Citywire Berlin Conference
Stock-picking and Quantitative Easing
For investment professionals only
7-9 November 2012 Stephen Moore
Agenda
1. A supportive environment for US equities
2. The key to developing conviction
3. Fundamental opportunities abound
4. One strategy, two funds
5. Threadneedle American Extended Alpha Fund
6. Threadneedle American Absolute Alpha Fund
7. Conclusion
Stock-picking and Quantitative Easing
2
A supportive environment for US equities
01
Benefiting from under-appreciated characteristics
Positive demographic trends
Most dynamic & innovative in the global economy
Strong legal framework
Stable regulatory framework
Good corporate governance
An aggressive central bank
US dollar remains the reserve currency
An increased energy self-reliance
An industrial renaissance
America: the Saudi Arabia of agriculture
Dealing (slowly) with the entitlement culture (Wisconsin recall; NJ)
The case for US equities
4
The best equity returns have come in the wake of disinflation / deflation
Investing in a zero interest world (lesson from Japan) Change in inflation drives the business cycle
Source: Wolfe Trahan, October 2012.
5
-60%
-40%
-20%
0%
20%
40%
60%
80%
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Nikkei Index (yoy, LHS) Japan's CPI (inverted, adv. 6m RHS)
Inflation expectations1 have declined (in %)
Low inflation expectations are spurring central bank action
Source: Bloomberg, 25 October 2012.
(1) Inflation time series shown is the average of the 2 year breakeven rates 2 year forward and global CPI. TRSLAG Index is the 1 year change in the Federal
Reserve’s US treasury Securities held outright
6
-2
-1
0
1
2
3
4
5
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
-400000
-200000
0
200000
400000
600000
800000
1000000
.INFLAT U Index (LHS) .TRSLAG Index (RHS)
Inflation scare
Deflation scare
QEI falls short
QEII works
Twist fails
Quantitative
tightening
QEI
QEII
QEII ends, Twist begins
QE∞ begins
1 year change in Treasury securities held outright
The Fed and ECB are expanding their balance sheets, supporting equity markets
Source: Bloomberg, Federal Reserve as at 25 October 2012
Orange line is the S&P500 Index; Yellow line are the assets held by the European Central Bank; the Green line is the 1-year change in the US Treasury held outright
by the Federal Reserve.
7
S&P 500
Fed
ECB
US homebuilder sentiment points to an increase in housing activity
Source: Bloomberg, 23 October 2012
The yellow line represents building permits; The grey line represents the National Association of Homebuilder s Housing Market Survey; .
0
500
1000
1500
2000
2500
Oct-92 Oct-94 Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12
0
10
20
30
40
50
60
70
80
90
LEI BP Index (LHS) US.HMSURV NAHB Index (RHS)
8
The wildcard of the 2013 fiscal cliff remains
Source: Morgan Stanley, April 2012
9
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%
The key to developing conviction
02
Developing a clear view of the opportunity and the risk
Ideally buying $3 of upside, for $1 of downside
Holding differentiated, substantiated views
Considering the macroeconomic environment
Our approach: Assessing upside/downside risks, stock by stock
11
Upside /
Downside analysis
Explicit risk / reward
assessment
Up / down price targets
Business
model Management
Financial
model
Valuation What is it worth?
Leveraging deep resources
Overseeing $12.4bn in US equities
Source: Threadneedle as at 30 June 2012.
1 Junior Analyst
2 Governance and Responsible Investment
12
Cormac Weldon
Head of US Equities
Health Care
Diane Sobin
Materials, Energy
Stephen Moore
Telecoms
William Warren
Technology
Other Gary 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
Team Brad Colton
Financials
Paul Gannon
Consumer Discretionary
Olivia Miller1
Consumer Staples
Nafis Chowdhury
Industrials
Fundamental opportunities abound
03
The US Consumer is no longer over-extended
Source: Federal Reserve Board, Empirical Research Partners Analysis, September 2012.
14
U.S. Consumers debt levels and debt service
payments as a share of disposable income
1980 through Q1 20121
All commercial banks year-over-year changes in
consumer loans 2005 through Late-August 2012
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
80 83 86 89 92 95 98 01 04 07 10
De
bt
Se
rvic
e (
%)
50
60
70
80
90
100
110
120
130
De
bt
Le
ve
l (%
)
Debt Debt Service
(10)
(5)
0
5
10
15
Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12%
Large-capitalization consumer lenders relative-to-core consumer cyclicals ratio of price-to-book ratios1
1972 through mid September 2012
US banks are historically cheaply valued against consumer plays
Source: Corporate Reports, Empirical Research Partners Analysis, October 2012.
