CI Global High Dividend Advantage Fund Epoch Investment Partners, Inc.
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Transcript of CI Global High Dividend Advantage Fund Epoch Investment Partners, Inc.
CI Global High DividendAdvantage Fund
Epoch Investment Partners, Inc.
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Highlights A Case for Global Shareholder Yield Portfolio Characteristics
Table of Contents
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Actively Managed Portfolio
Exposure to Global Portfolio focused on “Shareholder Yield” comprised of:
High Dividend Paying Securities
MLPs / REITs
Equities
Diversified by company, geography and industry
Proven investment strategy: Epoch Investment Partners
Highlights
4
Attractive, tax efficient monthly distributions 6% annual initial target distribution
Approx. 8.5% pre-tax interest equivalent
Forward structure recharacterizes income into tax-efficient capital gains, return of capital
Benefits of traditional Closed End funds without their drawbacks
Highlights
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Details
Price: $10 per unit
Minimum investment: $500
Target Yield: 6% (8.5% pre-tax equivalent)
Commission
ISC DSC LL MLL
Class A 0-5% 5.00% 2.00% 3.00%
Service Fees
ISC DSC LL MLL
Class A 1.00% 0.50% 0.50% first 3 yrs1.00% thereafter
0.40% first 4 yrs1.00% thereafter
Fund Name
Fund Code
Class A Class F Class I
ISC DSC LL MLL ISC ISC
CI Global High Dividend Advantage Fund 2810 3810 1610 6976 4810 5810
CI Global High Dividend Advantage Fund US$ 2811 3811 1611 6977 4811 N/A
A Case for Global Shareholder Yield
Epoch Investment Partners, Inc.
William W. Priest, CFA, CPAChief Executive Officer/Chief Investment Officer
Michael A. Welhoelter, CFAManaging Director, Portfolio Manager
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Financial Economy & Real Economy Are Linked – Role of Inflation and Interest Rates
Changing Order Within Sources of Return Leads to Rising Importance of Yield
Globalization Turbo-Charges Global Real Growth and Enhances Free Cash Flow Growth Rates
Importance of Free Cash Flow Metric for Capital Allocation Options
Dividends and Shareholder Yield
Summary Case for Shareholder Yield
Backdrop
Financial Economy and
Real Economy are Linked
- Role of Inflation and
Interest Rates
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Real and Financial Economy: Directly Connected
Real GDP
Inflation
StockMarket Level
P/E Ratio
EPSNominal GDP
+
=
Real Economy Financial Economy
x
10
“3.11- A Rate, Not A Date” – Bill Priest
“Following almost 20 years of expanding P/E ratios,
interest rates are poised to rise, thereby eliminating
P/E ratios as the major driver of total equity returns
as was the case over the 1980-2000 period.”*
* See Bill Priest’s Paper “3.11- A Rate, Not a Date”
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P/E’s Are Inversely Related to Interest Rates
Sources of Equity Returns: P/E’s, Earnings, & Dividends
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
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8
200
2 0.0
1.5
3.0
4.5
6.0
7.5
9.0
10.5
12.0
13.5
15.0
Trailing P/E Ratio
Long Term GovernmentBond Interest Rate
Inte
rest R
ates (%
) on
10-year G
ov’t S
ecurities
P/E
rat
ios
at y
ear
end
Source: Epoch Investment Partners/Standard & Poors
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Nominal GDP and Earnings: Long-term History
4.00
5.00
6.00
7.00
8.00
9.00
10.00
1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
No
min
al G
DP
, L
N(G
DP
)
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
S&
P 5
00 E
PS
, L
N(E
PS
)
Ln Nominal GDP
Ln S&P 500 Earnings Per Share
Sources of Equity Returns: P/E’s, Earnings, & Dividends
Source: Epoch Investment Partners/Standard & Poors
Changing Order Within the
Sources of Return Leads to
Rising Importance of Yield
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1. P/E’s
2. Earnings
3. Dividends
Sources of Equity Returns
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Components of Compound Annual Total Returns for Trailing 10-year
Periods(S&P 500 Composite 1926-2004)
-10%
-5%
0%
5%
10%
15%
20%
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361
937
19
381
939
19
401
941
19
421
943
19
441
945
19
461
947
19
481
949
19
501
951
19
521
953
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541
955
19
561
957
19
581
959
19
601
961
19
621
963
19
641
965
19
661
967
19
681
969
19
701
971
19
721
973
19
741
975
19
761
977
19
781
979
19
801
981
19
821
983
19
841
985
19
861
987
19
881
989
19
901
991
19
921
993
19
