JOHCM Global Opportunities Fund

Transcription

1 JOHCM Global Opportunities Fund April FOR PROFESSIONAL INVESTORS ONLY

2 Global Opportunities summary Objective: above average risk adjusted equity returns Concentrated portfolio of attractively-valued compound growth companies Four key investment priorities: 1. Attractive industry 2. Well incentivised management, reinvesting for growth 3. Strong balance sheet 4. Attractive (absolute) valuation Capped at GBP 5bn (to be reviewed at GBP 2.5bn) Heads we win, tails we don t lose too much 2

3 Investment philosophy Superior long term investment returns are achieved through high returns on capital and valuation discipline Short term earnings Long term returns on capital Distributions to shareholders Reinvestment for growth Relative, PE-based valuation Absolute cashflow-based valuation Benchmark aware portfolio Concentrated, unconstrained portfolio 3

4 Earnings momentum is not the same as compound growth Market routinely underpays for this and overpays for this Free cash flow Free cash flow vs. Year 3 Year 3 Time Time Years 3-10 are more important than years 1-2 4

5 Long term value creation is achieved by reinvestment Maintenance investment This is what creates value for shareholders Normalised, discretionary free cash flow (used for valuation) Growth investment: Retained surplus Expensed or capitalised Organic and acquisitive Value created depends on marginal returns These create no additional value Distributions to shareholders Discretionary free cash flow is the best proxy for intrinsic value 5

6 Process: filtering down a wide universe High and stable cash ROCE; barriers to entry, recurring revenues Attractive Industry Fundamentals Strong Balance Sheet Gross/net debt vs. free cash flow, maturity profile, cash flow stability Sales growth, EBIT/PBT, cash flow, ROIC Incentivisation Reinvestment Headcount, R&D, A&P, Capex, M&A Attractive absolute risk/reward balance based on cashflow-derived intrinsic value Valuation PORTFOLIO stocks, 2-5% position sizes 6

7 Features of attractive industries STRUCTURAL STRUCTURA TAILWINDS L TAILWINDS MOATS MOATS BUSINESS MODELS BUSINESS MODELS Outsourcing Automation Convenience Aspiration Demographics Networks Installed bases Intellectual property MOATS Brands Scale Recurring revenues Cash generation Terminal value Diversification Evidence is high and consistent cash return on invested capital 7

8 Screening for Quality High and/or reliable returns on capital Strong balance sheet Cash generation Bias towards: Technology Healthcare Consumer (staples and discretionary) Industrials Intangible assets (brands, IP, networks, switching costs) Bias away from: Energy and Resources Financials Capital-intensive, commoditised, cyclical stocks at front of mind 8

9 Not all companies have a terminal value vs.? E.g. software, brands E.g. hardware, biotech 9

10 Attractive absolute valuations Evaluate all investments against cash Forecast normalised free cash flow in a range of possible scenarios Buy stocks with limited or no downside in a pessimistic scenario and substantially more upside in an optimistic one Single target prices give a false sense of certainty In other words we invest with a margin of safety We hold up to 20% cash when we cannot find enough ideas at attractive valuations 10

11 Genuine versus Fake Value We prefer to buy quality at a double discount Growing Genuine value Free cash flow growth Shrinking Fake value High Free cash flow yield Low but our priority is compound growth and terminal value 11

12 Don t pay for free options Free cash flow Potential from free options, e.g.: unproven technology use of net cash adjacent markets Resumption of compound growth Zero growth annuity (extrapolation of current trajectory) No terminal value Year 3 Time 12

13 Sell discipline We sell stocks to zero when they have too much downside This can materialise either from fundamental changes or rising share prices We sell to cash if we have nothing to buy with the proceeds Cash balance rises if we have a period with more sells than buys We do not manage turnover because this would impair the sell discipline 13

14 Holdings and sector/regional positions Industrials Consumer Discretionary America UK Europe ex-uk Japan Asia WW Grainger 3.05% Experian 3.83% United Technologie 3.01% Ultra Electronics 2.22% Rockwell 1.93% Michael Page 2.05% Intertek 2.03% Capita 2.02% Wolseley 1.97% TJX Companies 2.73% Reed Elsevier 3.64% Advance Auto Parts 1.93% Wolters Kluwer 3.64% Emerging Total 22.11% 11.94% Healthcare Baxter International 1.86% Sanofi 1.94% 3.80% Consumer Staples Procter & Gamble 1.94% British American Tobacco 2.57% L'Oreal 2.02% Japan Tobacco 2.99% Imperial Tobacco 2.56% Unilever 1.98% Shiseido 1.88% 15.94% Telecoms 0.00% Financials TD Ameritrade 1.58% 1.58% Information Technology Oracle 4.08% Sage 2.66% SAP 2.72% Accenture 2.67% Ansys 2.59% Cognizant Tech 2.59% Mastercard 2.28% Equifax 2.17% 21.76% Utilities 0.00% Materials Praxair 1.94% 1.94% Energy BG Group 2.27% Inpex 2.35% 4.62% Cash 16.30% Total 36.35% 24.18% 15.94% 7.22% 0.00% 0.00% Source: JOHCM as at 31 March All data is shown for the JOHCM Global Opportunities Fund. Data may not add to % due to rounding. 14

