Quarterly Investment Management Conference Call

Transcription

1 Quarterly Investment Management Conference Call What s Developing Now April 18, 2012 Marc D. Stern Chief Investment Officer Peter J. Langas Head of Investment Strategies 1

2 This material is provided for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any fund or portfolio mentioned herein. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indices in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index. Sector and Industry classifications included in this presentation utilize the Global Industry Classification Standard ( GICS ). GICS is the exclusive property and a service mark of Morgan Stanley Capital International Inc. ( MSCI ) and Standard & Poor s ( S&P ), a division of The McGraw-Hill Companies, Inc. Neither MSCI nor S&P makes any express or implied warranties or representations or shall have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) with respect to GICS data or results obtained therefrom. 2

3 Today s Agenda What are the most important developments in the investment landscape? How are we positioning client portfolios accordingly? 3

4 Five Big Developments 1. Governments struggle with budget imbalances 4

5 Rising Government Debt 130% U.S., Europe, Japan Debt/GDP 120% 110% 100% 90% 80% 70% 60% 50% As of January 31, Reflects gross federal debt. Source: Congressional Budget Office, Eurostat, International Monetary Fund, Japan Cabinet Office, U.S. Bureau of Economic Analysis 5

6 Government Bond Yields Vary Around The World Yiel ld % Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Italy U.S. Germany Japan As Reflects of November three-year 25, government bonds yields as of March 31, Source: FactSet 6

7 Long-Term Challenges for Developed Countries Japan Euro Zone U.S. GDP ($ Trillions) $6.1 $12.3 $15.3 Gross Federal Debt (% of GDP) 196% 89%¹ 102%³ Federal Budget Deficit (% of GDP) (7.8)% (4.0)%² (8.7)% As of December 31, ¹Individual euro zone countries Federal debt varies significantly (e.g., Germany 83%, France 87%, Italy 121%, Spain 67%). ²Individual euro zone countries Federal budget deficits vary significantly (e.g., Germany (1.4)%, France (3.8)%, Italy (2.6)%, Spain (4.4)%). ³U.S. gross Federal debt includes securities held by other government entities (e.g., Federal Reserve, Social Security Trust Fund). Debt held by the public represents 69% of U.S. GDP. Source: Congressional Budget Office, Eurostat, Japan Cabinet Office, U.S. Bureau of Economic Analysis 7

8 Complex Situations Country/Region Strengths Weaknesses Japan Strong economic ties to China Robust manufacturing base Domestic ownership of government debt High educational achievement High fuel costs Overpriced yen Substantial government debt Poor demographics Euro zone Large economic market German manufacturing prowess Proactive European Central Bank Increasing fiscal coordination Monetary union without fiscal union Divergence between North and South Inflexible labor markets Overly leveraged banks U.S. Size and breadth Technological leadership Strong corporate balance sheets R t t Fiscal complacency Debt ceiling crises Tax code inefficiencies Ed ti t t Reserve currency status Education system stresses 8

9 Simpson-Bowles Plan: A Road Map Sl Selected dhihlih Highlights Rein in entitlement programs Raise eligibility ages Introduce means testing Enforce Medicare cost controls Cut discretionary spending Close one-third of overseas military bases Cut federal workforce by 10% Reduce farm subsidies Restructure tax code Eliminate loopholes and deductions Raise gasoline tax by 15 cents per gallon Reduce corporate and personal tax rates to spur growth 9

10 Five Big Developments 1. Governments struggle with budget imbalances 2. Corporate profits surge 10

11 Corporate Profits at Record High U.S. Corporate Earnings Growth drivers: Technology Globalization Housing $ Ear rnings Per Share As of December 31, Source: FactSet, Standard & Poor s 11

12 Stocks Generating More Income Than Bonds Johnson & Johnson Dividend Yield vs. 5-Year Treasury Yield J&J Higher Difference e (%) Treasury Higher As of March 31, Source: Company reports, Johnson & Johnson, Standard & Poor s 12

13 Growth, But With Rising Challenges 2011 Corporate Profit Growth Factors for Slower Profit Growth in % Europe recession China policy restraint 9.8% Wage gains Limited cost reductions Historical i Norm S&P 500 Total S&P 500 ex-apple As of December 31, Source: Company reports, Standard & Poor s 13