941
995
19
961
997
19
981
999
20
002
001
20
022
003
20
04
Ending Date of 10-year Period
Combined EffectsP/E ExpansionEarnings GrowthDividends & ReinvestmentTotal Return
Sources of Equity Returns: P/E’s, Earnings, & Dividends
Source: Epoch Investment Partners/Standard & Poors
Globalization Turbo-Charges
Real Growth and Enhances
Free Cash Flow Growth
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Turbo-Charging Real Economic Growth Through:
Globalization and its Instrument –
The Law of Comparative Advantage
“Volume of tradable goods has doubled in the past five years”
Emergence of new trading paradigms has led to:
- Stephen Roach Economist, Morgan Stanley
Productivity Profitability Inflation
Importance of Free Cash Flow Metric
for Capital Allocation Options
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From an investor’s perspective, “Free cash flow is the cash available for distribution to investors after all planned capital investment and taxes.”*
“But, accountants define the cash flow of a company as the sum of net income plus depreciation and other non-cash items that are subtracted in computing net income.”* - too inadequate for financial decisions
Free cash flow is emerging as dominant capital allocation driver and hence, that of equity returns as well
Rise in Private Capital Firms emphasizing role of free cash flow exclusively
Importance of Free Cash Flow Analysis for Capital Application Options
*Valuations for Mergers, Buyouts, and Restructuring , Enrique R. Arzac
“The New Kings of Capitalism”Economist
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Free Cash Flow Options
Acquisitions
Reinvestment in Business
Firm Growth
Shareholder Yield
Dividends
Share repurchase
Debt reduction
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Dividends and Shareholder Yield
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Shareholder Yield is a better measure of a firm’s ability to deliver income to investors
Application of free cash flow model clarifies components
Traditional dividend measures fail to capture all shareholder yield contributions
Buybacks and debt reduction are now viewed as important use of cash
Dividends and Shareholder Yield
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0
20
40
60
80
100
120
140
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180
200
74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Dividend Yield will be re-defined as Shareholder Yield with ascendancy of free cash flow metric
Shareholder Yield will rise sharply as corporations more efficiently use their capital
Source: Corporate Reports, Empirical Research Partners Analysis.
1 Largest 1,500 stocks; data smoothed on a trailing one-year basis. Excluding Microsoft's special dividend in 12/2004.
Dividends as a Share of Free Cash Flow 1
1974 Through November 2005
Current
Dividend Yield to become Shareholder Yield
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Shareholder Yield positively affected by
emerging compensation policies
Shareholder Yield
Restricted Stock Units
Summary Case for
Shareholder Yield
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Summary Case for Shareholder Yield
Interest rates will stay flat or rise for the foreseeable future.
P/E ratios will stay flat or fall.
To the extent that equities deliver positive returns, such positive returns will, out of necessity, be driven by dividends and earnings (the other two contributing sources of total return).
Both dividends and earnings are “real” phenomena as opposed to “pricing multipliers”.
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Summary Case for Shareholder Yield
Assume overall economy (nominal terms) grows 6%. Assume current dividend yield is 2%. The return to equities will be 8%.
If interest rates rise, P/E ratios will fall. Under such a scenario, equity returns will be less than 8%.
To the extent that equities deliver positive returns, such positive returns will, out of necessity, be driven by dividends and earnings.
A clear opportunity exists by focusing on the sources of real returns.
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Summary Case for Shareholder Yield
Through the use of a financial metric (free cash flow) rather than an accounting metric (earnings) it is easier to discern those firms most likely to utilize their free cash flow intelligently for shareholder value creation.
If the return on incremental capital to be deployed in the business is equal to or less than the present average return on capital, the capital should be returned to shareholders.
