Why be a Stock-picker now?

ValueX Seminar - Zurich / Klosters, February 2011

Don Fitzgerald, CFAdfi@tocquevillefinance.fr

� Macroeconomic forecasting - historically treacherous

1. Top-down approach - no magic formula

2

Source: Federal Reserve Bank of Philadelphia, GMO

� Even more challenging in times of global monetary & fiscal experiments

� Can you read minds of our policy-makers?

1. Top-down approach - no magic formula

3

1. Top-down approach - no magic formula

� No correlation between economic growth & equity returns in short & long

run

4

2. Stock-Picking is out of favour

� Observation I: Explosion in number of Balanced Funds

1300

1500

1700

1900

2100

2300Number of mixed funds - Germany

+44.33%

+22.86%

+30.94%

5

� Observation II: Some Stock-Pickers contaminated by top down approach

Source : BVI Bundesverband Investment und Asset Management e.V.

500

700

900

1100

2005 2006 2007 2008 2009

+42.88%

+44.33%

2. Stock-Picking is out of favour

� Out of favour strategy - better chance to outperform

� Out of favour makes the Contrarian happy

6

�Obrservation: Explosion in number of ETFs

3. Exploit inefficencies caused by ETF craze

Number of ETFs(USA)

7

Does ETF growth result in less resources devoted to fundamental research?

Index inclusion occurs after strong performance & vice versa - ETF tends to buy high & sell low

Source BCA, Investment Company Institute, * without December

3. Exploit inefficencies caused by ETF craze� Can the agile, wise Stockpicker out-maneuver the ETF hulk?

8

4. Value-driven Stock-Picking works!

� Vicat und Lafarge

300

400

500

600

700

Lafarge VICAT

9Source: Bloomberg

0

100

200

�Same Industry�Same Country �Totally different Value creation

4. Value-driven Stock-Picking works!

� Ireland: On the blacklist…..

� DCC: > 51% Outperformance � Origin Enterprises: > 50% Outperformance

90

100

110

120

130

Kauf

Zukauf

130

140

150

160

170

Kauf eines Blocks

10

40

50

60

70

80

90

DCC Stoxx 600 Europe

80

90

100

110

120

130

Origin Enterprises Stoxx 600 Europe

Source: Bloomberg

5. Favourable Timing

� Two main directional movements appear to be behind us.

Phase Time PeriodPerformance(Stoxx 600)

7/2007 – 3/2009 - 60%

11

3/2009 – 4/2010 + 70%

Stock-picker Market 4/2010 – today + 5%

Why be a Stock-picker now?

� Top-down approach - no magic formula

� Stock-picking is out of favour

� World uncertain => Focus on Intrinsic value & margin of safety

� Neglected strategies should outperform

12

� ETF craze

� Stock-picking works

� Timing favorable

outperform

� Exploit inefficencies caused by ETF craze

� Exploit stock mis-pricing from macro confusion

Baron de Ley – An (il)liquid Stock

Baron de Ley – An (il)liquid Stock

�The Stock

14

Baron de Ley – An (il)liquid Stock

� The products

� Winemaker - Spain‘s Rioja region

� Affordable quality wines

� 2 main brands – iconic El Coto & Baron de Ley

� 90% Aged Wines – Crianza (60%) , Reserva /Gran Reserva (30%)

15

� 90% Aged Wines – Crianza (60%) , Reserva /Gran Reserva (30%)

Baron de Ley – An (il)liquid Stock

� 60% sales - domestic cash cow; 40% sales - International

� Owner-managed (41%)

�Competitive advantage – brand strength and reputation

� The business

16

�Competitive advantage – brand strength and reputation

� 15% self supply

� Business is growing

� Through cycle returns: EBIT% : 26 to 33%; ROCE 9% to 15%

� Emerging markets ?

� No PIIGS exposure ?

�A Checklist : Top-Down Investor

Baron de Ley – An (il)liquid Stock

17

� Share highly liquid ?

� New product, technology, etc ?

� A fashionable theme ?

� Do I understand the business ?

� A moat, good business, decent returns ?

Baron de Ley – An (il)liquid Stock

� A Checklist: Contrarian Value-driven Stockpicker

bbb

18

� Cashflows predictable ?

� Owner managed ?

� Out of favour ?

� Can I value the business ? Under-valued ?

b

bb

bb

Baron de Ley – An (il)liquid Stock

Earnings based Balance sheet

� Ca. 6x 2011 EBITA� Company benefits from low tax rate� Un-levered PE/NOPAT multiple <9x

� EV = CE for ROCE 9% to 15%� Resale value of assets well exceeds Book Value

Market Valuation

19

Intrinsic Value

� 10x 2011 EBITA implies value per share above EUR 55

NB : Market Cap EUR 230mLimited free float, Daily Volume EUR 400k Cash returned via share buybacks not dividends

The Fund – Tocqueville Value Europe

� Performance since inception

20Past performance is no indication as to future performance. Performance is not constant over time – Source: Europerformance

� Ratings

� Don Fitzgerald

Sébastien Lemonnier

Citywire - European Equity category

Ranked 2nd since inception in its category (from

31/03/00 to 31/01/2011)

� Lipper� Preservation

� Consistent return

� Total return

� Europerformance

• This document is strictly confidential and for the use of intended recipients only. It may not be reproduced, communicated or published in its entirety or in part, without the prior written authorisation of Tocqueville Finance S.A.

• This commercial document should not be interpreted as a contractual or pre-contractual commitment on the part of Tocqueville Finance S.A. It is produced purely for illustrative purposes and may be amended at any time without previous notice.

• The information/analyses contained in this document, particularly figures, have come partly from external sources considered to be trustworthy. However, Tocqueville Finance SA cannot guarantee that the information/analyses are complete, accurate and up-to-date.

• Tocqueville Finance S.A. draws investors’ attention to the fact that past performances are presented on the basis of figures relating to previous years and are not an indication of future performance.

Disclaimer

21

basis of figures relating to previous years and are not an indication of future performance.

• Moreover, Tocqueville Finance S.A. in no way guarantees the current or future performances of funds cited in this document

• Investors are reminded that any financial investment includes risks (market risks, capital risk, foreign exchange risk) that may result in financial losses. Therefore, Tocqueville Finance S.A. recommends that prior to any investment, the recipient of this document carefully reads the prospectuses of the cited funds which are available free of charge at its head office located 8 rue Lamennais, Paris 75008 or on its website www.tocquevillefinance.frand ensures that they have the experience and knowledge needed to make an investment decision, particularly with regard to the legal and tax implications.

22

May the Force be with you!