threadneedle wealth managers retreat presentation 2012
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US Equities at Threadneedle
Citywire Wealth Manager Retreat
The Grove
Cormac Weldon, Head of US Equities 18-19 October 2012
1. Team and products
2. Philosophy and process
3. Portfolio construction
4. Market outlook
5. Conclusion
Agenda / Contents
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US equities team
2 PT.12.01817
Overseeing $12.4 bn in US equities
Source: Threadneedle Investments as at 30 June 2012.
1 Junior analyst.
2 Governance and Responsible Investment.
US Equities Team
Overseeing $12.4bn in US equities
Source: Threadneedle as at 30 June 2012.
1 Junior Analyst
2 Governance and Responsible Investment
PT/11/00695
Cormac Weldon
Head of US Equities
Health Care
Diane Sobin
Materials, Energy
Stephen Moore
Telecoms
William Warren
Technology
OtherGary Young
Dedicated Dealer
Stéphane Jeannin
Investment Specialist
Additional
resources
Other equity (including G & RI2)
and managed funds
48 professionals
Fixed income
36 professionals
Property
21 professionals
Investment risk
9 professionals
Equity dealers
6 professionals
Investment
TeamBrad Colton
Financials
Paul Gannon
Consumer Discretionary
Olivia Miller1
Consumer Staples
Nafis Chowdhury
Industrials
Threadneedle’s main US equity strategies
3
American
Fund
American
Select Fund
American Extended
Alpha Fund
Typical
tracking error1 4-6% 5-8% 4-8%
Stock holdings: Long1 70-90 50-60 30-60
Stock holdings: Short1 - - 30-80
Max. sector load deviation + 10% + 10% + 15%
Max. stock load deviation + 5% + 5% + 8%
Benchmark S&P 500 S&P 500 S&P 500
Source: Threadneedle
1 The numbers indicated represent typical values under normal market conditions
PT.12.01817
Actual returns
1 year 3 years 5 years 10 years
Large caps
S&P 500 Composite Index +25.6% +12.8% +5.9% +7.7%
Threadneedle American Fund +20.3% +14.2% +8.1% +9.0%
Threadneedle American Select Fund +23.1% +11.5% +6.9% +8.9%
American Extended Alpha Fund +28.3% +14.2% n/a n/a
Gross performance in sterling
Source: FactSet as at 30 September 2012. Data quoted in GBP and annualised. Fund data is quoted on a bid to bid basis. Gross performance from 31 March 2010 is
based on daily cash flows and valuations. Prior to this Global Close prices. Prior to January 2008 based on 12pm prices
4
We are constantly assessing
Macroeconomic information
Stock specific information
We leverage Threadneedle’s resources
137 in house investment professionals
Access to 60 research houses
Company meetings with >700 US management teams per annum
The questions we are asking ourselves is…
Distinguishing between winners and losers
What is priced in?
What is our conviction in our differentiated view?
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Ashland: a compelling upside/downside ratio
Source: Datastream as at 30 September 2012, in local currency
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Share performance
2-year price performance
UPSIDE: $107 (+63%)
Greater pricing power thanks to better end markets (specialty ingredients)
Factoring-in cyclical rebound in performance materials
Margins uplift thanks to better mix of businesses, integration efforts and cost rationalisations
Broadly meeting management 2014 targets
40
45
50
55
60
65
70
75
80
Sep 10 Mar 11 Sep 11 Mar 12 Sep 12
Pri
ce -
$
DOWNSIDE: $52 (-28%)
Factoring in 2008/9-like hit to businesses (but taking consideration of the stronger business mix)
Stable margins in downturn in specialty ingredients (c.50% of profits)
Business benefits from lower raw material prices & stickier prices on the downside
Cyclical businesses of performance materials and water technology impacted
Limited impact on car motor oil segment
$70
$107
$52
Market background
7
Earnings growth will slow down but margins are underpinned by:
Weak labour pricing power
Low interest and depreciation costs
Corporate sector is strong – low debt and high cash flow
Well capitalised and liquid banking system reduces tail risks
Some sectors (housing; autos) are starting to add back to GDP growth
Market valuation is attractive, especially relative to alternatives
Source: Threadneedle as at 30 September 2012.
