Deutsche CROCI Sector Opportunities Fund

Transcription

1 CROCI Sector Opportunities Fund For Institutional Use and Registered Representative Use Only. Not for Public Viewing or Distribution

2 Risk information The fund will be managed on the premise that stocks with lower CROCI Economic P/E Ratios may outperform stocks with higher CROCI Economic P/E Ratios over time. This premise may not always be correct and prospective investors should evaluate this assumption prior to investing in the fund. Investing in foreign securities presents certain risks, such as currency fluctuations, political and economic changes, and market risks. This fund is non-diversified and can take larger positions in fewer issues, increasing its potential risk. The fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details. 1

3 CROCI and the Real investor Real investor Real value Definition: An investor whose investments are driven principally by the careful analysis of company fundamentals, including their economic cash s and their economic valuation. Specifically, a real investor has two characteristics: 1.Fundamental: Any investment is informed or driven by the interplay between the cash flow generation, the capital intensity and the valuation of that company. 2.Skeptical of reported financial statements as a guide to investing: Real investors believe that the income statement and balance sheet in a company's accounts are not necessarily designed to be helpful to equity investors, and that a synthesis of all the notes to the accounts and diligent restatement of the accounts must happen in order to render valuations comparable and meaningful Real investors look to economic value to inform investment, and believe that the reported financial statement data may not be representative of the economic reality of a company. Definition: Economic value as calculated by the CROCI process via the adjustments to and normalizations of reported financial statements, conducted by CROCI s team of company analysts. Notes: The CROCI process seeks to make company financial data more consistent, comparable and economically meaningful through a series of reviews and adjustments. This contrasts with more conventional definitions of value that tend to be based on accounting measures such as equity or profits. The principal indicator of real value is CROCI s Economic P/E. An attractive Economic P/E ratio suggests that the market is undervaluing the cash flow being produced by the operating assets, all other things being equal. The term real value can therefore be used attributively to refer to companies with the lowest CROCI Economic P/E. Since CROCI makes adjustments to financial statements in order to include all relevant information in the notes to the accounts, and to restate the accounts in order to render economic valuations, which are meaningful and comparable, CROCI may be one valuable approach. No inference should be made that an investment in CROCI will be suitable for all real Investors. 2

4 Definitions Book value is the value at which an asset is carried on a balance sheet. Cash Return On Capital Invested (CROCI ) is a proprietary investment research discipline of. Depreciation is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. Enterprise value is a measure of the market value of the firm that includes not only financial liabilities (such as debt) but also operational liabilities (such as warranties, pension funding, specific provisions, operating leases, etc.). Market capitalization is the total dollar market value of a company s outstanding shares. Net income is a company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. Net capital invested is the amount spent by a company on capital assets, or gross investment, less depreciation. Price-to-earnings ratio (P/E) ratio (or accounting P/E ratio, in this presentation) compares a company s current share price to its per-share earnings. The CROCI economic P/E ratio is a measure of valuation that incorporates all of the assets and liabilities of a company which are adjusted systematically by the CROCI team. The MSCI World Index tracks the performance of stocks in select developed markets around the world, including the United States. Return on equity is the amount of net income ed as a percentage of shareholders equity. Risk-adjusted Economic P/E Ratio adjusts for the risk of unsustainable earnings by incorporating trailing 12-month volatility into the CROCI Economic P/E Ratio. 3

5 Table of contents 01 CROCI Sector Opportunities Fund 02 The CROCI valuation process 03 Global sector rotation using low CROCI valuation 04 Investment and research teams 4