1 Equally-weighted data.
0.2
0.4
0.6
0.8
1.0
1.2
1.4
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
x
Consumer Lenders
Have Higher Ratios
Consumer Lenders
Have Lower Ratios
15
US banks are liquid, deposits-funded and have deleveraged
Source: Company data, July 2012.
The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been
acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change
without notice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.
16
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
Capital One Financial
Performance 2-year total return
Source: Datastream as at 30 September 2012, in USD.
Past performance is not a guide to future performance. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle
Investments does not give any investment advice. If you are in doubt about the suitability of any investment, you should speak to your financial adviser.
17
80
90
100
110
120
130
140
150
160
Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12
Re
ba
se
d =
10
0
Absolute Relative to S&P 500 Index
New regulations impacting the industry resulting in
pricing discipline
2009 Credit Card Accountability Responsibility and
Disclosure (CARD) Act brings discipline
Acquisition underpinning profits growth
ING Direct in the US (deposits)
c.$30bn of HSBC credit card loans (for c. $2.6bn)
Acquisitions mitigate the pressure to grow loans
Improving credit cycle
c. 30/40% of loans replaced every year
Business predominantly written since the financial crisis
of ’08
Chargedßoffs to remain below normal for longer period
of time
Strong cash generation
On track to reach 8% capital ratio bz 2013
Cash increasingly used to boost shareholder returns
Shares attractively valued on c.8x ’13 earnings
Shale gas now accounts for 25% of production, vs. 5% in 2006
Source: Bloomberg. 1 As at July 2012. 2 As at 10 September 2012.
Past performance is not a guide to future performance. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle
Investments does not give any investment advice. If you are in doubt about the suitability of any investment, you should speak to your financial adviser.
18
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
Ethylene cash production costs, (US$/tonne) February 2003 & 2012
US chemicals are low cost globally
Source: CMAI as at February 2012.
Past performance is not a guide to future performance. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle
Investments does not give any investment advice. If you are in doubt about the suitability of any investment, you should speak to your financial adviser.
19
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
US Large-capitalisation stocks (1)
Highest quintile of dividend yield stocks relative trailing-P/E ratios (x)
Higher-yielding equities are expensively valued
Source: Corporate Reports, National Bureau of Economic Research, Empirical Research Partners Analysis, August 2012. Based on capitalisation-weighted data.
(1) Based on 1500 US largest capitalisations
20
0.2
0.4
0.6
0.8
1.0
1.2
1.4
51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11
Recessions
Average
Higher Multiples
Yield relationships convey disbelief
Source: Federal Reserve Board, Bloomberg, LP, Corporate Reports, Empirical Research Partners Analysis
1 Large-capitalisation stocks excluding financials and utilities; capitalisation weighted data, February 2012 Past performance is not a guide to future performance. The
mention of any specific shares or bonds should not be taken as a recommendation to deal. Threadneedle Investments does not give any investment advice. If you are
in doubt about the suitability of any investment, you should speak to your financial adviser.
.
21
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
21
US companies have underinvested since the financial crisis
Source: Corporate Reports, Empirical Research Partners Analysis, January 2012.