15 Current positioning No risk assets are attractively valued in absolute terms Only chance of acceptable absolute returns over medium term, without risk of serious capital loss, lies with cash-generative compound-growth equities with recurring revenues and long term structural growth tailwinds Strong balance sheet essential to survive credit market implosion Wary of deflation in commodity supply chains 15

16 Credit cycles Balance sheet and income growth determines spending power Differentiate between long and short cycles Beware multiple layers of leverage (consumers, corporates, banks, investors) Watch BOTH the absolute level and pace of increase in debt/gdp 16

17 Leverage in the real world (I) Financials Corporate Households Public US 3M T-Bill yield US debt as % GDP % Yield Dec 79 May 82 Nov 84 May 87 Nov 89 May 92 Oct 94 Apr 97 Oct 99 Apr 02 Sep 04 Mar 07 Sep 09 Mar 12 Sep 14 The world remains very interest rate sensitive Source: Bureau of Economic Analysis, Federal Reserve and Federal Reserve Bank of St Louis as at 30 September

18 Leverage in the real world (II) Private Sector Debt as % of GDP 2.5 Jun-08 Jun % UK US China South Korea Malaysia Thailand Brazil India Turkey Mexico Debt is no longer just a developed market problem Source: Factset as at 31 December

19 Leverage in the financial world USD bn NYSE net debt margin* Jan 95 Jan 99 Jan 03 Dec 06 Dec 10 Dec 14 S&P 500** Jan 95 Jan 00 Jan 05 Jan 10 Jan 15 Everyone has forgotten drawdown risk Volatility index (VIX)** Jan 95 Jan 99 Jan 03 Jan 07 Jan 11 Jan 15 Source: *New York Stock Exchange as at 31 December **Bloomberg as at 31 January

20 Reinvestment is still in short supply Falling capex 25% 20% % % 0.2 Rising margins 5% 0.0 0% Dec 84 Sep 88 Jun 92 Feb 96 Nov 99 Aug 03 Apr 07 Jan 11 Sep 14 US capex as % corporate cash flows (LHS) US corporate profits as % national income (RHS) Source: FactSet/Federal Reserve as at 30 September

21 Low wage inflation The common denominator of high margins and low yields 68% 14.0% 66% 12.0% 64% 10.0% 8.0% 62% 6.0% 60% 4.0% 58% Wage share of US national income 10y US treasury yield 2.0% 56% 0.0% Sep 84 Sep 87 Sep 90 Sep 93 Sep 96 Sep 99 Sep 02 Sep 05 Sep 08 Sep 11 Sep 14 Pricing power and strong balance sheets are essential if this ever reverses Source: FactSet/BEA as at 30 September

22 Conclusion Real world is still overleveraged Risk assets are fully priced => Investment priorities: Strong balance sheet Recurring revenues High barriers to entry Long-term compound growth 22

23 Appendix

24 JOHCM Global Opportunities Fund performance since inception JOHCM Global Opportunities Fund MSCI AC World NR Index GLO: 56.40% Volatility: 9.23 Benchmark: 55.08% Volatility: Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 Mar 14 Jul 14 Nov 14 Mar 15 Source: JOHCM/Bloomberg/MSCI Barra. NAV per share monthly return calculated net of fees, net income reinvested, share class B in GBP. Benchmark: MSCI ACWI NR Index (net dividends reinvested). Data as at 31 March

25 JOHCM Global Opportunities Fund Net performance in GBP since inception to 31 March JOHCM Global Opportunities MSCI ACWI NR Index % * YTD 2015 SI (p.a)* Source: JOHCM/MSCI Barra. NAV of share class B in GBP, net income reinvested, as at 31 March All fund performance has been shown against the MSCI ACWI NR Index (net dividends reinvested). *Part period return from Inception date 30 June 2012 to 31 December Performance of other share classes may vary and is available upon request. 25

26 JOHCM Global Opportunities Fund style exposures since inception Relative to benchmark Latest Month 2.0 Style Tilt Quality Valuation -4.0 Significantly above-average quality without paying a premium Source: Style Research TM as at 31 March

27 Sources of cognitive error Acting on impulse Systems 1 & 2 Heuristics Doubt/inconsistency avoidance Sources of cognitive error Selecting information Analysing information Confirmation Availability Immediacy Quantifiability Association Causation vs. correlation Pigeonholing Linear thinking Feedback loops Overconfidence Gambler s fallacy Inevitability vs. probability 27