6 01 CROCI Sector Opportunities Fund Overview

7 CROCI Sector Opportunities Fund Investment guidelines summary Investment objective Benchmark Target number of portfolio securities Selection pool The fund seeks long-term growth of capital. MSCI World Index 30 stocks (approximately) The fund will invest in common stocks (excluding financial companies) from among the largest U.S., European and Japanese companies under CROCI coverage Management process 1 Identify the three most attractive economic sectors based on their economic valuation. Select the 10 stocks with the lowest Risk adjusted Economic P/E from each of the three sectors. Review frequency Quarterly Individual sector weight Equal weight (33.33% in each sector; approximately) 2 Individual stock weights Equal weight (3.33% in each stock; approximately) 2 Maximum country/region weight Currency exposure Portfolio manager No limit Unhedged to the U.S. dollar Di Kumble As of June 2017 (1) Management process: portfolio management intends to invest in stocks of companies that it believes offer economic value, as determined by applying the Cash Return on Capital Invested (CROCI ) proprietary strategy to the three industry sectors with the lowest median economic price-earnings ratio. Portfolio management measures economic value by using the such as CROCI Economic Price Earnings Ratio (CROCI Economic P/E Ratio) which is calculated for each of the approximately 830 companies in the CROCI global company database. The CROCI Economic P/E is a proprietary measure of company valuation using the same relationships between valuation and as an accounting P/E ratio (i.e. price-to-book value (P/BV) divided by on equity).the CROCI strategy is supplied by the CROCI Investment Strategy &Valuation Group, a unit within, through a licensing agreement with the fund s advisor. Risk-adjusted Economic P/E Ratio adjusts for the risk of unsustainable earnings by incorporating trailing 12-month volatility into the CROCI Economic P/E Ratio. (2) Subject to the portfolio manager s discretion. See slide 3 for definitions. 6

8 A proven global sector rotation and valuation approach A proven global sector rotation strategy There has historically been wide dispersion in global sector s, making sector selection an important driver of equity investment s. The CROCI framework for assessing real value, based on CROCI Economic P/E Developed in 1996, CROCI is a systematic proprietary valuation methodology that attempts to understand the real value of a company. The central aim of CROCI is to ensure that the valuations of all covered companies are comparable regardless of their sector or geography. Global CROCI investment platform With over 20 years of history, the CROCI database consists of economic data for over 850 companies, covered by a team of over 64 analysts, on a global basis. There are approximately $10.7 billion in assets globally invested in CROCI strategies, with more than $3.6 billion in the United States (as of 12/31/17). The team has offered CROCI strategies as retail 40-Act mutual funds in the U.S. since February Systematic investment process A systematic approach to stock selection minimizes the role of emotions and provides consistent exposure to real value, based on Economic P/E. Source: Bank and Bloomberg as of 12/31/17. Performance is historical and does not guarantee future results. The CROCI strategy is supplied by the CROCI investment strategy and valuation group, a unit within, through a licensing agreement with the fund s advisor. The CROCI valuation process is not managed or executed by Americas, Inc (DIMA). The members of the CROCI team are not employees of DIMA nor do they provide investment advisory services on behalf of DIMA. The fund is subject to certain regulatory restrictions (e.g., limits on percentage of assets invested in a single issuer and industry and requirements on distributing income to shareholders) that do not apply to the indices. The fund also experiences cash flows, which do not impact indices. See slide 3 for definitions. 7

9 02 The CROCI valuation process Seeking real value

10 The CROCI philosophy 1. In buying a share of a company, an equity investor becomes a part-owner of that company. 2. A rigorous analysis of a company s fundamentals is essential for assessing the underlying economic valuation. The challenge is to achieve consistency and comparability across all companies globally. This has been at the heart of CROCI since Once proper due diligence and analysis has taken place, the equity investor can make an informed decision. 9

11 When CROCI began CROCI starts to publish regular company screens CROCI Sectors index launches Launch of CROCI Real Earnings Weighted indices 1996 Late 1990s CROCI is developed by Bank Research to solve cross-border accounting issues in equity valuation Launch of CROCI U.S., CROCI Euro and CROCI Japan indices CROCI moves into Asset Management Source: as of 12/31/16 unless otherwise noted. CROCI indices / strategies are sponsored by DB AG London and their methodology could be altered in the future. Performance information for indices was not calculated by an independent calculation agent. Performance does not include any fees associated with products on the index. It is not possible to invest directly in an index. The CROCI indices / strategies are supplied by the CROCI investment strategy and valuation group, a unit within, through a licensing agreement with the fund s advisor. The CROCI valuation process is not managed or executed by Investment Management Americas, Inc (DIMA). The members of the CROCI team are not employees of DIMA nor do they provide investment advisory services on behalf of DIMA. 10