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Housing market healing
1 Source: (left hand chart) Bloomberg, Federal Reserve, as at 31 July 2012.
2 Source (right hand chart):Source: National Association of Realtors (Latest Revision), House Tracker 1999 through July 2012
8
Durable goods spending
% of disposable personal income¹
Existing home inventories²
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Millio
ns
Normal level
8.0
10.0
12.0
14.0
16.0
18.0
19
59
19
'62
19
66
19
69
19
73
19
76
19
80
19
83
19
87
19
90
19
94
19
97
20
01
20
04
20
08
20
11
Mid
pri
ce
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Lending cycle is starting to turn
9
US commercial banks
YoY % change in total loans¹
(12)
(9)
(6)
(3)
0
3
6
9
12
15
18
21
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
%
Recession
Average
Source: Federal Reserve Board, Empirical Research Partners Analysis.
1 Seasonally-adjusted weekly data, 1974 through early January 2012.
2 Seasonally-adjusted weekly data, 2005 through early January 2012.
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US banks are liquid, deposits-funded and have deleveraged
10
US P/B P/TBV PE12 PE13 Reserves /
loans NPLs / loans
NPA
coverage
Loans /
deposits
Assets /
equity
JP Morgan 0.8 1.0 8.3 6.7 3.8% 1.5% 250% 64% 12
Bank of America ML 0.4 0.6 11.7 7.4 3.6% 3.0% 122% 90% 9
Citigroup 0.4 0.5 6.7 5.8 4.5% 1.7% 255% 75% 10
Wells Fargo 1.3 1.7 9.8 8.7 2.5% 3.4% 75% 84% 9
PNC 0.9 1.4 9.4 8.7 2.7% 2.6% 105% 85% 7
USB 1.9 2.6 11.2 10.3 2.3% 1.8% 126% 91% 10
Europe
BNP Paribas 0.5 0.6 4.6 5.1 4.0% 6.3% 64% 127% 23
Credit Agricole 0.2 0.4 5.1 3.1 4.0% 6.0% 66% 79% 35
Societe Generale 0.3 0.4 4.9 3.7 4.1% 5.8% 70% 122% 23
UniCredit 0.1 0.1 2.2 1.7 5.9% 13.3% 45% 166% 17
Intesa Sanpaolo 0.3 0.5 5.4 4.5 5.9% 11.1% 53% 205% 13
Santander 0.6 0.9 6.6 5.4 2.5% 4.3% 59% 133% 15
BBVA 0.7 0.7 9.6 5.7 2.2% 4.3% 51% 128% 15
Deutsche Bank 0.5 0.7 5.7 5.6 1.0% 2.6% 39% 69% 40
Commerzbank 0.3 0.3 4.9 3.9 2.8% 6.5% 44% 120% 27
Source: Company data, July 2012.
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SunTrust Banks
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Performance relative to S&P 500 Index
2 year total return
Source: Datastream as at 30 September 2012, in local currency.
US regional bank with strong franchise in the
Eastern US (FL; GA; NC; SC; TN, VA, WV)
1651 branches
$178bn in assets
Strong capital ratios
9.3% Tier 1 capital
92% loan/deposit ratio
New management team has de-risked the
business and reduced the expense base
Fully provisioned the risk of mortgage repurchase
$300m cost savings realised by year-end’12
Cost/income ration coming down to 60%, from 70%
Leveraged to a housing recovery as charged-offs
normalise (esp. in residential mortgages)
Bought at less than 0.9x tangible Book Value 50
60
70
80
90
100
110
Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12
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Shale gas now accounts for 25% of production, vs. 5% in 2006
12
Natural gas dry production -
Billion cubic feet per day1
44
48
52
56
60
64
68
90 92 94 96 98 00 02 04 06 08 10 12
Natural gas for next day delivery at Henry Hub
(US benchmark) - $ per MMBtu2
0
2
4
6
8
10
12
14
16
04 05 06 07 08 09 10 11
Source: Bloomberg.
