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Invesco Continental European and Pan European Small Cap StrategiesWhy embedding sustainability is crucial for Mid Cap Investors
AmsterdamSeptember 2020
This marketing document is exclusively for use by Professional Clients and Financial Advisers in Netherlands. This is not for consumer use, please do not redistribute.
Erik Esselink – Fund Manager, Global & European Small and Mid Cap Equities
Introduction
Why sustainability matters more in Small and Mid Cap
How our thinking has evolved on ESG and Sustainability
Examples
Appendix
Agenda
Investment Team – Collaboration and ConsistencyLeveraging Regional knowledge to build consistent portfolios
Source: Invesco as at 31 March 2020.
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Continental Europe Stock Research UK Stock Research
European Small Cap Equity Pan European Small Cap Equity
Continental European Small Cap FundUCITS Fund50-60 StocksAUM $250 mln
Erik Esselink Portfolio Manager Global & European Small CapJames Matthews Senior Analyst European Equity
European Smaller Co’s Fund ICVC Fund50-60 StocksAUM $150 mln
Robin WestJonathan Brown
James MatthewsErik Esselink
Pan European Small Cap Equity FundUCITS Fund50-70 Stocks (40 EU) AUM $75 mln
Martin WalkerCiaran MallonJames GoldstoneTim Marshall
Stock recommendations
All market capsJeff TaylorJohn SurpliceOliver CollinJames RutlandSteve SmithJames Kariuki
All market caps
Small and Mid cap Small and Mid cap
Small Cap Asset class
Investment proposition Combining the attributes of small and mid Caps with a unique investment process
For illustrative purposes only.
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Fundamentalapproach
Repeatable process
Invesco proposition Conviction
Disciplined risk
management
ESG integration
Our Approach
Experiencedteam
Small cap proposition
Idiosyncraticcompanies
Family ownership
Faster growth
Diversificationbenefit
Under owned Huge universe
Our Mission is to build portfolios of European Small and Mid Caps that consistently outperform their benchmarks on a 3-year rolling basis driven predominantly by stock selection rather than factor risks
Investment Philosophy, our Investor DNAWe invest in European Smaller companies using a 3 pillar framework
Source: Invesco. For illustrative purposes only.
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DurableCompanies Non-Consensual
Valuation Asymmetry
Ideas come in many shapes and sizes, we are style agnostic
We invest in Durable Companies with a sustainable financial framework and competitive advantage
Value creation for all stakeholders is a key driver of long term shareholder returns
We see ESG analysis as an important part of our risk assessment of a company
Our Investment Thesis needs to be Differentiated to be valuable
We are contrarian and non-consensual by nature at the time of purchase
Our financial analysis needs to lead to significant valuation Asymmetry
We set 3 year price targets based on a number of valuation tools and based on our own assumptions
In Small Cap Equity, share prices can deviate significantly from their fundamental value providing opportunities
Why sustainability matters more in Small and Mid Cap
Per Euro invested, Small Cap investors can achieve more ‘impact’.
A $ 20 mln investment in in a $500 mln market cap company allows for proper engagement with company management.
Small and Mid Cap investors provide ‘new’ capital driving innovation and change, whereas mature Large-Caps are more often in capital return mode.
Smaller companies can give investors exposure to specific Sustainable Development Goals or ESG themes allowing targeted investment providing better alignment with overall ESG objectives.
Yet external Small Cap ESG data is poor, hence proprietary analysis is required.
Smaller Companies ESG reporting/communication is less sophisticated as world class ESG reporting is expensive.
Like in traditional investment research ESG research tends to be focused on larger companies, ESG analysis is evolving fast however but the universe of Smaller Companies is vast.
Why Sustainability matters more in Small and Mid Cap
For illustrative purposes only.
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Smaller Companies are the key engine of growth for local communities
– 63% of employees of listed companies worldwide are employed by companies with a sub $5 bln market cap.
