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Transcript of Cazenove capital management
www.cazenovecapital.com
POWERING INCOME
Cazenove UK Equity Income Fund
Matt Hudson, Fund Manager
Robert Thorpe, Head of UK Retail
For professional advisers only
Equity yields vs bonds
Source: Datastream & Bloomberg, gross market yield:
01/01/07 to 31/12/12 - 2 -
UK Equities 3.76
10 year gilt 1.82 AAA-AA 1.49
AAA-A 1.94
BBB 3.38
BB-B (HY) 6.43
US Equities 2.20
10 year treasury 1.76 AAA-AA 2.32
AAA-A 2.03
BBB 3.32
BB-B (HY) 5.89
Eurozone Equities 4.40 10 year bund 1.31
AAA-AA 1.25
AAA-A 1.53
BBB 3.27
HY 6.47
0
2
4
6
8
10
12
Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
Div
iden
d y
ield
(%
)
FTSE MIB (Italy)
IBEX 35 (Spain)
DAX
S&P 500
Nikkei 225
FTSE All-Share
UK equities - a leading equity income source
Source: Datastream & Bloomberg
: 01/01/07 to 31/12/12 - 3 -
Three Citywire AAA UK managers - three UK sector leaders
IMA: UK All Companies IMA: UK Equity Income IMA: UK Smaller Companies
UK Opportunities Fund UK Equity Income Fund UK Smaller Companies Fund
Nominated UK growth fund
of the year 2012 Investment Week Awards
Winner UK smaller companies fund of the year
2012 Investment Week Awards
Nominated UK equity income fund
of the year 2012 Investment Week Awards
2012 Industry’s best selling
UK equity fund*
2012 Industry’s best selling
UK small cap fund*
2013 Industry’s best selling
….….?
*Source: Cazenove Capital. 2012 net sales versus IMA sector
- 4 -
Cazenove UK Equity Income Fund
Philosophy, process & performance
UK equity income – the power of compounding
*Source: Lipper, Dec 1985 – Dec 2012
**Source: Cazenove Capital Management
5 years ended 31/12/12 (B Income class)
Income reinvested outperforms*
5 years cumulative income returns**
Cazenove UK Equity Income
Fund 25.6%
FTSE All-Share
Index 20.3%
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.00
Dec 85 Dec 90 Dec 95 Dec 00 Dec 05 Dec 10
Inde
x r
eba
sed
to
100
as o
f D
ec 8
5
FTSE All-Share Price Index FTSE All-Share Total Return Index
- 6 -
Appreciating capital
*Source: Lipper, B (Inc) share class, net income reinvested
31/12/05 to 30/11/12
Annualised returns*
- 7 -
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
IMA UK Equity Income FTSE All-Share Cazenove UK Equity Income B Inc
Total Return % (Annualised)
Capital Return % (Annualised)
Portfolio strategy – income through the cycle
Market yield & dividend
growth
Dividend growth &
rerating
Slowdown Recession Recovery Expansion
High & secure yield Low / no yield,
high capital growth
Stock:
Delivers:
Phase:
- 8 -
Where are we in the business cycle(s)?
UK Markit Manufacturing PMI
Source: Markit & Thomson Datastream at 28/09/12
UK Manufacturing PMI vs FTSE All-Share
EPS estimates
30
35
40
45
50
55
60
65
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Headline Index New Orders
30
35
40
45
50
55
60
65
-50
-40
-30
-20
-10
0
10
20
1999 2001 2003 2005 2007 2009 2011
Earnings revisions last 6 months Manufacturing PMI
- 9 -
Income portfolio construction – driving returns
December
2005
December
2006
December
2007
December
2008*
December
2009
December
2010
December
2011
December
2012
Premium real yields 44 49 68 86 60 54 55 60
Superior dividend growth 37 30 21 6 10 20 30 24
Capital Returns 19 21 11 8 30 26 15 16
No of stocks 69 78 58 51 68 57 52 55
- 10 -
• Business cycle
• Pragmatic income
• Focused approach
Cazenove UK Equity Income Fund year end positioning
Source: Cazenove Capital Management
*cash 4.7% at year end 2008
Cazenove UK Equity Income Fund
Current views
Relative price against FTSE All Share (base=100)
1200
1400
1600
1800
2000
2200
2400
2600
130
140
150
160
170
180
190
200
Feb '09 Feb '10 Feb '11 Feb '12
Best Standard EPS Adjusted 2013 (LHS) Price (RHS)
Safety first – the bubble in security
Source: Morgan Stanley & Cazenove Capital at 20/12/12
• Secure growth has re-rated over deep cyclicals/value stocks from 2007
• Driven by the search for safety…
• …and emerging market growth over developed market maturity
Unilever price: relative performance and 2013 earnings forecasts
- 12 -
Income investing – yield at a premium (1)
Source: Mirabaud
• Investors mistaking
‘low volatility’ for
growth
• ‘Secure’ dividend
stocks squeezed
upwards
• Value traps 0
20
40
60
80
100
120
140
160
180
200
220
Trend P/E relative Average + 1 SD - 1 SD