1 Excludes financials
2 Measured quarterly
22
The S&P 5001
Capital spending as a share of gross cash flow2 – 1976 through Q4 2011E
30
40
50
60
70
80
90
100
110
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
Percentile Rank (100 = lowest capital spending as a share of gross cash flow)
%
Latest
Q3 2009
US Equities - Mutual fund net flows (m)
The demise of the equity culture
Source: ICI Goldman Sachs Research as at 29 May 2012
23
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
One strategy, two funds
04
Threadneedle US equities strategies
Source: Threadneedle
25
Strategy Fund manager(s)
Threadneedle American Fund Core Cormac Weldon
Threadneedle (Lux) American Fund Core Cormac Weldon
Threadneedle US Equity Income Fund Income Diane Sobin
Threadneedle American Select Fund High alpha Cormac Weldon
Threadneedle (Lux) – American Select Fund High alpha Cormac Weldon
Threadneedle American Smaller Companies Fund Small cap Cormac Weldon
& Diane Sobin
Threadneedle (Lux) American Absolute Alpha Absolute Returns Stephen Moore
Threadneedle American Extended Alpha Fund Long/short S&P500 benchmarked Stephen Moore
One strategy, two funds
1 Investors should note that the fund does not offer any form of guarantee with respect to investment performance and no form of capital protection will apply
Source: Threadneedle; as at 30 September 2012
26
Threadneedle (Lux) American Absolute Alpha Fund
■ Target return of 8-10% with high single digit volatility1
■ Focus on stock selection (alpha), not market-derived
returns (beta)
Characteristics
Launch date June 2010
Liquidity Daily
Assets $158m
Gross exposure Max. 200%
Net exposure Typically -25% to +35%
Instruments Cash equity and equity swap
Bottom-up fundamental analysis with macroeconomic inputs
Stock-level conviction, long and short
Risk management embedded in our process
Threadneedle
Threadneedle American Extended Alpha Fund
■ Targets 1st quartile performance over rolling 3 years
■ Enhances market-derived returns (beta) via stock
selection (alpha)
Characteristics
Launch date October 2007
Liquidity Daily
Assets $723m
Gross exposure Max. 200%
Net exposure Typically +90% to +110%
Instruments Cash equity and equity swap
Threadneedle American Extended Alpha Fund
05
Threadneedle American Extended Alpha Fund Characteristics and risk framework
Source: Threadneedle as at 30 September 2012.
1 Against primary benchmark
2 Using the S&P GICS sectors
28
US equity fund broadly diversified by market size and sector
Current fund size $723 million
Target 1st quartile over rolling 3-year periods
Benchmark - primary S&P 500 Composite
Benchmark - secondary UK IMA – US equities
Typical tracking error range 4%–8%
Typical number of stocks c.30–80 longs
c.30–80 shorts
Maximum typical gross exposure 150% long, 50% short
Typical net exposure range 90%–110%
Typical maximum stock load difference1 +8%
Typical maximum sector2 load difference1 +15%
Registration Austria, Belgium, France, Germany, Netherlands, Luxembourg, Spain, Chile,
Switzerland, Portugal, Denmark, Singapore and Italy.
Annualised performance ($) 6 months 1 year 2 years 3 years Volatility1
(3 years p.a.)
Since
inception2
Threadneedle American Extended
Alpha Fund – net 4.2% 29.9% 18.0% 13.5% 15.6% 4.3%
Sector median 0.2% 25.3% 11.6% 10.2% - -0.7%
Relative return +3.9% +3.7% +5.7% +3.0% - +5.0%
Percentile ranking 1 11 3 15 - 2
Threadneedle American Extended
Alpha Fund – gross 4.6% 33.0% 19.0% 14.6% 15.4% 5.4%
S&P 500 Index 3.4% 30.2% 14.8% 13.2% - 0.8%
Relative return +1.1% +2.2% +3.7% +1.2% - +4.6%
Threadneedle American Extended Alpha Fund Performance summary
Source: Morningstar / FactSet as at 30 September 2012. Data in $. Net performance on bid to bid basis with net income re-invested at bid. Sector median – Morningstar Offshore & International
Universe. Morningstar changed its definition of the GIFS Offshore Universe as at February 2011. This resulted in this fund being removed from it. For the purposes of comparison, Threadneedle
continues to use this Universe with its fund included. Gross performance on a bid to bid basis with income re-invested at bid. Gross performance from 31 March 2010 onwards is based on daily
cash flows and valuations, from 1 January 2008 to 31 March 2010 based on Global Close prices, and prior to January 2008 based on 12pm prices. Relative returns calculated on a geometric basis.
1 Based on monthly data
2 Threadneedle American Extended Alpha Fund is since inception 31 October 2007.
29
Threadneedle American Extended Alpha Fund Portfolio composition
Source: Threadneedle as at 30 September 2012.