Smaller Companies devote a larger share of Ebitda to employees than Large-Caps
Smaller companies are on average more sustainably financed than larger companies despite growing faster
Smaller companies tend to be earlier in their life cycle and hence have fewer legacy businesses, potential stranded assets and entrenched view points
High founder/family ownership punishes Smaller companies yet this can be a material positive for long term investors
Why Sustainability matters more in Small and Mid Cap
For illustrative purposes only.
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Source: Invesco as at 31 May 2020.
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Easier times ahead for European banks-v- political criticism of buybacks in the US
Bankregulation
Populist influences on policymaking, wages & ESG may prove expansionary and inflationary
Socio-economic disparity
Greater fairness in EC carbon policy to come leading to level playing fields for steel, cement & aluminium?
Europeanborder
tax
On the agenda in several European countries
Big Tech revenue
tax
Shorter, more local supply chains, near-shoring not offshoring, policy divergence, inflation not deflation
Deglobalisation
Pushing the burden of proof on to Big Tech
EU Anti-trust
Indispensable in meeting EU climate targets
EU Taxonomy
Post-recovery the world will changeHead winds disappearing for some, but only just starting for others
Digitalisation: “We have to push for investment and reform – and we have to strengthen our economies by focusing on our common priorities, like the European Green Deal, digitalisation and resilience,” – Von der Leyen,14th May 2020
Infrastructure investment: “The European Green Deal as the EU's recovery strategy: A massive renovation wave of our buildings and infrastructure and a more circular economy, bringing local jobs” –https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940
Taxonomy: Policy aiming to reduce the cost of equity for cleanest technology and encourage change
5G, Fibre: “Executive Vice-President, Margrethe Vestager, said: “The coronavirus crisis has demonstrated how crucial it is for citizens and businesses to be connected and to be able to interact with each other online.” –https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1025
Themes for a changing world
Source: Invesco as at 12 June 2020.
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How our thinking has evolved on ESG and Sustainability
Investment process 1.0Financial & ESG Research working in tandem, mainly risk focused
For illustrative purposes only.
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Financial investment process
Idea generation
Watchlist Recommendation
Fundamental Research
Portfolio construction Risk management
Optimal portfolio
ESG/SRI process
ESG Risk & Rating Assessment
Magnitude: Key issues provide focal point for fundamental research
Momentum: In depth analysis of key ESG controversies
ESG AnalysisESG Monitoring & Active Engagement
Engagement: Quarterly screening & company interaction
We believe the relationship of companies with their environment is constantly changing, ESG and Impact analysis helps us to better understand these changing risks and opportunities.
Investment process 2.0Our goal of our non financial analysis is to better understand the corporate culture and motivation, helping us to better value securities
For illustrative purposes only.
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The difficulty lies not so much in developing new ideas as in escaping from old ones. John Maynard Keynes
Non financial Impactanalysis
Financial analysis
ESG risk analysis
Corporate culture analysis
Financial riskanalysis
Valuation analysis
Industry/Macroanalysis
Investment process 2.0Understanding the value a company adds to its surroundings, helps us understand the sustainability of shareholder value creation
For illustrative purposes only.
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Sustainabilityof
shareholdervalue creation
Environment
Clients
Suppliers
Society
EmployeesCommunity
Value creation for all stakeholders is a key driver of long term shareholder returns (grow the pie)
Examples
Investment process: Signify ESG/Impact case studyESG and Impact are the main parts of their product value proposition
For illustrative purposes only.
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Signify sells its LED products based on reducing energy consumptions driven by its world leading R&D. Within the company Signify has reduced its energy, Co2, waste and water usage significantly over the last 5 years.
Signify holds its suppliers to the same standards as it self and actively trains suppliers in issues like recycling and waste management. The company is not vertically integrated so its supply chain management is key.
Signify works with its clients to find the best long term solutions based on lifecycle cost of light. The company also provides clients with research and advice to improve worker productivity by using better lighting solutions.
Although employee turnover has increased, we are encouraged by employee take up of voluntary salary reduction proposal during the Covid19 crisis as a sign of company loyalty.
Signify is providing hygiene solutions through UV-C Light solutions preventing the spread of Covid 19 and has made their research available to the industry at no cost.
Signify is at the forefront of smart farming light solutions allowing more local farming at better crop yields, furthermore the company is improving traffic and citizens safety through better city lighting.
