valufolio january 2018 - valuanalysis...global sector 30, which went up a creditable 3.4% this...

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ValuFolio – January 2018 Investors were in risk-seeking mood in January. This can of course be

seen from the jump that global equity markets made in a single month

(5.4% measured by MSCI World LC, and even 5.7% for the U.S. market). This

is also revealed by the kind of stocks and sectors that drove the market.

Globally, the best and worst performing stocks were for the most part

Contentious Franchises. We call these companies whose franchise is

either under threat by competitors, or is seen in danger by investors in

aggregate. Investors either decided to back such names as Cisco, Gilead or

Next, all fighting to preserve or consolidate their franchise, or to express

doubts about such names as Pandora, following a disappointing earnings

release. This battle ground is indicative, we think, of a higher risk appetite,

and consequently more stable companies (e.g. Roche) are left behind.

More defensive sectors such as Utilities or Telecom. Services

underperformed as a result. This prevented eROC Global Sector 30, which

is defensively positioned, to follow the more diversified market, despite a

credible increase of 4% in the month.

In Europe, investors were seeking a clear cyclical and financial

exposure. Financials, Materials, Industrials and Energy were the top

performing sectors. These sectors generate, typically, a low rent (the ratio

of free cash flow to net economic assets) and have hardly any franchise (a

rent above the cost of capital). They would generally not be considered by

our strategies, which explain why we lagged the market here.

Across the board, our strategies benefitted from the bids of Keurig on

Dr Pepper, which was part of the US strategies, and of Melrose

Industries on GKN plc, which featured in the European ones. It is not

unusual to see a convergence of opinions between our Intrinsic Value

models and boardroom activity, in that the former are attempting precisely

to replicate the decision-making process of industrial investors for capital

allocation. What is interesting is to witness two such events in a month. It is

possible that 2018 will witness more corporate activity, usually a late cycle

signal.

7th February 2018

Pascal Costantini (+44) 203 058 2931 | Joakim Darras (+44) 203 058 2933 | Janet Lear (+44) 203 058 2934 | Diarmid Ogilvy (+44) 203 058 2932

ValuFolio | 2

Contents

VALUANALYSIS EQUITY STRATEGIES ........................................................................................................................................................... 3

INVESTORS WERE LOOKING FOR RISK AT THE START OF 2018 .................................................................................................................. 4

GLOBAL TRENDS SEEN IN EARLY 2018 ............................................................................................................................................................................... 4

STOCK PICKS AND PERFORMANCE ..................................................................................................................................................................................... 5

REGIONAL PERFORMANCE AND TRENDS ............................................................................................................................................................................. 6

STRATEGIES FACTSHEETS.............................................................................................................................................................................. 8

VALUFOCUS ..................................................................................................................................................................................................................... 8

EROC GLOBAL SECTOR 30 ............................................................................................................................................................................................... 9

EROC GLOBAL 90 ......................................................................................................................................................................................................... 10

EROC GLOBAL S 60 ....................................................................................................................................................................................................... 11

EROC USA 60 .............................................................................................................................................................................................................. 12

EROC USA S 40............................................................................................................................................................................................................ 13

EROC EUROPE 50 .......................................................................................................................................................................................................... 14

EROC EUROPE S 30 ....................................................................................................................................................................................................... 15

GLOSSARY.................................................................................................................................................................................................... 17

DISCLAIMER ................................................................................................................................................................................................. 18

ValuFolio | 3

ValuAnalysis Equity Strategies

ValuAnalysis uses its proprietary “eROC” models (economic Return on Capital) to value and select stocks in order to build

strategies and portfolios for institutional investors. All strategies below are based on our approach to Franchise and Intrinsic

value, a detailed exposé of which can be found on our website, The Theory and Practice of Franchise and Intrinsic Value Analysis.

Strategy

Name

Live

Since Region Description Page ValuFocus 12-Jun-17 Global The reference portfolio is constructed from 3 lists of stocks: Core Franchises (franchises with little dispute from competitors or from

investors and an economic rent of 10%-20%), Emerging Franchises (franchises stemming from an unusual business model, a genuine new

sector or an old industry reinventing itself) and Contentious Franchises (franchises under threat with a higher risk / reward proposition).

These three sub-portfolios are given a weighting depending on ValuAnalysis' view of their relative potential and these views are outlined

in the ValuFocus research reports.

8

eROC Global Sector

30

30-Dec-16 Global The reference portfolio is composed of 30 liquid & large cap worldwide stocks selected and weighted equally on a quarterly basis. The

selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal ranks all industry sectors by their median

valuation. The 3 industry sectors with the lowest valuations are kept, represented by the 10 most "reasonably priced" stocks within these

sectors. In case less than 10 stocks are below the sector median, additional stocks with the lowest valuation outside these sectors are

also included.