14 Five Big Developments 1. Governments struggle with budget imbalances 2. Corporate profits surge 3. Consumers bouncing back 14

15 Reduced Consumer Debt Burden isposable In ncome As % of D 18% 17% 16% U.S. Household Debt Service Personal savings rate Mortgage debt (trillions) 15% 30-year fixed mortgage rate 14% Disposable income (trillions) 13% At Debt Peak Current 2.1% 3.7% $10.4 $9.8 61% 6.1% 39% 3.9% $10.5 $11.8 Household o debt service and mortgage debt as of December 31, 2011; personal savings rate and disposable income as of February 29, 2012; 30-year fixed mortgage rate as of April 12, Source: Federal Reserve, U.S. Bureau of Economic Analysis 15

16 Gas Prices Take Bigger Bite Out of Workers Pay 25 Gasoline Price Per Gallon As Percent of Average Hourly Earnings As of March 31, Source: Empirical Research Partners, U.S. Bureau of Labor Statistics, U.S. Energy Information Administration 16

17 U.S. Job Market: Clear Improvement 2009: Widespread Pain 2012: Signs of Recovery Employment cuts Decrease of 2.0% or more Decrease of less than 2.0% Employment growth Increase of 2.0% or more Increase of less than 2.0% Reflects year-over-year percent change in private sector employment by state as of December 31, 2009 and February 29, Source: U.S. Bureau of Labor Statistics 17

18 Five Big Developments 1. Governments struggle with budget imbalances 2. Corporate profits surge 3. Consumers bouncing back 4. Housing depressed, but starting to improve 18

19 The Collapse of Housing Price Change from Peak -61% Las Vegas -55% Phoenix -51% Miami -41% Los Angeles -41% San Francisco -36% Atlanta -35% Chicago -28% Washington, D.C. -24% New York -19% Boston -12% Denver -10% Dallas Hou using Units (M Millions) New Home Construction Metropolitan areas price changes as of January 31, New home construction as of February 29, Source: Case-Shiller, National Association of Home Builders, Standard & Poor s 19

20 Record High Affordability Reduced Inventory Percent of U.S. Families Able to Afford Median-Priced Homes 76% U.S. Housing Inventory As Percent of GDP 41% Historical Norm 8.0% 5.8% Historical Norm At Peak Current As of December 31, Source: Empirical Research Partners, National Association of Home Builders, Wells Fargo 20

21 Housing Depressed, But Signs of Life 90 Housing Market Index As of March 31, Reflects National Association of Home Builders survey gauging builder perceptions of current single family home sales, sales expectations ti for the next six months, and traffic level l of prospective buyers. Source: National Association of Home Builders 21

22 Five Big Developments 1. Governments struggle with budget imbalances 2. Corporate profits surge 3. Consumers bouncing back 4. Housing depressed, but starting to improve 5. World growth shifts to emerging markets 22

23 Emerging Markets Are Poised for Growth U.S., Japan, Germany, China, Brazil, Russia, France, U.K., Italy, India, Mexico, and Canada Indonesia, and Turkey Population (millions) 743 3,315 Workers per retiree Debt (% of GDP) 119.3% 36.9% Current Account (% of GDP) (1.2)% 1.7% Total GDP ($ trillions) 1990 $14 $ $32 $ E $62 $52 Source: International Monetary Fund, World Bank 23

24 Complex Situations Country Strengths Weaknesses China Skilled economic policy leadership Strong manufacturing base Massive currency reserves Spreading economic success Reliance on investment/exports Inflexible currency/banking Unrest due to corruption/pollution One child demographics India Strong local demand Entrepreneurial culture Favorable demographics Established legal system Large deficits/bureaucracy/corruption Weak infrastructure Rising inflation/unstable currency Low literacy rate Brazil Ample natural resources Emphasis on renewable energy Manageable debt levels Banking system strength Volatile commodity prices Complex legal system/bureaucracy Low savings/inadequate investment Inflationary pressures Banking system strength Inflationary pressures 24