12 CROCI - Cash Return On Capital Invested What is CROCI? CROCI stands for Cash Return on Capital Invested and is a proprietary investment process based on a valuation technique. A Bank trademark, CROCI has aimed to assess the Real Value 1 of companies, sectors and markets since There are over 850 companies & 64 professionals. What does CROCI do? There are four key functions performed by the CROCI Team : 1. Research the distortions in reported financial statements and rigorously adjust them to provide a comparable platform for investment and research purposes; 2. Consistently apply the CROCI framework to over 850 companies on a global basis, using experienced people rather than machines; 3. Provide CROCI analysis on equity markets we have been doing this since 1996; 4. Develop standardized and bespoke investment solutions for retail and institutional clients. These can be delivered in different formats (SMAs, funds). Why CROCI? Markets are not 100% efficient. Analyzing company fundamentals in an objective and consistent manner leads to a better understanding of companies which in turn can potentially lead to better stock picking. History CROCI originated in 1996 as a valuation technique in DB Equities Research. Today the team resides in AM delivering clients global and regional investment strategies and products. CROCI 40-Act Funds 1. CROCI International Fund (International Equity) 2. CROCI Sector Opportunities Fund (Global Equity) 3. CROCI Equity Dividend (U.S. Equity) 4. CROCI U.S. (US Equity) (1) Please see slide 2 for a full definition of the CROCI term Real Value. No assurance can be made that following the CROCI methodology will meet its stated objectives. 11

13 Why CROCI? Intelligent focus on economic reality Traditional evaluation: P/E ratio compares a company s current share price to its per-share earnings The CROCI alternative Recognize all liabilities Liabilities should include off-balance-sheet items such as operational leases, pension underfunding, warranties and future provisions. Adjust for inflation Book value is typically represented at original cost, which means depreciation is understated by the impact of inflation. Adjust for economic value Similar assets that are located in different countries should be depreciated over the same economic lives irrespective of the accounting and tax depreciation methodology used in those countries. Account for intangibles Investments in unreported assets such as branding and research and development (R&D) should be capitalized and depreciated. Economic P/E ratio Revised economic data feeds into a valuation metric called Economic P/E ratio, which enables intelligent comparisons between markets and sectors and is the primary metric in building CROCI indices and investment strategies. 12

14 Accounting vs. Economic Data Accounting data Economic data Market Capitalization Enterprise Value Only includes the value of the equity, but ignores debt and other calls on shareholders Includes not only financial debt but other liabilities, such as leases, warranties, pension under-funding Book Value Net Capital Invested Historical cost accounted. Ignores intangible economic assets, such as R&D and advertising of brands Adjusted for inflation, and also includes capitalized intangibles, such as R&D and advertising of brands Return on Equity Cash Return on Capital Invested (CROCI ) Does not represent an inflation-adjusted. For example, depreciation is not charged economically, and asset life is inconsistent The cash over the life of the assets. Depreciation is charged economically, with similar assets having similar lives Accounting P/E Economic P/E Not comparable across industries and sectors, or over time Price/Book Value Accounting P/E = Return on Equity Seeks true consistency and comparability between stocks, sectors and countries EV/NCI Economic P/E = CROCI EV = CROCI Enterprise Value, NCI = CROCI Net Capital Invested, CROCI = Cash Return on Capital Invested 13

15 Real value can appear very different to unadjusted value Economic valuations can substantially change stock rankings, once the CROCI approach has been applied to reported pro-forma accounts. For example, of these 9 companies: Apple moves to become the cheapest, having been the fifth most expensive Gazprom s Economic P/E is not meaningful, even though it ranks the cheapest on Accounting P/E Company Valuation 2015E Accounting P/E (ranking) Valuation 2015E Real Economic P/E (ranking) Amazon (9) 64.1 (8) Amgen 15.6 (5) 17.9 (2) Real Value Apple 12.9 (4) 16.5 (1) Gazprom 2.7 (1) N.M. (9) Apparent Value General Motors 7.7 (2) 46.6 (6) IBM 11.5 (3) 19.1 (3) Real Value LVMH 21.8 (8) 24 (4) Orange 16.6 (6) 58.1 (7) Apparent Value Pepsi 21.3 (7) 26.2 (5) Ranking RISES by 3 places Ranking FALLS by 8 places Source: Bank. Company data as of 12/31/15. Data in brackets show rank of the stock on Accounting P/E. These examples are for illustrative purposes only and do not represent any investment recommendation or investment advice. Assessment of Real and Apparent Value is as per CROCI methodology. Investors may have a different view than what is presented above. Data adjustments can impact company financials in different ways, and to a greater extent at some than others. Past Performance is not indicative of future results. 14