9

eROC Global 90 08-Apr-16 Global The reference portfolio is composed of 90 liquid & large cap US stocks selected and weighted equally on a quarterly basis. Stocks

exhibiting a sustainable “economic franchise” with a strong "shareholder pay-out ratio" at a "reasonable price" are selected.

10

eROC Global S 60 08-Apr-16 Global The reference portfolio is composed of 60 liquid & large cap worldwide stocks selected and weighted equally on a monthly basis. The

selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk analysis. First, 90

stocks exhibiting a sustainable “economic franchise” with a strong "shareholder pay-out ratio" at a "reasonable price" are pre-selected.

Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 30 more volatile and least stable stocks according to

advanced risk metrics.

11

eROC USA 60 22-Sep-17 USA The reference portfolio is composed of 60 liquid & large cap US stocks selected and weighted equally on a quarterly basis. Stocks

exhibiting a sustainable “economic franchise” at a "reasonable price" are selected.

12

eROC USA S 40 22-Sep-17 USA The reference portfolio is composed of 40 liquid & large cap US stocks selected and weighted equally on a monthly basis. The selection

is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk analysis. First, 60 stocks

exhibiting a sustainable “economic franchise” at a "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence the

letter S in the name) excludes the 20 more volatile and least stable stocks according to advanced risk metrics.

13

eROC Europe 50 22-Sep-17 Europe The reference portfolio is composed of 50 liquid & large cap European stocks selected and weighted equally on a quarterly basis. Stocks

exhibiting a sustainable “economic franchise” at a "reasonable price" are selected.

14

eROC Europe S 30 22-Sep-17 Europe The reference portfolio is composed of 30 liquid & large cap European stocks selected and weighted equally on a monthly basis. The

selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk analysis. First, 50

stocks exhibiting a sustainable “economic franchise” at a "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence

the letter S in the name) excludes the 20 more volatile and least stable stocks according to advanced risk metrics.

15

ValuFolio | 4

Investors Were Looking for Risk at the Start of 2018

We have the benefit of writing this comment a few days after the end of January, thus knowing of the global retreat of

equity markets in early February. But followers of the VA reports will know that our models have been showing various

signs of scepticism of late, notably struggling to select enough US stocks matching our value criteria, or indeed to select

sectors other than the utility-like kind (e.g. Utilities, Telecom. Services). Global equity markets, measured by MSCI World

Large Cap, went up 5.4% in January 2018. This is not far, give or take, from the long-term annual real return of equity

capital (which, depending on the measures, is between 6 and 7%) and, as such, rather over enthusiastic. We have no idea

of the severity of the correction to come, if at all, but we are firmer on the idea that there is now a lack of value in global

equities that demands a price adjustment.

Global Trends Seen in early 2018

Our main global strategy, eROC Global 90, was able to follow and

even beat MSCI World LC in January, with a jump of 6.1%, versus

a benchmark advance of 5.4%. It is always pleasing to do better

than the benchmark but we do not read too much into this

monthly performance, and certainly not a trend. eROC Global 90,

or indeed its risk controlled brethren, eROC Global S 60, are not

designed to take on the level of risk that would allow the

outperformance of the rising market. This serves merely as a

reminder that strategies can randomly depart from their expected

behaviour, in our view, for better, as the case here, or for worse.

Defensive Sectors Underperform

The froth in the market can be seen in the performance of eROC

Global Sector 30, which went up a creditable 3.4% this month, but

trailed the diversified market. As a reminder, in Q4 2017, this

strategy spectacularly departed from its long-standing investment

in the Global I.T. sector, in which it had been invested since 2010.

As noted in the previous month’s commentary, we read this move

as a lack of value in the higher growth areas, rather than as a

distrust in the fundamental drivers of Technology sector, which

we think are still attractive. But this move has not paid off yet;

Utilities, Telecom. Services and Consumer Discretionary (the three

sectors selected by the strategy) did not do enough to match the

diversified market.

Investors Seek Cyclical and Low Rent Exposure

Another sign of risk-seeking is given by the analysis of the market

drivers in the month. In Europe, for instance, Financials, Materials,

Industrials and Energy were the top performing sectors. This

suggests a marked preference for a cyclical exposure from

investors. We note as well that all these sectors have a low

economic rent, and hardly a franchise on our definition (economic

rent, or the ratio of free cash flow to net assets, above the cost of

capital). Most of these sectors or stocks would be ignored by our

strategies.