1 Excludes cash position of 4.7%
30
Largest 10 overweights Active
weight %
Alliance Data Systems 3.2
Pfizer 2.7
Tyco International 2.3
Capital One Financial 2.2
Spansion 2.1
Discover Financial
Services 2.1
Thermo Fisher Scientific 2.0
Wyndham Worldwide 1.9
Riverbed Technology 1.9
Newmont Mining 1.9
Largest 10 positions Fund
weight %
Apple 5.6
Pfizer 4.1
Alliance Data Systems 3.2
Exxon Mobil 3.1
Wells Fargo & Co. 2.8
Capital One Financial 2.5
Tyco International 2.5
Berkshire Hathaway 2.3
EMC 2.3
Discover Financial
Services 2.3
Sector exposure relative to S&P5001
Top overweight and underweight
sub-sectors (%)
Active
weight
%
Health Care 5.1
Financials 4.8
Materials 4.3
Consumer Discretionary 2.3
Telecoms -1.0
Information Technology -2.4
Energy -3.0
Industrials -3.3
Utilities -4.0
Consumer Staples -7.6
-6 -4 -2 0 2 4
Threadneedle American Absolute Alpha Fund
06
Threadneedle (Lux) American Absolute Alpha Fund Term sheet
Source: Threadneedle
32
Launch date 15 June 2010
Liquidity Daily
Legal structure SICAV (Part 1)
UCITS III designation Sophisticated Fund
Fees 1.5% (retail), 0.75% (inst), 20% performance fee over 3mth LIBOR with high water mark
Gross exposure guide Max. 200% (longs + shorts)
Typical net exposure -25% to +35% (Longs – shorts)
Instruments Long: cash equity / equity swap, short: equity swap
Currency USD, EUR, GBP and EUR & GBP–hedged
Domicile Luxembourg
SWAP counterparty Bank of America Merrill Lynch
Custodian RBC Dexia Investor Solutions Bank
Auditor Ernst & Young
Valuation point Global Close
Registrations UK, France, Germany, Italy, Spain, Netherlands, Luxembourg, Switzerland, Portugal, Austria, Hong Kong
Threadneedle (Lux) American Absolute Alpha Fund
Performance since inception
33
Source: Morningstar and Datastream as at 30 September 2012. All data quoted in $. Net performance based on 12pm prices, unadjusted income reinvested
1 The fund's inception date was 16 June 2010. Performance is shown from 30 June 2010 as the fund was not fully invested according to strategy until this time and
therefore any returns for that initial period would be unrepresentative of the fund's true performance. Performance is annualised.
2 Total Return Index in $
2011 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011
Threadneedle (Lux)
American Absolute
Alpha Fund (net)
0.1% 1.1% 0.3% 1.1% 0.5% 0.2% 0.1% -1.1% 1.0% -0.1% 0.1% 0.5% 3.6%
S&P 500 Index2 2.4% 3.4% 0.0% 3.0% -1.1% -1.7% -2.0% -5.4% -7.0% 10.9% -0.2% 1.0% 2.1%
2010 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 20101
Threadneedle (Lux)
American Absolute
Alpha Fund (net)
- - - - - - -0.3% -2.0% 1.5% 1.0% 0.5% 0.9% 1.7%
S&P 500 Index2 - - - - - - 7.0% -4.5% 8.9% 3.8% 0.0% 6.7% 23.3%
6 months 1 year Since inception1
Threadneedle (Lux) American
Absolute Alpha Fund (net) 0.8% 4.8% 4.3%
S&P 500 Index2 6.4% 30.2% 18.5%
2012 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012
Threadneedle (Lux)
American Absolute
Alpha Fund (net)
0.3% 1.2% 1.6% 1.0% -0.1% -0.3% 0.6% 0.2% 0.0% 4.4%
S&P 500 Index2 4.5% 3.1% 3.3% -0.6% -6.0% 4.1% 1.4% 2.3% 2.6% 16.4%
Threadneedle (Lux) American Absolute Alpha Fund Portfolio composition
Source: Threadneedle as at 30 September 2012.
Shown on a look-through basis.