16 Using CROCI data instead of Accounting Data has historically resulted in markedly different portfolios The overlap between portfolios seeking out the lowest accounting P/E and lowest Economic P/E is close to half 1 MSCI World Index S&P 500 Index lowest accounting P/E stocks 46 same stocks lowest Economic P/E stocks CROCI lowest accounting P/E stocks 18 same stocks lowest Economic P/E stocks CROCI 100 stocks from MSCI World Index with lowest accounting P/E compared to 100 stocks with lowest Economic P/E 40 stocks from S&P 500 Index with lowest accounting P/E compared to 40 stocks with lowest Economic P/E CROCI seeks to provide exposure to real value based on economically adjusted data Low-Economic-P/E portfolios are qualitatively distinct from traditional value portfolios in terms of operational and financial characteristics 2 (1) A comparison of the companies that are in more than one of the 100 global and 40 U.S. stock strategy baskets using data as of 12/31/17. U.S. baskets are composed of the 40 cheapest stocks as measured by Economic P/E and the 40 cheapest stocks as measured by accounting P/E. Global baskets are composed of the 100 cheapest stocks as measured by Economic P/E and the 100 cheapest stocks as measured by accounting P/E. 12 years of annual data from shows that the overlap ranges between 38% and 53%, with a mean of 45%. (2) Refer to slide 13 for a comparison between Economic P/E and traditional accounting based value portfolios. 15

17 Global characteristics have historically differed greatly Economic P/E portfolios vs. Accounting P/E portfolios The Economic P/E portfolio has a greater tilt towards sectors more traditionally thought of as growth (such as IT) than the Accounting P/E portfolio The Economic P/E portfolio has higher profitability, higher free cash flow but lower financial leverage than the Accounting P/E portfolio Selected Sector Weights (12/31/17) Selected Operational Characteristics (12/31/17) 120% 112.8% % % 80 41% 37% Consumer Discretionary 19% 18% 7% Health Care Economic P/E Basket 16% 6% 2% 0% 12% Industrials Telecom Utilities Accounting P/E Basket 60% 40% 20% 0% 14.9% 9.3% 42.9% CROCI Net Fin. Liabilities / Mkt Cap Economic PE Basket Economic PE Basket2 17.9x 24.1x Economic P/E 5.2% 4.9% FCF Yield Accounting PE Basket Accounting PE Basket Source: Bank, Factset as of 12/31/17. The Economic P/E basket constituents are compared to a basket of 100 stocks from MSCI World excluding Financials and covered by CROCI selected based on lowest trailing 12 month Accounting P/E. These baskets are as of 12/31/17 and the comparisons between them may not be consistent over a longer period of time either historically or in the future. Eleven years of annual data from shows sharp differences between both operating characteristics and sector allocation over the whole period. No assurance can be made that a strategy following the CROCI methodology will meet its stated objectives. 16

18 Adding a risk measure to valuation A company may seem cheap based on its current earnings, but if these earnings were to fall in the future, the company may actually turn out to have been expensive. Eastman Kodak, as referenced in the chart on the left, provides an example The fair value of a company is dependent on the earnings stream that the company generates. All things being equal, the higher the earnings, the higher the price should be. High price volatility reflects the market s uncertainty over those earnings. CROCI adjusts for this type of risk by adjusting the CROCI Economic Earnings Yield (1/Economic P/E) to account for risk. For example, consider two cheap companies, A and B, with the same share price and current earnings. Company A s share price volatility is 60%, whereas, company B s is only 15%. Although both companies appear cheap, company B s risk-adjusted valuation is more attractive, because of its lower volatility. Eastman Kodak CROCI cash s 1 Risk vs. Return for CROCI Global Selection Pool % (1) Source: Bank, CROCI. Example is for illustration only and does not constitute investment advice or recommendation. Data as of 9/7/15. (2) Bank, CROCI, Datastream and Factset Research Systems. The chart shows the relationship between Economic Earnings yield (1/Economic P/E) and volatility of the U.S., European and Japanese companies covered by CROCI. Companies with negative Economic Earnings yields are excluded from this analysis. Data as of 6/17/15. Cost of capital refers to the opportunity cost of making a specific investment. CROCI is a measure of cash earnings yield, standardized for all companies, regardless of their business or location. 17