ValuFolio | 5

Stock Picks and Performance

Active Selection

ValuFocus is the only “actively managed” selection, a list of ca. 30

global companies with an identifiable economic franchise, which

we classify either as “core”, “contentious” or “emerging”. The three

categories are weighted differently, with the largest weight usually

given to core. The portfolio has a low turnover (revisited

approximately four times a year).

ValuFocus went up 4% in January. The analysis of the top and

bottom stock contributors (see page 8) shows that all the best

positive contributors belonged to the Contentious Franchise

category. We call Contentious Franchise a company with an

economic franchise (the ability to sustain a free cash flow rent

above the cost of capital) put under threat from competing forces,

or under question by the market. This is perhaps a sign, among

others, that investors are seeking more exposure to controversial

investments. We had noted in the previous month’s report that

Contentious Franchises offered the best risk reward ratio, and it

seems that investors are keen to exploit this ratio further and

want to increase their exposure towards these types of stocks.

We control the risk of ValuFocus by weighting Contentious

Franchises at a lower weight than, for instance, Core Franchises

(20% vs 60%), which explains why the strategy, despite a

significant advance, did not manage to keep up with the market.

Incidentally, among the bottom contributors we find Roche,

Kimberly-Clark and Nestlé, three Core Franchises, or more stable

and predictable propositions, which investors rather sold than

bought, maybe because their risk profile was not interesting

enough, or maybe because they did not offer enough value.

Systematic Selection – Contribution to Total Return Analysis

The individual strategy sheets (see page 9 onwards) give the five

best and worst contributors to total return (CTR) on a monthly

basis. The following table gives the top two best and worst

contributors for selected systematic strategies.

MONTHLY CONTRIBUTION TO TOTAL RETURN, BEST AND WORST, SELECTED STRATEGIES

Best two CTR % Worst two CTR %

ValuFocus

Gilead, Inc. 1.13% Pandora A/S -1.04%

Cisco, Inc. 0.67% Roche AG -0.21%

eROC Global Sector 30

Frontier Com. 0.68% Pandora A/S -0.45%

Gilead, Inc. 0.56% Signet Jewellers ltd -0.21%

eROC Global 90

GKN plc 0.44% Capita plc -0.59%

Seagate tech. plc 0.35% Pandora A/S -0.15%

eROC USA 60

Seagate tech. plc 0.53% Juniper Net., Inc. -0.14%

Dr Pepper Snapple, Inc. 0.39% Signet Jewellers ltd -0.11%

eROC Europe 50

GKN plc 0.70% Pandora A/S -0.32%

Next plc 0.30% Shire plc -0.27%

(VALUANALYSIS)

The table above illustrates the following trends:

ValuFolio | 6

More corporate bids emerge

Our strategies have benefitted from two high profile corporate

bids this month, one from Keurig on Dr Pepper, and one from

Melrose Industries on GKN plc, the British engineering group. It is

not unusual to see a convergence of opinions on the value of a

firm between our Intrinsic Value models and corporate

boardrooms. In fact, we believe that intrinsic value models

replicate the way an industrial investor thinks and makes

decisions on capital allocation.

But two bids in a month remains unusual and probably indicates

that we are likely to see more such corporate activity in 2018.

Corporate mergers and take-overs are usually a late-cycle

phenomenon, and companies will be keen to take advantage of

(currently) low interest rates to gear up their balance sheets to

acquire the assets they want. We can only hope that we will be

able to identify good value targets in the coming months.

Contentious Franchises dominate the debate

This month, both “best contributors” and “worst contributors” lists

are made of either special situations (e.g. the two bids on Dr

Pepper and GKN) or Contentious Franchises. In that last case,

investors either decided to back and bid up well-known names

(Gilead, Cisco, Next are all among the best contributors) or

expressed more doubts following disappointed results (Pandora),

which made the shares underperform.

The fact that investors were clearly more focused on either

supporting a contested franchise or contesting a potential one is

indicative of the same risk-seeking behaviour that we mentioned

earlier. Core Franchises, with the notable exception of Roche, do

not feature on the best and worst list, an indication that they were

not part of the issue for investors, maybe perceived as not offering

enough of an expected return, despite their lower risk profile.

Regional Performance and Trends

U.S. Market

The U.S. market was, again, a major driver behind global equity

markets, with a 5.7% jump (MSCI USA) in January. Our strategies

are not designed to seek a broad market exposure and risk,

especially not in strongly rising markets. We were nevertheless

able to beat this jump in large part due to the Dr Pepper bid, which

benefitted the eROC USA 60 and 40 (risk-controlled version).