25 Summary Serious fiscal challenges in Europe, Japan, and the U.S. need to be resolved or markets will insist on it Strong U.S. corporate profits make owning companies attractive particularly compared to owning bonds but growth is tapering off Consumers buoyed by less debt, more jobs, and a gradual housing recovery could provide needed stimulus to the U.S. economy Emerging markets have enormous potential to drive global economic growth 25

26 Weighing a Complex Landscape Reasons to emphasize growth Reduced probability of European collapse Reasons to emphasize capital preservation Much of Europe in recession Improving U.S. economic data U.S. fiscal difficulties Reasonable equity valuations Moderating profit growth/ heightened h geopolitical l risk Not an environment for bold directional moves 26

27 Capturing Growth Asset Class Commodities Select Themes High commodity prices create opportunities in commodity-related equities (e.g., fertilizer, oil services, precious-metals mining) Hedge Funds Lower correlations among assets improves return potential for long/short strategies Small & Mid Cap Equities Smaller companies benefiting from secular growth in life sciences and technology Large Cap Equities Leading global companies offer diverse opportunities around the world 27

28 Large Cap: Four Key Principles Global Approach Complementary Strategies Objective: Competitive, consistent performance High Conviction Disciplined Process 28

29 Large Cap Equities: Key Themes Fears of economic headwinds create value opportunities in global companies based in Europe and Japan Renault (Autos, France) Fanuc (Robotics, Japan) Siemens (Industrial, Germany) Hitachi (Industrial, Japan) Technological innovation and emerging-market consumers are driving growth opportunities ARM Holdings (Technology, U.K.) Tingyi (Consumer, China) Salesforce.com (Technology, U.S.) Hero MotoCorp (Motorcycles, India) Bottom-up research uncovers opportunities in underappreciated franchises and unrecognized turnarounds Sanofi (Healthcare, France) IBM (Technology, U.S.) Johnson & Johnson (Healthcare, U.S.) ENI (Energy, Italy) Quality companies with powerful global brands or wide scale present attractive opportunities Adidas (Consumer, Germany) Apple (Technology, U.S.) Schlumberger (Oil Services, U.S.) Unilever (Consumer, Netherlands) 29

30 Capturing Emerging-Market Growth Many Ways Direct investments Global Opportunities Real Return Global Small & Mid Cap Hedge Funds Private Investments 82% of global bonds in emerging markets Emerging-market-based commodity companies 20 emerging-market countries Asia-based strategies, emerging-market strategies Private ventures in technology, infrastructure, real estate Companies benefiting from growth Large Cap Global Small & Mid Cap Consumer, financials, technology Consumer, industrials, materials Commodities Real Return Energy, mining, agricultural products 30

31 Protection on Several Levels Bonds/Cash Yields unattractive, but provide desirable stability Defensive Growth Assets Credit and covered call strategies provide good total return potential with more downside protection than equities Strategic Currency Protect against potential decline of U.S. dollar 31

32 Bessemer s Flexible Investment Platform Internal Resources External Resources Municipal bonds Treasuries/TIPS/Agencies i High-yield bonds Mortgage-backed securities Investment-grade corporates Global government bonds Short-term investments Large cap stocks Convertible bonds Small/mid cap stocks Large cap stocks Hedge funds Mid cap stocks Private equity Commodities Real estate Currencies 32

33 The X-Ray Private Equity Real Estate Cash Municipal Bonds Hedge Funds Large Cap Equities TIPS Mortgage-Backed Securities Global Gov't Bonds High-Yield Bonds Convertible Bonds Commodities Mid Cap Equities Strategic Currency Small Cap Equities As of March 31, This model displays Bessemer s suggested model portfolio allocation guidelines. Each client situation is unique and may be subject to special circumstances, including but not limited to greater or less risk tolerance, classes and concentrations of assets not managed by Bessemer, investment limitations imposed under applicable governing documents and other limitations, that may require adjustments to the suggested allocations. Model asset allocation guidelines may be adjusted from time to time on the basis of the foregoing or other factors. Alternative investments, including Bessemer hedge funds of funds, are not suitable for all clients and are available only to qualified investors. 33

34 Combining Growth and Protection Equities Commodities Hedge funds Private equity Real estate Growth Assets 63% Protective Assets 37% Cash High-quality bonds Defensive growth assets Currency Portfolio objectives: Participate in upside Protect on downside As of March 31,

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