Severn Trent: Trend P/E relative, 1990 - 2012
- 13 -
Trend historic EPS growth rate = 5.2%
Income investing – yield at a premium (2)
Source: Mirabaud
• ‘High volatility’ stock
de-rated is the
opposite side of the
trade
• Value opportunities
0
20
40
60
80
100
120
140
Trend P/E relative Average + 1 SD - 1 SD
Barclays: Trend P/E relative, 1990 - 2012
- 14 -
Trend historic EPS growth rate = 3.9%
Dividend recoveries
*Source: MSDW/Datastream, FTSE, Global Financial Data,
Morgan Stanley Research **Source: Cazenove Capital
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09
FTSE All Share – Dividend Per Share Growth (YoY %)*
Year Dividend
distributions (net) 2007 4.39p
2008 5.12p
2009 4.84p
2010 4.55p
2011 4.86p
2012 5.12p
Cazenove UK Equity Income Fund**
- 15 -
Portfolio strategy – active positions
Source: Cazenove Capital Management 31/12/2012
Market Cap Exposures Index Portfolio
FTSE 100 84.3% 60.8%
FTSE 250 13.4% 29.5%
FTSE Small Cap 2.3% 1.5%
AIM - 0.2%
Ex Index - 3.1%
Cash - 4.9%
Portfolio Risk
Predicted Tracking error p.a. 4.1%
Beta 0.91
# of stocks 55
Underweight Market Overweight
-4.54% BP
-4.48% Shell A
-3.72% GlaxoSmithKline
-3.26% Shell B
-2.55% Diageo
-1.86% HSBC
-1.61% Unilever
-1.50% SAB Miller
-1.75% Standard Chartered
-2.54% BHP Billiton
easyJet +1.76%
Legal & General +1.73%
Berendsen +1.67%
GKN +1.65%
Aberdeen Asset +1.61%
DS Smith +1.61%
Resolution +1.60%
Rio Tinto +1.59%
BT Group +1.58%
Babcock +1.56%
- 16 -
Cazenove UK Equity Income Fund
- 17 -
-50
-40
-30
-20
-10
0
10
20
30
40
Cazenove UK Equity Income B Inc
IMA UK Equity Income
5 year cumulative performance
Source: Lipper 31/12/07 to 31/12/12
Summary
• UK Equity yields look attractive compared to other equity markets
• A business cycle fund offers an alternate UK equity income approach
• Cazenove UK strength: three UK managers AAA rated by Citywire
• Cazenove UK Equity Income Fund 1st decile over 1, 2, 3 ,4 and 5 years*
Citywire rating to 30/11/12.*Source: Lipper B (Inc) reinvested to 30/11/12..**Source: Cazenove Capital B (Inc) net
income reinvested. †Source: Cazenove Capital, B (Inc) net income reinvested. ††X class 0.75% AMC, minimum
investment £1million (waived via adviser platforms), A class 1.0% AMC, minimum investment £25, 000, B class 1.5%
AMC, minimum investment £1000.
• Fund has delivered above market and sector yield for last 5 calendar years**
• Capital returns a key focus
• Historic yield of 4%†
• From 0.75% AMC – across all major platforms††
Thank you
Q&A
Issued by Cazenove Capital Management which is the name under which Cazenove Capital Management
Limited and Cazenove Investment Fund Management Limited both authorised and regulated by the Financial
Services Authority provide investment products and services. Past performance is not a guide to future
performance. The value of investments and the income from them can go down as well as up and an investor
may not get back the amount originally invested and may be affected by fluctuations in exchange rates. The
levels and bases of tax assumptions may change. This document is for information purposes only and does not
constitute an offer to enter into any contract/agreement nor is it a solicitation to buy or sell any investment or to
provide any services referred to therein. Details of the terms and risk warnings are contained in the Prospectus
and Key Investor Information Document. This document is intended for Professional Advisers, Professional
Intermediaries and non-private clients only.
Regulatory information and risk warnings
- 20 -
Appendix
The Cazenove UK Equity Income Fund – summary
Internal Performance Objective:
Benchmark FTSE All-Share Index
Number of stocks Current 55, minimum 35
Portfolio Restrictions
(Rel to FTAS)
Stock +5% / No minimum
Sector +10 / No minimum
50% max weight in mid-cap,10% max in
small/ AIM/ other
(+ minimum 80% in UK Equities)
Tracking Risk 4-8% target range, current 4.1%
Launch Date 6 May 2005
Fund Size £175m
Structure UK Domiciled, UCITS III
Base Currency £ (Sterling)
Historic Yield 4.0%
• Pragmatic income
• Income and Capital returns
• Business cycle approach
• Focused portfolio
• Top decile 1, 3 and 5 years*
*Source. Cazenove Capital Management, fund ranking in
Lipper UK Equity Income universe as at 30/11/12. There
is no guarantee that the target will be met.