28 5 strategies to avoid cognitive errors and emotional overreaction 1. Small team 2. Clear investment philosophy 3. Repeatable process (information gathering) 4. Valuation control 5. Sell discipline (acknowledge errors) 28

29 Advantages of a small team Consistent analysis of quality, growth and value Cross-sector insights, question banks and mental models Greater control of agenda Fewer conflicting emotions 29

30 Global and UK Opportunities team Two senior fund managers and three dedicated fund analysts: Ben Leyland, CFA Senior Fund Manager of the JOHCM Global Opportunities strategy Co-manager of the JOHCM UK Opportunities strategy 12 years industry experience: joined JOHCM in 2006 as analyst on the UK Opportunities Fund. Previously 5 years at Schroders John Wood, ACA Senior Fund Manager of the JOHCM UK Opportunities strategy Co-manager of the JOHCM Global Opportunities strategy Joined JOHCM in 2005 to launch the UK Opportunities strategy. Previously 10 years at Newton Robert Lancastle, CFA Analyst for the JOHCM Global Opportunities strategy. Joined JOHCM in February 2012 Previously at Orbis Investment Advisory as an equity analyst for the Orbis Global Equity strategy Rachel Reutter, CFA Analyst for the JOHCM UK Opportunities strategy. Joined JOHCM in September 2012 Previously at Goldman Sachs, initially as an Associate and then as the lead analyst in the UK General Retail Sector Todd King Provides desk support to John Wood and Rachel Reutter. Joined JOHCM in September 2014 Previously at PwC, where he was part of the Graduate programme Proven investment process, wider universe 30

31 JOHCM UK Opportunities Fund performance since inception JOHCM UK Opportunities Fund FTSE All-Share TR Index UKO: % Volatility: Benchmark: 85.12% Volatility: Dec 05 Oct 06 Aug 07 Jun 08 Apr 09 Feb 10 Dec 10 Oct 11 Aug 12 Jun 13 Apr 14 Feb 15 Everyone has forgotten drawdown risk Source: JOHCM/Bloomberg/FTSE Group. NAV per share monthly return calculated net of fees, net income reinvested, share class B in GBP. Benchmark : FTSE All-Share Total Return Index TR, net income reinvested, adjusted. Data as at 31 March

32 Scaling up to a global universe Same objective: high risk-adjusted total return Global nature of FTSE All-Share Bias towards multinationals for whom listing venue is irrelevant Fundamental screens narrow universe Small team creates cross-sector consistency Basic principles of investing remain the same 32

33 Sources of information (in order of importance) Reports & Accounts Fundamental databases and screens Industry contacts (suppliers, customers, competitors) Independent experts Company management (custodians of capital) Sell-side analysts We control the agenda 33

34 DISCLAIMER THIS DOCUMENT IS FOR PROFESSIONAL INVESTORS ONLY. J O Hambro Capital Management Limited. Registered in England No: Authorised & regulated by the UK Financial Conduct Authority. Registered office: Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB, United Kingdom. The registered mark J O Hambro is owned by Wiltons Holdings Limited and is used under licence. JOHCM is a registered trademark of J O Hambro Capital Management Limited. The information in this document does not constitute, or form part of, any offer to sell or issue, or any solicitation of an offer to purchase or subscribe for the proposed Funds described in this document; nor shall this document, or any part of it, or the fact of its distribution form the basis of, or be relied on, in connection with any contract. Recipients of this document who intend to subscribe to any of the proposed Funds are reminded that any such purchase may only be made solely on the basis of the information contained in the final prospectus, which may be different from the information contained in this document. No reliance may be placed for any purpose whatsoever on the information contained in this document or on the completeness, accuracy or fairness thereof. No representation or warranty, express or implied, is made or given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions (but so that nothing in this paragraph shall exclude liability for any representation or warranty made fraudulently). The distribution of this document in certain jurisdictions may be restricted by law; therefore, persons into whose possession this document comes should inform themselves about and observe any such restrictions. Any such distribution could result in a violation of the law of such jurisdictions. The information contained in this presentation has been verified by the firm. It is possible that, from time to time, the fund manager may choose to vary self imposed guidelines contained in this presentation in which case some statements may no longer remain valid. We recommend that prospective investors request confirmation of such changes prior to investment. Notwithstanding, all investment restrictions contained in specific fund documentation such as prospectuses, supplements or placement memoranda or addenda thereto may be relied upon. Investments fluctuate in value and may fall as well as rise and that investors may not get back the value of their original investment. Past performance is not necessarily a guide to future performance. Investors should note that there may be no recognised market for investments selected by the Investment Manager and it may, therefore, be difficult to deal in the investments or to obtain reliable information about their value or the extent of the risks to which they are exposed. The Investment Manager may undertake investments on behalf of the Fund in countries other than the investors own domicile. Investors should also note that changes in rates of exchange may cause the value of investments to go up or down. Sources for all data: JOHCM (unless otherwise stated). 7152