Philadelphia, London, Amsterdam, Singapore and Mumbai offices. The firm is defined as all assets managed by MSIM, excluding those associated with the Alternative Investments and Merchant Banking Divisions.
Prior to January 1, 2002, the firm was defined as an investment management firm consisting of investment advisory operations within various legal entities. As of January 1, 2002, the firm definition was expanded to include all investment advisory operations within MSIM excluding affiliated and unaffiliated wrap fee programs. From January 1, 2007 to May 31, 2010, the firm definition included affiliated and unaffiliated wrap fee programs. Returns for the period prior to January 1, 1994 were not calculated in accordance to GIPS because not all fee paying, fully discretionary accounts were included in composites prior to January 1 1994.
The Global Franchise Composite was created on July 28, 2000 and its inception date is March 31, 1996. The composite includes all segregated portfolios managed on a fully discretionary basis according to the Global Franchise strategy. With the exception of forward exchange contracts, no derivatives are included in the composite. The strategy seeks capital appreciation by constructing a concentrated portfolio of high quality franchise stocks, characterized by dominant intangible assets, high returns on invested capital and strong free cash flow generation. As of June 2009, William Lock and Peter Wright were named co-lead managers of the strategy. Prior to that, Hassan Elmasry was the lead manager.
Performance data quoted represents past performance, which is no guarantee of future results. The composite results shown are GROSS and NET of investment advisory / management fees. Returns are computed and based in US$ and are inclusive of currency fluctuations. The dispersion of annual returns is measured by the standard deviation of asset-weighted portfolio returns included in the composite for the full year. Policies for valuing portfolios, calculating performance and preparing compliant presentations are available upon request.
The MSCI World Index is used as a benchmark. The benchmark is calculated with net dividends reinvested and is used for comparative purposes only.
Gross performance is net of all transaction costs, and net performance is net of transaction costs and investment management / advisory fees. The firm’s standard fee schedule is as follows: 0.80% per annum on first US$25 million of assets; 0.75% per annum on next US$25 million of assets; 0.70% per annum on next US$50 million of assets; 0.65% per annum on assets in excess of US$100 million
51For Exclusive Use at the Ideas 2013 Conference – February 26th, 2013
Important Disclosures
For Business and Professional Investors Only and Not To Be Used With The General Public
This presentation (the “Presentation”) was issued and approved in the UK by Morgan Stanley Investment Management Limited, 25 Cabot Square, Canary Wharf, London E14 4QA, authorized and regulated by the Financial Services Authority, for distribution to Professional Clients or Eligible Counterparties only and must not be relied upon or acted upon by Retail Clients (each as defined in the UK Financial Services Authority’s rules).
The information in this presentation is provided solely for informational and educational purposes and for the exclusive use at The Ideas Conference February 26th,2013 and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Except as otherwise indicated herein, the views and opinions expressed herein are those of Morgan Stanley Investment Management, are based on matte s as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.
The information in this presentation (the “Presentation”) is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.
Charts and graphs provided herein are for illustrative purposes only. Forecasts / estimates are based on current market conditions subject to change, and may not necessarily come to pass. Past performance is not indicative of future results.
All information contained herein is proprietary and is protected under copyright law.
Risk Warnings
Past performance is not a guarantee of future performance.
The value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. There can be no assurance that the Fund will achieve its investment objectives.