“The Fund aims to outperform by 1.5% over rolling 3 year periods and achieve a minimum yield of 110%
of the benchmark yield”
- 22 -
Cazenove UK Equity Income Fund – portfolio through the cycle
Source: Cazenove Capital Management
*cash 4.7% at year end 2008
Business cycle (+ve) active weights for
Cazenove UK Equity Income
Business cycle (-ve) active weights for
Cazenove UK Equity Income
December
2005
December
2006
December
2007
December
2008*
December
2009
December
2010
December
2011
December
2012
Premium real yields 44 49 68 86 60 54 55 60
Superior dividend growth 37 30 21 6 10 20 30 24
Capital Returns 19 21 11 8 30 26 15 16
No of stocks 69 78 58 51 68 57 52 55
- 23 -
0
5
10
15
20
25
30
35
40
Acti
ve w
eig
ht
(%)
Commodity Cyclical Consumer Cyclical Financial
Growth Growth Defensive Industrial Cyclical
Value Defensive
-40
-35
-30
-25
-20
-15
-10
-5
0
Acti
ve w
eig
ht
(%)
Commodity Cyclical Consumer Cyclical Financial
Growth Growth Defensive Industrial Cyclical
Value Defensive
Business cycle investing – market analysis
• Sector market divides are not homogenous. They do not necessarily help us determine the
behaviour of these stocks within the cycle.
• Define the beta of stocks and allocate them to seven style groupings:
Commodity Cyclicals Growth Financials Growth Defensives
Consumer Cyclicals Value Defensives
Industrial Cyclicals
HIGHER BETA LOWER BETA
• Pragmatic approach combining top-down macro view with earnings based security selection
• Avoid permanent style / size bias
• Demand for products and services changes throughout the business cycle
• Operational gearing of companies impacts profitability of companies
- 24 -
• Commodity Cyclicals – stocks whose revenues are linked either directly or indirectly to a particular commodity product
such as oil, steel, gas, mining, bulk chemicals e.g. BP, Rio Tinto
• Consumer Cyclicals – cyclical stocks which rely on consumer spending for their revenues e.g. retailers, automotives,
house builders, leisure, general retail e.g. Marks & Spencer, easyJet
• Industrial Cyclicals – stocks which manufacture capital goods or which have revenues linked to industrial production
e.g. engineering, aerospace, construction e.g. GKN, Vesuvius
• Growth – stocks which grow revenues well in excess of GDP with a high degree of uncertainty or volatility e.g. luxury
goods, medical technology, IT e.g. Smith and Nephew, ARM Holdings
• Financials/Interest Rate Sensitive – stocks whose business depends on interest rate spreads, financial markets and
asset valuations e.g. banks, insurers, real estate e.g. Barclays, Land Securities
• Growth Defensives – stocks which grow revenues in excess of GDP with a low volatility and high visibility e.g. support
services, food retailers e.g. Pearson, Compass group
• Value Defensives – stocks which grow revenues at or below GDP with low volatility and high visibility e.g.
telecommunications, pharmaceuticals, utilities, food producers, beverages, tobacco, e.g. GlaxoSmithKline, Vodafone
Business cycle investing - seven style groupings
- 25 -
Business cycle investing - horses for courses
Source: Thomson Datastream
31.12.99 -
12.03.03
12.03.03 -
15.06.07
15.06.07 -
03.03.09
03.03.09 -
30.04.12
Morgan Crucible Electronic & Electrical Cyclical -74% +272% -42% +129%
Bodycote Industrial Engineering Cyclical -55% +114% -26% +120%
Cookson General Industrials Cyclical -80% +98% -78% +246%
Diageo Beverages Defensive +147% -17% +40% 19%
Unilever Food Producers Defensive +178% -35% +57% -2%
Reed Elsevier Media Defensive +72% -23% +43% -38%
Stock Sector Style
Performance relative to FTSE All Share*
- 26 -
• Franchise
• Income
• Optionality
Stock selection - Filtrona
A value trap
A growth stock
Recovery to growth
Source: Thomson Datastream, 20/01/05 to 20/01/11 Weekly
HIGH 397.30 10/1/12, LOW 110.25 23/6/09, LAST 380.30
BOUGHT
SOLD
2005 2006 2007 2008 2009 2010 2011 2012
100
150
200
250
300
350
400
450
- 27 -
Source: Cazenove Capital at 31/12/12
Portfolio strategy – business cycle style tilts
14.8
6.7
9.3
7.0
1.2
29.3
Overweight Underweight Neutral/ NA
5.1
26.7
- 28 -
Change over 12 months
vs FTSE All-Share Fund % Index %
Key income portfolio
holdings
Commodity Cyclicals -13.8% 25.6 Rio Tinto
Consumer Cyclicals +29.9% 5.4 Easyjet
Industrial Cyclicals +14.3% 6.1 Elementis
Financials +21.7% 19.4 Aviva
Other/Cash/Unallocated = 4.3 Cineworld
Growth +1.6% 4.3 Sage
Growth Defensives +10.2% 9.1 Babcock
Value Defensives -8.8 % 25.7 BATS
Cazenove UK Equity Income Fund – performance analysis
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
Blue = Positive IMA Sector Return Red = Negative Sector Return
Cazenove UK Equity Income relative to IMA UK Equity Income (%)
Source: Lipper 30/06/2005 to 30/11/2012
- 29 -