19 03 Global sector rotation using low CROCI valuation

20 Why sector selection matters There has historically been wide dispersion in global sector s Annual dispersion of s for MSCI World Index sector indices (12/31/02 12/31/17) Return 80% 60% 40% 20% 0% -20% -40% -60% 3.2% 19.9% 38.6% % 33.1% 16.8% % 28.7% 14.7% 2.5% % 9.9% % 33.2% 20.1% 9.3% % 3.2% % 40.7% 50.1% % 30.0% 24.6% 11.8% 6.2% 1.0% % 5.5% 19.8% % 15.8% 39.2% 26.7% 1.8% 3.4% % 4.9% 11.6% % 0.9% 22.8% % 7.5% 6.8% % 22.40% 5.0% Maximum 3.2% 48.3% 28.4% 28.7% 35.8% 33.2% 21.5% 61.5% 24.6% 9.5% 24.3% 39.2% 18.1% 6.6% 26.6% 38.2% Minimum 38.6% 16.8% 2.5% 9.9% 9.3% 3.2% 50.1% 6.2% 1.0% 19.8% 1.8% 3.4% 11.6% 22.8% 6.8% 5.0% Top sector Consumer staples IT Utilities Energy Utilities Materials Health care Materials Consumer disc. Health care Consumer Consumer disc. disc. Health care Health care Energy IT Bottom sector IT Consumer staples IT Telecomm. serv. IT Consumer disc. Materials Utilities Utilities Materials Utilities Materials Energy Energy Health care Energy MSCI World Index 19.9% 33.1% 14.7% 9.5% 20.1% 9.0% 40.7% 30.0% 11.8% 5.5% 15.8% 26.7% 4.9% 0.87% 7.51% 22.40% Source: MSCI, Bloomberg as of 12/31/17. Past performance is historical and does not guarantee future results. This chart is for illustrative purposes only and does not represent any product. Index s assume reinvestment of all distributions. It is not possible to invest directly in an index. MSCI World Index s are in U.S. dollars. 19

21 CROCI Sector Opportunities Fund Systematic investment process* Identify the universe Start with a universe of large cap U.S., European and Japanese companies that are under CROCI coverage Identify the three cheapest sectors based on economic valuation Select three most attractive sectors from among Consumer discretionary Consumer staples Information technology Telecommunication services Health care Industrials Energy Utilities Materials Identify the cheapest stocks Select 10 stocks with the lowest positive risk-adjusted CROCI Economic P/E from each of the three global sectors with the lowest median risk-adjusted CROCI Economic P/E ratio 1 Review and adjust periodically Equal weight, manage turnover, transaction costs and tax-efficiency 1 Risk-adjusted Economic P/E Ratio adjusts for the risk of unsustainable earnings by incorporating trailing 12-month volatility into the CROCI Economic P/E Ratio. *At each review, subject to measures taken to attempt to reduce portfolio turnover, approximately 10 stocks are selected generally from the three sectors with the lowest positive median CROCI Economic P/E Ratio and equally weighted, resulting in a portfolio typically consisting of 30 holdings. In addition, certain regulatory restrictions (e.g., limits on percentage of assets invested in a single industry) could constrain the fund s ability to invest in some stocks that may have a lower Economic P/E Ratio. 20

22 Global sector rotation using low CROCI valuation Employing the proprietary CROCI valuation methodology, the fund aims to invest in the three most undervalued sectors globally. The chart below illustrates how the funds sector allocations have shifted since its inception. CROCI Sector Opportunities Fund quarterly sector allocations (as of 12/31/17) Utilities Utilities Utilities Utilities Utilities Utilities Consumer discretionary Health care Health care Health care Health care Health care Health care Utilities Industrials Industrials Industrials Industrials Industrials Industrials Health care Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Source: as of 12/31/17. 21