European Market

Europe was a less buoyant market, with an advance of 1.5% only

(MSCI Europe). eROC Europe 50 followed with a lag, up 0.9%,

despite the benefit of the GKN bid. The risk-controlled version was

marginally down (0.4%), suffering from the cyclical rotation that

investors imposed on the market. We note that Imperial Brands,

Roche and Véolia, all parts of the European strategies but

weighing on their performance, are all stable cash generators,

precisely the kind of stocks that were not in favour in January.

ValuFolio | 7

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ValuFolio | 8

Live since : 12-Jun-17 Strategy inception : 12-Jun-17

Benchmark : MSCI World LC (USD)

Selection method : Active

Stock weighting : Discretionary

Rebalancing frequency : Discretionary

Style : Long Only

Available as : Calculated by VA

Region : Global

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return VA FOCUS 4.0% 12.6% 16.2% 4.0% 19.0% n/a n/a n/a n/a

MSCI World LC 5.4% 9.1% 13.9% 5.4% 16.5% n/a n/a n/a n/a

Excess Return -1.5% 3.6% 2.4% -1.5% 2.5% n/a n/a n/a n/a

Risk Larg. Drawdown VA FOCUS -1.2% -1.3% -2.5% -1.2% -3.8% n/a n/a n/a n/a

MSCI World LC -1.5% -1.5% -2.0% -1.5% -2.0% n/a n/a n/a n/a

Volatility VA FOCUS 7.7% 7.6% 7.1% 7.7% 7.7% n/a n/a n/a n/a

MSCI World LC 7.0% 5.8% 5.6% 7.0% 5.8% n/a n/a n/a n/a

Ratio Ret / Vol VA FOCUS 51% 166% 227% 51% 246% n/a n/a n/a n/a

MSCI World LC 78% 155% 246% 78% 286% n/a n/a n/a n/a

The portfolio is constructed from 3 lists of stocks: Core Franchises

(franchises with little dispute from competitors or from investors

and an economic rent of 10%-20%), Emerging Franchises

(franchises stemming from an unusual business model, a genuine

new sector or an old industry reinventing itself) and Contentious

Franchises (franchises under threat with a higher risk / reward

proposition). These three sub-portfolios are given a weight

depending on ValuAnalysis' view of their relative potential. These

views are outlined in the ValuFocus research reports.

Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.

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ValuFocus

Strategy Description Cumulative Performance (daily) Relative Performance (daily)

Historical Top & Bottom 5 Contributors in the monthSector Split

Annualised<1 y0% 10% 20% 30% 40%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018

Top 5 Contributors CTR (%) Status

Gilead Sciences Inc. 1.13 hold

Cisco Systems, Inc. 0.67 hold

McKesson Corporation 0.64 hold

Wal-Mart Stores Inc. 0.59 hold

Kone Oyj 0.42 hold

Bottom 5 Contributors CTR (%) Status

Pandora A/S -1.04 hold

Roche Holding AG -0.21 hold

Apple Inc. -0.07 hold

Kimberly-Clark Corporation -0.07 hold

Nestlé S.A. 0.00 hold

Strategy live date Strategy live date

ValuFolio | 9

Live since : 30-Dec-16 Strategy inception : 10-Jan-06


Selection method : Systematic (Value)

Stock weighting : Equal

Rebalancing frequency : Quarterly

Style : Long Only


Region : Global

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return ESEC 30 3.4% 8.3% 10.4% 3.4% 31.0% 28.0% 16.7% 19.4% 14.9%

MSCI World LC 5.4% 9.1% 13.9% 5.4% 26.2% 26.1% 11.9% 11.6% 6.3%

Excess Return -2.0% -0.7% -3.5% -2.0% 4.8% 1.9% 4.8% 7.8% 8.7%

Risk Larg. Drawdown ESEC 30 -1.7% -1.7% -3.1% -1.7% -3.1% -3.1% -24.4% -24.4% -50.7%

MSCI World LC -1.5% -1.5% -2.0% -1.5% -2.0% -2.0% -17.6% -17.6% -54.6%

Volatility ESEC 30 9.7% 8.8% 8.1% 9.7% 7.9% 7.8% 14.9% 13.6% 19.3%

MSCI World LC 7.0% 5.8% 5.6% 7.0% 5.9% 5.9% 11.1% 10.6% 17.5%

Ratio Ret / Vol ESEC 30 35% 95% 127% 35% 395% 358% 112% 142% 77%

MSCI World LC 78% 155% 246% 78% 442% 439% 107% 110% 36%

The reference portfolio is composed of 30 liquid & large cap

worldwide stocks selected and weighted equally on a quarterly

basis. The selection is the result of a two-pronged analysis: an

initial fundamental valuation appraisal ranks all industry sectors by

their median valuation.