1 As at July 2012.
2 As at 10 September 2012.
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US chemicals are low cost globally
13
Ethylene cash production costs, (US$/tonne) February 2003 & 2012
0
250
500
750
1,000
1,250
1,500
Ethane Ethane C2/C3 Ethane Weighted Condensate Propane Naphtha Low cost Typical High cost Naphtha
KSA Iran KSA US US KSA KSA US W Eur W Eur W Eur Asia
Cash Cost 2003 Cash Cost 2012
US EthaneUS Weighted
Average
Europe low cost
Europe typical
Asia
Source: CMAI as at February 2012.
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LyondellBasell Industries
14
Performance relative to S&P 500 Index
Total return since listing 29 April 2010
Source: Datastream as at 30 September 2012, in local currency.
Chemicals and polymers manufacturer
Simplistically, profitability is based on
Brent oil prices (for sales)
Natural gas prices (for input)
Declining ethane (natural gas liquid) prices will
boost profitability
Strong free cash flows
Management team acting to optimise shareholder
returns
$4.50 special dividend announced in Q4 ’11
Quarterly dividend raised from 25 cents to 40
cents (+60%) in May 2012
Less than 9x 2012 earnings 60
80
100
120
140
160
180
200
220
Apr 10 Aug 10 Dec 10 Apr 11 Aug 11 Dec 11 Apr 12 Aug 12
Re
ba
se
d =
10
0
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The fiscal cliff in 2013
15
Percentage points of potential GDP
-4.5
-3.0
-1.5
0.0
1.5
3.0
4.5
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Fiscal year
Fiscal Restraint (+)
Fiscal Stimulus (-)
Current Law
2013 Fiscal Cliff
(% of GDP )
Expiration of
unemployment
benefits
-0.2%
Automatic
spending cuts
(sequestration)
-0.8%
Expiration of
payroll tax cuts -0.8%
Expiration of Bush
tax cuts -0.8%
C.-3.0%
Source: Morgan Stanley, April 2012.
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Yield relationships convey disbelief
16
Equity free cash flow yields as a ratio to Baa corporate bond yields1 1953 through early-January 2012
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10
Recessions
Average
Source: Federal Reserve Board, Bloomberg, LP, Corporate Reports, Empirical Research Partners Analysis.
1 Large-capitalisation stocks excluding financials and utilities; capitalisation weighted data.
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Portfolio strategy
17
Characteristics we like
Growth/high barriers to entry
Exposure to domestic capital spending
Proactive capital management
Underleveraged balance sheets / strong free cash flow
Sector overweights
Consumer Discretionary, Healthcare, Materials, Financials
Sector underweights
IT, Consumer Staples, Utilities, Energy
Source: Threadneedle. Representative account is American Fund (OEIC) as at 30 September 2012.
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Well resourced team
Global approach in insular market
Pragmatic, simple and disciplined investment process
Excellent and consistent long-term record
Conclusion
18 PT.12.01817
Appendix
AP
Cormac Weldon joined Threadneedle in 1997 and is Head of US Equities. He manages the Threadneedle American,
American Select and American Smaller Companies funds, as well as the Allied Dunbar North American Growth fund.
Cormac started his career with KPMG. He has also worked for Provident Mutual as an analyst on their North
American equities team and British Gas Pension Fund as a fund manager on their North American equities team.
Cormac has a BA in Accounting and Finance from Dublin City University. He is also an associate member of the UK
Society of Investment Professionals (UKSIP) and a CFA Charterholder.
Threadneedle start date: 1997
Industry start date: 1989
Biography
20
CORMAC WELDON
Head of US Equities and Fund Manager
PT.12.01817
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Important notes
PL5/09/193 21