34
Top 5 long holdings Fund (%)
Alliance Data Systems 3.0
Tyco International 1.9
Spansion 1.9
EMC 1.8
Capital One Financial 1.8
Top 5 short holdings Fund (%)
S&P 500 ETF -1.2
Payroll & HR services firm -1.0
Semiconductors -0.9
Customer relationship management -0.9
Payroll & HR services firm -0.9
Sector positioning Net (%) Gross(%)
Energy -0.7 0.7
Materials 5.1 9.0
Industrials 1.2 7.6
Consumer discretionary 6.6 15.6
Consumer staples -2.4 3.2
Healthcare 3.0 4.2
Financials 2.6 14.9
Information technology 1.9 27.8
Telecommunications -1.0 1.0
Utilities -1.0 1.0
Total 15.4 85.4
Conclusion
07
Decline in inflation leads to money printing, supporting asset prices
US equities are attractive in this environment
Conviction is key
Like CEOs, we assess investment opportunities in their macroeconomic context
A Risk/Return framework is instrumental to developing conviction
Conclusion
36
Appendix
AP
How we build portfolios
38
Company research
Rigorous
fundamental analysis
Collaboration and
discussion
Valuation
assessment
Target prices
Monitoring and
risk control
Consideration of
downside
fundamental risk
Daily risk reports
Automated system of
compliance checks
11 strong risk
department
Idea generation
Experience
Company meetings
External research
Macroeconomic
Thematic and sub-
sector views
Portfolio construction
Stock conviction
Individual stock risk
Factor / systematic
risk
Competition for
capital
Idea generation
Stock selection is main source of Alpha
1 S&P 500 Index constituents and opportunistic list of small / mid cap names
39
Thematic / sector
views
Company
meetings
Macroeconomic
view
External
research
Experience
>12 yrs
average
Proprietary
company
research
Qualitative
screening
> 500 stocks¹ c. 250 stocks
Company
research
Monitoring
and
risk control
Idea
generation
Portfolio
construction
Intensive team debate – Formal and informal
Company research and upside/downside price targets
40
Upside /
Downside analysis
Explicit risk / reward
assessment
Up / down price targets
Company
research
Monitoring
and
risk control
Idea
generation
Portfolio
construction
Business
model Management
Financial
model
Valuation What is it worth?
The up/down in practise
41
Downside = $60 (-72.7%)
DCF based (discount rate
15%; -2% terminal growth)
Domestic business
Max penetration of 30m
subscribers1
Increase in churn &
program costs hitting CF
International business
Lack of brand recognition
& 1st mover advantage
Penetration peaks at 35%
of broadband households
Competitive operating
environment and high
customer acquisition costs
Upside = $270 (+22.7%)
DCF based (discount rate
15%; +3% terminal growth)
Domestic business
Max penetration of 40m
subscribers1
Increase op. margin from
15% to 19%
International business
Roll-out in 2-3 markets p.a.
Targeting top 20
broadband markets
50% penetration in
Canada and LatAm.
25% elsewhere
ARPU rise to $10 from $8
Video streaming service
operating in North America,
Latin America and the UK
Streams movies and TV
programs
25m subscribers
No barrier to entry
Content not on exclusive
deals
Up/down = 0.3 to 1
Source: Threadneedle; Broker estimates – as at 2 September 2011
(1) Management estimated the total addressable market at 55 to 65m households (i.e. households with broadband and a credit card) out of a total number of
households of c.110m. Netflix has a 4.5% monthly churn rate, with 66% of households cancelling their Netflix subscription not returning, which over time reduces the
firm’s total addressable market
$220
Brokers estimates of 70m domestic subscribers by 2015 implied an unrealistic 100% penetration rate
Real TAM penetration
Broker estimates were unrealistic and failed to take churn into consideration
42
Source: Threadneedle; Broker estimates – as at 2 September 2011
0
10000
20000
30000
40000
50000
60000
70000
80000
Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
US
Ho
useh
old
s
NFLX TAM (Broadband household w/credit card) NFLX domestic subs
Total non returning cancellations Total market addressed
Fully penetrated
at 45m subs
Fund manager is sole decision maker
Conviction derived from up/down analysis drives portfolio construction
Portfolio construction
Constant review
43
Importance
Company
research
Monitoring
and
risk control
Idea
generation
Portfolio
construction
Stock conviction (risk/reward)
Individual stock risk
Contribution of stock risk to overall portfolio risk
Sector weightings
Comprehensive risk reports
Active money
Active risk
Concentration analyses
Sector
Country
Region
Market cap size
Effective style analysis
Risk monitoring
44
Sample daily risk report
Apple – Growth at a very reasonable price
Performance relative to S&P 500 Index
2-year total return
Source: Datastream as at 30 September 2012, in local currency.