23 Current positioning vs. benchmark Sector composition as of 12/31/17 CROCI Sector Opportunities Fund MSCI World Index (ticker: MXWO) 32% 35% 6% 5% 3% 3%3% 18% 9% 17% 12% 33% 12% 12% Consumer Discretionary Utilities Health Care Financials Consumer discretionary Industrials Energy Real estate Telecommunication services Information technology Health care Consumer staples Materials Utilities Source: and MSCI Barra as of 12/31/17. It is not possible to invest directly in an index. 22

24 Historical regional allocations CROCI Sector Opportunities Fund CROCI Sector Opportunities Fund (9/30/16 12/31/17) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q Q Q Q Q Q Americas Asia-Pacific Europe Source: as of 12/31/17. 23

25 Current positioning vs. benchmark Country composition as of 12/31/17 CROCI Sector Opportunities Fund MSCI World Index (ticker: MXWO) 4% 4% 3% 18% 6% 7% 47% 4% 4% 7% 7% 59% 9% 23% United States Switzerland France Japan United Kingdom Germany United States United Kingdom Japan France Ireland Spain Germany Other Source: and MSCI Barra as of 12/31/17. It is not possible to invest directly in an index. 24

26 04 Investment and research teams

27 CROCI From concept to investment solution Head of CROCI CROCI Company Analysis Virginie Galas (1995) Mukarram Ali (2002) Janamejay Kumar (2007) Venkat Bijjaram (2004) Gyanendra Jaiswal (2005) Yogendar Khairari (2003) Mahesh Rathi (2005) Bharat Shah (2002) Hussain Firoz Abbasi (2010) Abhishek Mital (2012) Tathagat Kumar (2017) Plus 40 CROCI offshore analysts CROCI Thought Leadership Colin McKenzie (1998) Sarvesh Agrawal (2002) Francesco Curto (1998) Support Anil Raina (2017) Michael Yakir (2001) Gina Niehaus (2015) Lynn Mulligan (1999) CROCI Investment Specialists Joe Hall Americas (2013) Christian Roessling EMEA (2011) CROCI Marketing CROCI External Support Providers Global Client Group Trading & Execution Wealth Management Legal, Compliance, IT, COO CROCI Investment Strategies Markus Barth (2002) Karan Mehta (2010) Dirk Schlueter (2012) Fabio Pinna (2014) Mital Parekh (2002) Pragya Patwari (2015) Vikash Sonika (2006) CROCI Portfolio Management Chris Wane (2000) Shinil Balakrishnan (2006) Di Kumble - Americas (2003) The Office of the Chief Investment Officer Markets Equity Structuring Source: 12/31/17, Bank 26

28 Investment development the company database Comprehensive coverage across major markets Total Number of Companies in the Index % (314) 90% (74) 95% (79) 95% (139) 76% (355) 81% (678) 40% (114) S&P 500 TOPIX 100 Euro STOXX Large 100 Percentage of Non-Financial Market Capitalization covered by CROCI (Number of Companies in CROCI Coverage) STOXX Large 200 MSCI EAFE MSCI World Number of Financials and Real Estate Companies MSCI EM Source: Bank CROCI, Bloomberg Finance LP, Datastream, Factset Data as of 12/31/17 27

29 Important information For purposes of ERISA and the Department of Labor s fiduciary rule, we are relying on the sophisticated fiduciary exception in marketing our services and products through intermediary institutions, and nothing herein is intended as fiduciary or impartial investment advice. Obtain a prospectus To obtain a summary prospectus, if available, or prospectus, download one from www. deutschefunds.com, talk to your financial representative or call (800) We advise you to carefully consider the fund s objectives, risks, charges and expenses before investing. The summary prospectus and prospectus contain this and other important information about the fund. Please read the prospectus carefully before you invest. Investment products offered through AM Distributors, Inc. Advisory services offered through Investment Management Americas, Inc. represents the asset management activities conducted by Bank AG or any of its subsidiaries. On or about 3/23/18, AM Distributors, Inc. will change to DWS Distributors, Inc. AM Distributors, Inc. 222 South Riverside Plaza Chicago, IL rep@db.com Tel (800) Bank AG. All rights reserved. (2/18) R