Corporate governance has improved significantly post spin-off of Royal Philips, the company has 100% independent board members. We are also encourage by the share count reduction and dividend policy.
Environment
Suppliers
Clients
Employees
Community
Society
.
Governance
ESG and Impact analysis were key parts of our durability analysis.
We saw the impact that Signify has as a key differentiator in our investment thesis.
The two combined played a decisive role in setting our price target and downside risk.
Signify is a manufacturer of LED and Connected LED lighting solutions. The company was part of Royal Philips and became an independent company in 2016. Sustainability is a core component of the corporate culture.
Appendix
Smaller Companies are the key engine of growth for local communitiesSmaller companies employ more people than larger companies
For illustrative purposes only.
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Smaller Companies are the key engine of growth for local communitiesSmaller companies devote more of their earnings to employees while growing faster
For illustrative purposes only.
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Over the long-term, smaller companies demonstrated greater earnings growth than larger companies
Smaller companies typically have lower levels of net debt relative to earnings
Given their more restricted access to capital, smaller companies must be better capital allocators
Why have Smaller Companies performed well historically?Over the long-term, smaller companies demonstrated greater earnings growth than larger companies.
Source: Table: JP Morgan as at 17 May 2019. Historical average since 1997 excluding Technology Bubble Years (2000-2001. For RHS only: Source: Bloomberg, consensus of analysts’ forecasts* (for next 3 forecast years 2019E, 2020E and 2021E) as at 14 May 2019. USD basis.
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MSCI Europe Small Cap MSCI Europe
MSCI Europe 3 year average annual EPS Growth Rate* (%)
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Global Net Debt to EBITDA – average since 1997*
Large Cap Companies 1.4x
Small Cap Companies 0.9x
UBS Family Owned Index
Largecaps
MidcapsSmallcaps
1%
4%
7%
10%
13%
16%
21.0% 22.0% 23.0% 24.0%
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Annualised Risk
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UBS Family-owned Index Global Midcap
Why we like co-investing with Founder/family owned businessesDespite often being seen as a negative in external ESG research
Source: Top left – MSCI ESG Research Inc., UBS. (rebased to 100) for the period 26 September 2005 to 26 September 2017. Top right – USB estimates based on the same period of time as the left hand chart. Bottom left – UBS Global Research. As at 26 September 2017. Returns image: For illustrative purposes only.
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UBS analysis indicates outperformance in absolute percentage terms of family firms since 26 September 2005…
…and this outperformance does not seem to come with a higher risk profile
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Smid-Cap Large Cap
Smaller companies are less well covered by sell side analysts
Smaller companies require more in-house research by fund managers
The result is a less efficient market with more alpha opportunities
Smaller Companies attracts less sell-side research. ESG research tends to focus on larger companies too
Source: Bloomberg, Factset, JP Morgan as at 31 May 2020. DM = Developed Markets. GEM = Global Emerging Markets.
Total Number of Analyst Recommendations - GlobalLarge versus Small/Mid Cap companies
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4000
6000
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Global DM GEM
Number of Companies with <5 Sell Side Analysts
Smaller Companies tend to outperform over longer periods of time versus larger companiesDespite better ESG characteristics
For illustrative purposes only.
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The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
Invesco Continental European Small Cap Equity Fund is a small companies fund, you should be prepared to accept a higher degree of risk than a fund that invests in larger companies.
Risk warnings
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This marketing document is exclusively for use by Professional Clients and Financial Advisers in Netherlands. This is not for consumer use, please do not redistribute.
By accepting this document, you consent to communicate with us in English, unless you inform us otherwise. This document is not for consumer use, please do not redistribute.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. For more information on our funds, please refer to the most up to date relevant fund and share class-specific Key Investor Information Documents, the latest Annual or Interim Reports and the latest Prospectus, and constituent documents. This information is available using the contact details of the issuer and is without charge. Further information on our products is available using the contact details shown. This marketing document is not an invitation to subscribe for shares in the fund and is by way of information only, it should not be considered financial advice. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
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Important information
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