45 PT/12/01458
Market leadership
Extreme customer loyalty and brand reputation
Participate in high growth market segments at much
better than average gross margins (55% gross margin
on iphones)
Management has demonstrated an ability to
execute through market transitions to maintain
high top line growth without sacrificing profitability
(e.g. iPod to iPhone to iPad)
Shareholder returns
High levels free cash flow have led to an accumulation
of cash on the balance sheet (Q2’12: $110.2bn net cash
($28.6bn over the past 2 quarters) or $117 per share)
Announced in March 2012:
– Initiation of a $2.65 quarterly dividend (~1.8% yield)
– $10bn stock buy-back program
Attractive valuation but near-term risks
80
100
120
140
160
180
200
Sep 10 Mar 11 Sep 11 Mar 12 Sep 12
Re
ba
se
d =
10
0
Apple share price and FY (Sep.) 2010 and 2011 consensus estimates
Up/down discipline: the case of Apple
Source: Bloomberg, IBES consensus estimates, June 2012.
46 PT/11/00678
EPS’ 11 consensus estimate
EPS’10 consensus estimate
EP
S c
on
se
nsu
s e
stim
ate
(in $
pe
r sh
are
) A
pp
le s
hare
pri
ce
(w
hit
e lin
e –
in
$)
299
410
395
353
468
172
200
215
205
236
Biography
47
STEPHEN MOORE
Fund Manager
Stephen Moore began his career at First State Fund Managers in 1997, covering North American consumer cyclical
companies before becoming an analyst then progressing to portfolio manager in 2001.
In 2002, Stephen joined the US team at Threadneedle. He went on to manage Allied Dunbar Life and Pension funds
as well as co-managing the Threadneedle American long / short equity fund.
He was actively involved in the development of the American Extended Alpha Fund and has managed the fund since
its launch in 2007. In March 2008 he became lead manager on the American long / short equity fund. In June 2010,
he went on to manage the Threadneedle American Absolute Alpha Fund.
Stephen holds a BComm and a BA from the University of Queensland, Australia.
In 2000 he received his Investment Management Certificate. Stephen is an associate of the Securities Institute of
Australia.
Threadneedle start date: 2002
Industry start date: 1997
Biography
48
STÉPHANE JEANNIN
Investment Specialist
Stéphane Jeannin is an Investment Specialist for Global and US equities long only and absolute return strategies. He
is responsible for providing clients, prospective clients and consultants with detailed information on Threadneedle’s
capabilities and investment views.
Prior to joining Threadneedle, Stéphane spent six years at JP Morgan Investment Management in a variety of roles,
including Global and European Equities Client Portfolio Manager.
Stéphane holds a MA in Political Science and Economics from Sciences-Po Strasbourg and an MSc in Corporate
Finance from Dauphine University, Paris. He is also a CFA charterholder.
Threadneedle start date: 2004
Industry start date: 1998
Threadneedle (Lux) American Absolute Alpha Fund
No Capital Guarantee - Positive returns are not guaranteed and no form of capital protection applies.
Liquidity Risk - The fund invests in assets that are not always readily saleable without suffering a discount to fair value. The portfolio may have to lower the selling
price, sell other investments or forego another, more appealing investment opportunity.
Valuation Risk - The fund’s assets may sometimes be difficult to value objectively and the true value may not be recognised until assets are sold.
Short Selling Risk - Short selling is designed to make a profit from falling prices. However, if the value of the underlying investment increases, the short position will
negatively affect the fund’s value.
Leverage Risk - Leverage amplifies the effect that a change in the price of an investment has on the fund’s value. As such, leverage can enhance returns to investors
but can also increase losses.
Derivatives Risk - Investment in derivatives may result in losses in excess of the amount invested.
Threadneedle American Extended Alpha Fund
Liquidity Risk - The fund invests in assets that are not always readily saleable without suffering a discount to fair value. The portfolio may have to lower the selling
price, sell other investments or forego another, more appealing investment opportunity.
Valuation Risk - The fund’s assets may sometimes be difficult to value objectively and the true value may not be recognised until assets are sold.
Short Selling Risk - Short selling is designed to make a profit from falling prices. However, if the value of the underlying investment increases, the short position will
negatively affect the fund’s value.
Leverage Risk - Leverage amplifies the effect that a change in the price of an investment has on the fund’s value. As such, leverage can enhance returns to investors
but can also increase losses.
Derivatives Risk - Investment in derivatives may result in losses in excess of the amount invested.
Threadneedle American Equities - Key Risks
49
Past performance is not a guide to future performance.
The value of investments and any income from them can go down as well as up.