The 3 industry sectors with the lowest valuations are kept,

represented by the 10 most "reasonably priced" stocks within

these sectors. In case less than 10 stocks are below the sector

median, additional stocks with the lowest valuation outside these

sectors are also included.


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From: 29-Jan-10 to: 31-Jan-18 (daily)

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eROC Global Sector 30



Annualised<1 y0% 10% 20% 30% 40%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018


Frontier Communications Corporation0.68 hold


Target Corp. 0.51 hold

Discovery Communications, Inc. 0.38 hold

Ralph Lauren Corporation 0.35 hold



Signet Jewelers Limited -0.21 hold

Red Eléctrica Corporación S A. -0.16 hold

Persimmon plc -0.14 hold

National Grid plc -0.12 hold


ValuFolio | 10

Live since : 08-Apr-16 Strategy inception : 10-Jan-06


Selection method : Systematic (Franchise, Value, Dividends)


Rebalancing frequency : Quarterly

Style : Long Only

Available as : Independently calculated by S&P

Region : Global

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return EGL 90 6.1% 9.3% 15.3% 6.1% 20.7% 25.3% 13.0% 15.5% 12.2%

MSCI World LC 5.4% 9.1% 13.9% 5.4% 20.6% 26.1% 11.9% 11.6% 6.3%

Excess Return 0.6% 0.2% 1.4% 0.6% 0.1% -0.8% 1.1% 3.9% 6.0%

Risk Larg. Drawdown EGL 90 -1.3% -1.6% -2.5% -1.3% -7.9% -2.5% -17.5% -17.5% -45.1%

MSCI World LC -1.5% -1.5% -2.0% -1.5% -7.1% -2.0% -17.6% -17.6% -54.6%

Volatility EGL 90 8.3% 7.2% 6.6% 8.3% 9.6% 6.7% 11.9% 11.3% 17.0%

MSCI World LC 7.0% 5.8% 5.6% 7.0% 8.5% 5.9% 11.1% 10.6% 17.5%

Ratio Ret / Vol EGL 90 73% 129% 230% 73% 215% 375% 109% 137% 72%

MSCI World LC 78% 155% 246% 78% 244% 439% 107% 110% 36%

The reference portfolio is composed of 90 liquid & large cap US

stocks selected and weighted equally on a quarterly basis. Stocks

exhibiting a sustainable “economic franchise” with a strong

"shareholder payout ratio" at a "reasonable price" are selected.


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eROC Global 90



Annualised<1 y0% 10% 20% 30%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018


GKN plc 0.44 hold

Seagate Technology plc 0.35 hold

Frontier Communications Corporation0.23 hold

Next Plc 0.21 hold

Johnson Matthey Plc 0.20 hold


Capita plc -0.59 hold


Burberry Group plc -0.09 hold

Barratt Developments plc -0.06 hold

Imperial Brands PLC -0.05 hold


ValuFolio | 11

Live since : 08-Apr-16 Strategy inception : 10-Jan-06


Selection method : Systematic (Franchise, Value, Dividends, Risk)


Rebalancing frequency : Monthly

Style : Long Only


Region : Global

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return EGL S60 5.9% 9.2% 15.4% 5.9% 17.1% 23.0% 12.3% 16.1% 11.8%

MSCI World LC 5.4% 9.1% 13.9% 5.4% 20.6% 26.1% 11.9% 11.6% 6.3%

Excess Return 0.4% 0.2% 1.6% 0.4% -3.5% -3.0% 0.5% 4.5% 5.6%

Risk Larg. Drawdown EGL S60 -1.2% -1.6% -1.9% -1.2% -6.8% -2.6% -14.1% -14.1% -40.9%

MSCI World LC -1.5% -1.5% -2.0% -1.5% -7.1% -2.0% -17.6% -17.6% -54.6%

Volatility EGL S60 7.4% 6.5% 6.1% 7.4% 8.7% 6.2% 10.9% 10.4% 14.8%

MSCI World LC 7.0% 5.8% 5.6% 7.0% 8.5% 5.9% 11.1% 10.6% 17.5%

Ratio Ret / Vol EGL S60 79% 142% 255% 79% 197% 369% 113% 155% 80%

MSCI World LC 78% 155% 246% 78% 244% 439% 107% 110% 36%


worldwide stocks selected and weighted equally on a monthly

basis. The selection is the result of a two-pronged analysis: an

initial fundamental valuation appraisal followed by a financial risk

analysis.