By assembling a portfolio of companies that offer superior dividend levels (direct dividends, share repurchases, debt reductions) and operating earnings growth we will be able to deliver performance superior to that of the broad-based equity market.
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Portfolio Characteristics
Core Portfolio Process
Current Portfolio Allocation
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Core Portfolio Process: Fund Competitive Positioning
Exceptional, robust, current yield > 5%Exceeds long bondsRoughly 300 bps greater than global equity indices
Consistent dividend growth 3% compound annual growth last three years85% of companies raised their dividend in the last 12 months
Global participation and diversification
Innovative Portfolio Construction Stock-specific performance and income risks reduced Simultaneously allocating portfolio weight, income, and dividend growth
Special Dividend Capture Program
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Core Portfolio Process: Epoch’s Proprietary Income Screen
Income Security and GrowthCurrent yield > 4% 3+ years of monotonically increasing dividends
Cash from operations exceeds dividends (or cash returned) over trailing three years
Want ample dividend coverage and to avoid liquidating income vehicles
No dividend cancellations in available financial history up to 20 years Dividend is “sacred”
Low incidence of dividend reduction in available history
Company has increased dividend in more than 50% of available history
Positive growth in cash flow from operations over the last 5 years
Liquidity:Market Capitalization > $250 million U.S.For lightly traded stocks, prospective position is less than one-day of trading volume
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Take candidate stocks ( n ~ 150)
Use quadratic optimizer to maximize the probability of achieving the following portfolio goals:
1. Conventional Dividend Yield >= 5%
2. Recent Dividend Growth = 10% (Expected Incremental Yield = 0.50%)
3. R-squared of security dividend streams > 0.9 for two-thirds of holdings
4. Seek additional 1.5% of shareholder yield through expected share repurchases and debt reduction
Position Constraints:
Maximum assets per security = 2.5%
Maximum income contribution per security = 3%
Maximum incremental income per security = 5%
Minimum position = 0.50%
Core Portfolio Process: Portfolio Construction
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Current Portfolio Allocation
Economic Sectors
0%
5%
10%
15%
20%
25%
30%
cons
umer
disc
retio
nary
cons
umer
stap
les
ener
gy
finan
cials
healt
h ca
re
indus
trials
infor
mat
ion te
chno
logy
mat
erial
s
telec
om se
rvice
s
utilit
ies
portfolio weight Citigroup BMI World weight
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Current Portfolio Allocation
Geographic Diversification
0%
10%
20%
30%
40%
50%
60%
U.S.
Japa
nU.K
.
Franc
e
Canad
a
Germ
any
Switzer
land
Austra
liaIta
ly
Spain
South
Kor
ea
Nethe
rland
s
Sweden
Hong
Kong
Finlan
d
Belgium
Singap
ore
Other
s
Portfolio Citigroup BMI World
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Minimum Purchase: $500 / Each subsequent investment minimum: $50.
RSP Eligibility: 100% eligible for RRSPs, RRIFs, RESPs.
Distributions: Paid monthly. Automatically reinvested with the option to receive in cash.
Selling Concession: 5.00% upfront plus 0.50% per annum trailer.
Liquidity: Daily liquidity.
Summary details
Class A (DSC): 7-year declining schedule
Class A (LL): 3-year declining schedule
Class A (MLL): 4-year declining schedule
Short-term trading fee may apply if units are sold within 30 business of purchase.
Class A (DSC): 10% free units, annually
Class A (LL): Not Available
Class A (MLL): Not Available
DSC Withdrawal Privileges:Redemption Fees:
Switches: Clients can switch units of one class of the fund to another class of the fund or to another fund managed by CI subject to any applicable fees. See the Prospectus for more details.
Commission
ISC DSC LL MLL
Class A 0-5% 5.00% 2.00% 3.00%
Service Fees
ISC DSC LL MLL
Class A 1.00% 0.50% 0.50% first 3 yrs1.00% thereafter
0.40% first 4 yrs1.00% thereafter
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Disclaimer
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ™CI Investments and CI Investments design are trademarks of CI Investments Inc.
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THANK YOU