Threadneedle (Lux) is an investment company with variable capital (Société d’investissement à capital variable, or "SICAV") formed under the laws of the Grand Duchy of Luxembourg. The SICAV issues,
redeems and exchanges shares of different classes, which are listed on the Luxembourg Stock Exchange. The management company of the SICAV is Threadneedle Management Luxembourg S.A, who is
advised by Threadneedle Asset Management Ltd. and/or selected sub-advisors.
The SICAV is registered in Austria, Belgium, France, Finland, Germany, Hong Kong, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, Switzerland, Taiwan and the UK; however, this is
subject to applicable jurisdictions and some sub-funds and/or share classes may not be available in all jurisdictions. Shares in the Funds may not be offered to the public in any other country and this
document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local legislation.
This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services.
Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms &
conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English, French,
German, Portuguese, Italian, Spanish and Dutch (no Dutch Prospectus) and can be obtained free of charge on request by writing to the SICAV’s registered office at 69, route D’Esch. L-1470 Luxembourg,
Grand Duchy of Luxembourg and/or from:
- in Austria from Erste Bank, Graben 21 A-1010 Wien;
- in Belgium: J.P. Morgan Chase Bank Brussels, 1, Boulevard du Roi Albert II, 1210 Brussels;
- in France from CACEIS Bank, 1/3 Place Valhubert, 75013 Paris; - in
Finland from Eufex Bank Plc, Keilaranta 19, 02150 Espoo, Finland
- in Germany from JP Morgan AG, Junghofstr. 14, 60311 Frankfurt,
- in the UK from JPMorgan Worldwide Securities Services, 60 Victoria Embankment, London EC4Y 0JP.
- in Sweden from Skandinaviska Enskilda Banken AB (publ), Sergels Torg 2, 106 40 Stockholm.
The mention of any specific shares or bonds should not be taken as a recommendation to deal.
The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is
made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. Information obtained from external sources is believed to be
reliable but its accuracy or completeness cannot be guaranteed.
This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form
or passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request.
Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242
74, rue Mühlenweg, L-2155 Luxembourg, Grand Duchy of Luxembourg.
Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies.
Disclaimer for (Lux) American Absolute Alpha Fund
50
Past performance is not a guide to future performance.
The value of investments and any income from them can go down as well as up.
Threadneedle Specialist Investment Funds ICVC (“TSIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the
UK by the Financial Services Authority (FSA) as a UCITS scheme.
TSIF is registered for public offer in Austria, Belgium, France, Germany, Hong Kong (some sub-funds only), Italy, Luxembourg, the Netherlands, Spain, Switzerland (some sub-funds only) and the UK.
Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the
public and are in accordance with applicable local legislation.
This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services.
Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms &
conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English, French,
German, Portuguese, Italian, Spanish and Dutch (no Dutch Prospectus) and can be obtained free of charge on request from the following:
- in Austria: Raiffeisen Zentralbank Österreich AG, Am Stadtpark 9, 1030 Wien (TIF and TSIF), and Erste Bank, Graben 21 A-1010 Wien (TFIF);
- in Belgium: J.P. Morgan Chase Bank Brussels, 1, Boulevard du Roi Albert II, 1210 Brussels;
- in France: BNP Paribas Securities Services, 66 rue de la Victoire, 75009 Paris;
- in Germany: JP Morgan AG, Junghofstr. 14, 60311 Frankfurt,
- in Ireland: J.P. Morgan Bank Administration Services (Ireland) Limited, J.P. Morgan House International Financial Services Centre, Dublin 1
- in Italy: State Street Bank S.p.A., via Col Moschin 16, 20136 Milano.
- in Luxembourg: State Street Bank Luxembourg S.A., 49 Avenue J. F. Kennedy, 1855 Luxembourg;
- in the Netherlands: Fortis Intertrust, Rokin 55, 1012 KK Amsterdam;
- in Spain: any appointed distributor listed on the Spanish Financial Regulator’s website (www.cnmv.es);
- in UK; Threadneedle Investments’ Client Services department P.O. Box 1331, Swindon SN38 7TA.
The mention of any specific shares or bonds should not be taken as a recommendation to deal.
The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is
made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. Information obtained from external sources is believed to be
reliable but its accuracy or completeness cannot be guaranteed.
This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form
or passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request.
Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, St Mary Axe, London EC3A 8JQ, United Kingdom. Authorised and regulated in the UK by
the Financial Services Authority.
Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies.
Disclaimer for American Extended Alpha Fund
51
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