First, 90 stocks exhibiting a sustainable “economic franchise” with

a strong "shareholder payout ratio" at a "reasonable price" are pre-

selected. Thereafter, a “safety net approach” (hence the letter S in

the name) excludes the 30 more volatile and least stable stocks

according to advanced risk metrics


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eROC Global S 60



Annualised<1 y0% 10% 20% 30%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018



Anhui Conch Cement Co. Ltd. 0.28 hold



Maxim Integrated Products, Inc. 0.27 hold





British American Tobacco p.l.c. -0.05 just bought

Campbell Soup Company -0.05 hold


ValuFolio | 12

Live since : 22-Sep-17 Strategy inception : 10-Jan-06

Benchmark : MSCI USA (USD)

Selection method : Systematic (Franchise, Value)


Rebalancing frequency : At least Quarterly

Style : Long Only


Region : USA

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return EUS 60 7.4% 16.1% 19.3% 7.4% 18.1% 25.9% 13.4% 17.5% 14.3%

MSCI USA 5.7% 10.0% 15.0% 5.7% 13.2% 25.5% 13.8% 15.1% 9.1%

Excess Return 1.7% 6.1% 4.3% 1.7% 4.9% 0.3% -0.4% 2.5% 5.2%

Risk Larg. Drawdown EUS 60 -1.4% -1.4% -3.7% -1.4% -1.8% -5.3% -19.9% -19.9% -47.9%

MSCI USA -1.7% -1.7% -2.2% -1.7% -1.7% -2.6% -14.2% -14.2% -51.7%

Volatility EUS 60 11.0% 9.6% 9.2% 11.0% 8.9% 9.0% 13.9% 13.0% 20.4%

MSCI USA 8.9% 7.0% 7.0% 8.9% 6.4% 7.0% 12.2% 12.0% 20.4%

Ratio Ret / Vol EUS 60 67% 168% 210% 67% 204% 286% 96% 135% 70%

MSCI USA 64% 142% 214% 64% 206% 366% 113% 126% 45%


stocks selected and weighted equally on a quarterly basis. Stocks

exhibiting a sustainable “economic franchise” at a "reasonable

price" are selected.


500

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eROC USA 60



Annualised<1 y0% 10% 20% 30% 40%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018


Seagate Technology plc 0.53 hold

Dr Pepper Snapple Group, Inc. 0.39 hold

Fluor Corporation 0.30 hold

Cardinal Health, Inc. 0.28 hold



Juniper Networks, Inc. -0.14 hold

Signet Jewelers Limited -0.11 hold



MEDNAX, Inc. -0.02 hold


ValuFolio | 13

Invested since : 22-Sep-17 Strategy inception : 10-Jan-06

Benchmark : MSCI USA (USD)

Selection method : Systematic (Franchise, Value, Risk)



Style : Long Only

Available as : Tracker

Region : USA

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return EUS S40 7.3% 12.5% 18.0% 7.3% 14.5% 25.2% 13.0% 17.2% 14.1%

MSCI USA 5.7% 10.0% 15.0% 5.7% 13.2% 25.5% 13.8% 15.1% 9.1%

Excess Return 1.6% 2.5% 3.0% 1.6% 1.2% -0.3% -0.8% 2.2% 5.0%

Risk Larg. Drawdown EUS S40 -1.2% -1.2% -2.3% -1.2% -2.0% -2.9% -14.0% -14.0% -40.5%

MSCI USA -1.7% -1.7% -2.2% -1.7% -1.7% -2.6% -14.2% -14.2% -51.7%

Volatility EUS S40 10.5% 8.8% 8.4% 10.5% 8.1% 8.2% 12.5% 11.9% 17.7%

MSCI USA 8.9% 7.0% 7.0% 8.9% 6.4% 7.0% 12.2% 12.0% 20.4%

Ratio Ret / Vol EUS S40 70% 142% 213% 70% 179% 306% 104% 145% 80%

MSCI USA 64% 142% 214% 64% 206% 366% 113% 126% 45%


stocks selected and weighted equally on a monthly basis. The

selection is the result of a two-pronged analysis: an initial

fundamental valuation appraisal followed by a financial risk

analysis.

First, 60 stocks exhibiting a sustainable “economic franchise” at a

"reasonable price" are pre-selected. Thereafter, a “safety net

approach” (hence the letter S in the name) excludes the 20 more

volatile and least stable stocks according to advanced risk metrics


500

1000

1500

2000

2500

3000

3500

4000

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rice

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DateEUS S40 MSCI USA Index


500

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Date EUS S40 Vs MSCI USA Index


eROC USA S 40



Annualised<1 y0% 10% 20% 30% 40%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018


Dr Pepper Snapple Group, Inc. 0.58 hold



Maxim Integrated Products, Inc. 0.40 hold

HCA Healthcare, Inc. 0.36 hold


Juniper Networks, Inc. -0.21 hold



Apple Inc. -0.02 hold

Johnson & Johnson -0.02 hold


ValuFolio | 14

Live since : 22-Sep-17 Strategy inception : 10-Jan-06

Benchmark : MSCI Europe (EUR)

Selection method : Systematic (Franchise, Value)


Rebalancing frequency : At least Quarterly

Style : Long Only


Region : Europe

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return EEU 50 0.9% 0.3% 6.3% 0.9% 3.8% 11.1% 7.7% 13.2% 10.6%

MSCI Europe 1.5% 0.3% 5.7% 1.5% 3.7% 12.6% 5.1% 9.1% 4.8%

Excess Return -0.6% 0.0% 0.7% -0.6% 0.1% -1.5% 2.6% 4.1% 5.8%

Risk Larg. Drawdown EEU 50 -1.7% -4.6% -4.6% -1.7% -4.6% -9.0% -17.6% -17.6% -42.7%

MSCI Europe -1.5% -3.6% -3.6% -1.5% -3.6% -5.8% -25.9% -25.9% -51.5%

Volatility EEU 50 9.2% 9.4% 9.3% 9.2% 9.0% 9.8% 16.1% 15.1% 19.8%

MSCI Europe 7.6% 7.7% 8.1% 7.6% 7.5% 8.9% 17.1% 15.9% 21.3%

Ratio Ret / Vol EEU 50 10% 3% 68% 10% 42% 113% 48% 88% 54%

MSCI Europe 19% 3% 70% 19% 49% 141% 30% 57% 23%


European stocks selected and weighted equally on a quarterly

basis. Stocks exhibiting a sustainable “economic franchise” at a

"reasonable price" are selected.


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1000

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3500

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eROC Europe 50



Annualised<1 y0% 10% 20% 30%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018


GKN plc 0.70 hold

Next Plc 0.30 hold


Randstad Holding NV 0.22 hold

Sandvik AB 0.17 hold



Shire plc -0.27 hold


Barratt Developments plc -0.17 hold



ValuFolio | 15

Invested since : 22-Sep-17 Strategy inception : 10-Jan-06

Benchmark : MSCI Europe (EUR)

Selection method : Systematic (Franchise, Value, Risk)



Style : Long Only

Available as : Tracker

Region : Europe

1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y

Return EEU S30 -0.4% -1.7% 3.9% -0.4% 1.6% 9.7% 6.8% 13.0% 11.0%

MSCI Europe 1.5% 0.3% 5.7% 1.5% 3.7% 12.6% 5.1% 9.1% 4.8%

Excess Return -1.8% -1.9% -1.7% -1.8% -2.1% -2.9% 1.7% 3.8% 6.2%

Risk Larg. Drawdown EEU S30 -2.5% -3.6% -3.6% -2.5% -3.6% -8.8% -14.8% -14.8% -32.7%

MSCI Europe -1.5% -3.6% -3.6% -1.5% -3.6% -5.8% -25.9% -25.9% -51.5%

Volatility EEU S30 10.2% 9.0% 9.1% 10.2% 8.8% 9.7% 15.8% 14.5% 16.9%

MSCI Europe 7.6% 7.7% 8.1% 7.6% 7.5% 8.9% 17.1% 15.9% 21.3%

Ratio Ret / Vol EEU S30 -3% -19% 43% -3% 18% 100% 43% 89% 65%

MSCI Europe 19% 3% 70% 19% 49% 141% 30% 57% 23%


European stocks selected and weighted equally on a monthly basis.

The selection is the result of a two-pronged analysis: an initial

fundamental valuation appraisal followed by a financial risk

analysis.

First, 50 stocks exhibiting a sustainable “economic franchise” at a

"reasonable price" are pre-selected. Thereafter, a “safety net

approach” (hence the letter S in the name) excludes the 20 more

volatile and least stable stocks according to advanced risk metrics


500

1000

1500

2000

2500

3000

3500

01/2010 06/2011 10/2012 03/2014 07/2015 12/2016P

rice

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DateEEU S30 MSCI Europe (EUR)


500

750

1000

1250

1500

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2000

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Date EEU S30 Vs MSCI Europe (EUR)


eROC Europe S 30



Annualised<1 y0% 10% 20% 30%

Cons. Disc.

Cons. Staples

Energy

Financ/Real…

Healthcare

Industrials

IT

Materials

Telecom.

Utilities

January 2018


Fresenius SE & Co KGaA 0.26 hold

Continental Aktiengesellschaft 0.25 hold

Telenor ASA 0.18 hold

Atlas Copco AB 0.16 hold

Adecco S.A. 0.13 hold






Veolia Environnement S.A. -0.16 hold


ValuFolio | 16

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ValuVest | 17

GLOSSARY

Competitive Advantage Period (CAP) The period during which a firm can generate a return (see Rent) above the cost of capital.

Economic Profits Cash profits or Free Cash Flow minus the notional cost of capital.

Excess Return The level of return above the cost of capital.

Fade The rate of normalisation of the competitive position of the firm, defined as its level of Rent and

growth rate. By construction, an excess return cannot be assumed to be perpetual, and the market

always assumes an eventual normalisation towards the cost of capital.

Franchise Value One of the three sources of value, defined as the net present value of a firm’s sustainable level of

Economic Profits over its Competitive Advantage Period.

Gross economic Capital (GeC) The sum of all operating capital used by the firm pre-depreciation, including all tangible assets,

capitalised intangible assets and operating leases, Other Long Term Assets (OLTA) and concession

assets.

Growth Value One of the three sources of value, defined as the residual of: Market Value minus Replacement

Value and Franchise Value.

Intrinsic Value The sustainable value of a firm, defined as Replacement Value plus Franchise Value.

Net economic Capital (NeC) The depreciated value of GeC, according to the principles of economic depreciation.

Net Free Cash Flow Gross cash flow minus all capital spending.

Operating Free Cash Flow Gross cash flow minus maintenance capital spending.

Rent or Rent Yield The ratio of FCF over Net economic Capital. We refer to it as “asset yield” or “cash return” as well.

Replacement Value One of the three sources of value, equal to Net economic Capital.

Residual Income Model A valuation framework defining the price of an asset as the net (depreciated) value of this

asset plus the net present value of its sustainable level of economic profits.

ValuFolio | 18

DISCLAIMER

This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference

number 710908). This document is only permitted for individuals or firms who would fall within the definition of a professional client as

defined by the Financial Conduct Authority’s rules.

This document does not provide personal recommendation based on your individual circumstances. By making this information available

to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover

the sum that you invested.

The views expressed in this document are as of the published date and based on information available at the time. ValuAnalysis does

not assume any duty to update any of the information contained in this document.

By viewing this document, you confirm that you have read and accepted this disclaimer.

CONFLICTS OF INTEREST

In taking all appropriate steps to prevent, manage and/or mitigate the possibility of conflicts of interest, ValuAnalysis’ employees are

subject to internal organisational and administrative arrangements in relation to the management of inside information, handling of

unpublished research material, gifts and hospitality, external business interests, remuneration and personal transactions. These internal

organisational and administrative arrangements have been designed in accordance with applicable legislation and relevant industry

standards. These internal organisational and administrative arrangements are considered appropriate and proportion in light of the

nature, scale and complexity of ValuAnalysis’ business.

As at the time of writing, ValuAnalysis does not perform services for any issuer mentioned in this report. Notwithstanding, ValuAnalysis

may, to the extent permitted by law, perform services for, solicit business from, or otherwise be interested in the investments, directly

or indirectly, of any issuer mentioned in this report.

ValuAnalysis prohibits its analysts, professionals reporting to analysts and members of their households from making personal

transactions in any issuer in the analyst's area of coverage for a period of 10 days before and after the publication of research pertaining

to the issuer. ValuAnalysis prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer,

director, advisory board member or employee of any company in the analyst's area of coverage.

ValuFolio | 19

ValuAnalysis has no agreements with issuers with respect to dissemination of recommendations. Analysts do not, nor will they, receive

direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in this report.

Analysts are paid in part based on the overall profitability of ValuAnalysis.

In line with the European Union’s Market Abuse Regulation, ValuAnalysis provides quarterly statistics on the overall ratio of "Buy”, “Hold”

and “Sell” in ValuAnalysis recommendations in financial instruments and the proportion of issuers corresponding to each of those

categories to which such person has supplied material services of investment firms over the previous 12 months. These are as follows:

“Buy”, “Hold” and “Sell” recommendations Investment services provided to these issuers in previous 12 months

Recommendation Number % of total Number % of total

Buy 27 82 0 0

Hold 0 0 0 0

Sell 6 18 0 0

The above table covers the period 26th October to 7th February 2018. This disclosure is reviewed and updated on a quarterly basis. Last

updated 7th February 2018.

VALUFOLIO

For more information:

Pascal Costantini

Founding Partner

The Clubhouse, 8 St. James's Square

London SW1Y 4JU

(+44) 203 058 2931

[email protected]

Joakim Darras

Founding Partner


London SW1Y 4JU

(+44) 20 3058 2933

[email protected]

Janet Lear

Partner


London SW1Y 4JU

(+44) 203 058 2934

[email protected]

Diarmid Ogilvy

Founding Partner


London SW1Y 4JU

(+44) 203 058 2932

[email protected]

www.valuanalysis.com

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