Investment Management Conference Call April 25, 2007

Transcription

1 Investment Management Conference Call April 25, 2007 Andrew M. Parker Managing Director, Quantitative Strategies Marc D. Stern Chief Investment Officer

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 Trust makes no representation or warranty with respect to the accuracy or completeness of such information. Opinions expressed herein are current opinions only as of the date indicated and are subject to change without notice. References to a particular security or portfolio are not intended to be stock-specific or other investment recommendation, and our views of these holdings may change at any time without notice based on a variety of factors, including stock price movements, new research conclusions, or changes in risk preference. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions and inflation. Past returns are not indicative of future performance. 2

3 Topic #1 Overview of current market environment 3

4 Investors Likely To Face Some Notable Challenges Sooner Scant compensation for taking risk of lowerquality assets Slower corporate earnings growth Ongoing weakness in housing Increased risk of protectionism Later Potential increases in tax rates on capital gains and dividends 4

5 Underlying Fundamentals Reveal Remarkable Strength Consumer Record household net worth Record employment Corporation Record earnings Record buyout funds Broad Economy & Markets Record tax receipts Moderate inflation Low interest rates Reasonable valuations Strong global economic growth 5

6 Investment Implications Carefully limit risk-taking Hold Strategic Cash position in anticipation of attractive opportunities Maintain shorter duration and higher-quality focus in bond portfolios Minimize exposure to hottest markets Remain fully invested in attractive markets Emphasize leading companies in developed markets Focus on strong franchises not solely tied to economic activity in healthcare, technology, and financial sectors Underweight areas where investor expectations appear to exceed likely outcomes, such as housing, utilities, and food Target attractive investment opportunities outside U.S. Asian stocks appear particularly compelling Interesting non-u.s. investments could benefit International, Global Small Cap, Real Return, Private Equity, and Hedge Fund portfolios 6

7 Topic #2 New research on active versus passive investing 7

8 One Portfolio s Historical Performance 1 st Decile (Highest Returns) 3 rd Decile 5 th Decile 6 th Decile 7 th Decile 10 th Decile (Lowest Returns) Market Return < 0% 0% to 10% 10% to 20% 20%+ Performance of Vanguard S&P 500 Index Fund relative to Lipper s U.S. equity fund universe. As of December 31, 2006, there were over 11,000 funds in this universe. Reflects rolling 12-month performance calculated quarterly from January 1, 1985 to December 31, Source: Lipper, Bessemer Trust 8

9 S&P 500 Index Weightings Vary 40.5% Tech & Telecom 4.0% Cisco 16.3% 0.9% Source: FactSet, Standard & Poor s, Bessemer Trust 'Mar-00 Peak: Trough: Sep-02 'Mar-00 Peak: Dec-05 Trough: Mar 00 Sep 02 Mar 00 Dec 05 Market Value ($ T) $5.1 $1.2 $0.5 $0.1 9

10 Changing Constituents Of S&P 500 Index Of the 500 companies in S&P 500 Index as of 1997, only 269 are still in the index today. Various factors lead to deletion, including: Acquisitions (e.g., First Chicago, Georgia Pacific, Grumman, GTE, Household International, Lotus, Nynex, Quaker Oats, Scientific Atlanta, Texaco, Unocal, Upjohn, Warner-Lambert) Financial difficulty (e.g., Bethlehem Steel, Delta Airlines, Enron, Kmart, MCI, Nortel, Pan Am, Polaroid, US Airways, Wang Labs, Winn-Dixie, WR Grace, Zenith) As of January 1, 2007 Source: FactSet, Standard & Poor s, Bessemer Trust 10

11 EAFE Index Weightings Vary, Too 64.7% Japan 20.1% 20.1% 'Dec-88 Peak: 1989 'Dec-01 Trough: 2002 Nikkei Index 38,916 8,303 Source: FactSet, MSCI, Bessemer Trust 11

12 Index Summary Indexing can be a sound strategy, in certain cases for certain purposes but its drawbacks mean it is not a panacea. The key question: Can active managers add value? Annualized Returns 10 Years Ended December 31, 2006 Average U.S. Large Cap Fund +7.2% S&P 500 Index +8.4% Based on Lipper Large Cap Universe consisting of more than 2,100 funds. Source: Lipper, Standard & Poor s 12

13 Academic Study Regarding Performance Professors from Yale School of Management studied performance of 2,650 U.S. equity mutual funds from 1990 to Three notable conclusions: Portfolios closely tracking index weightings generally underperform. Closet indexing tends to destroy value. Described 7% of non-index fund assets in 1995 and 32% in On the other hand, high tracking error hurts performance too. Generally achieved through sector rotation strategies. Factor bets tend to destroy value. To add value, portfolio managers must develop convictions and emphasize those holdings. Active stock pickers tend to create value for investors. The funds with the highest Active Share significantly outperform their benchmark indexes, while the funds with the lowest Active Share underperform. Study by Martijn Cremers and Antti Petajisto published August 7, 2006 Source: Yale School of Management 13

14 Active Share: Link To Performance Active Share = Annualized Performance Premium 1.0% 0.7% 1 st Quintile (Highest Active Share) 5 th Quintile (Lowest Active Share) -0.5% -1.4% -1.5% Study by Martijn Cremers and Antti Petajisto published August 7, 2006 Active Share refers to the portion of the portfolio weightings that differ from those of the index Performance information is after fees for all non-index equity funds for period from 1990 to 2003 Source: Yale School of Management, Empirical Research Partners, Bessemer Trust 14

15 Academic Study Regarding Trading Professors from University of Minnesota, The Wharton School, and College of William and Mary studied performance of 1,400 U.S. equity mutual funds from 1980 to Researchers divided trades into two categories: 1) Trades made solely to implement investment decisions 2) Trades made in response to investor inflows and outflows Conclusion: Our analysis reveals that managers making purely valuation-motivated purchases substantially beat the market, but are unable to do so when compelled to invest excess cash from investor inflows. A similar, but weaker, pattern is found for stocks that are sold. Study by Gordon Alexander, Gjergi Cici, and Scott Gibson published February 28, 2006 Source: University of Minnesota, The Wharton School, College of William and Mary 15

16 What Motivates The Trade? Annual Relative Performance 2.8% Purchases Sales 1.6% Investment- Motivated -0.4% Liquidity- Motivated Inv -0.7% Investment- Motivated Liq Liquidity- Motivated Study by Gordon Alexander, Gjergi Cici, and Scott Gibson published February 28, 2006 Source: University of Minnesota, The Wharton School, College of William and Mary 16

17 Key Success Factors For Active Management Talented people. Recruit top-flight portfolio managers and analysts, state clear objectives, encourage flexibility, and instill accountability. Independent research. Empower analysts by rewarding superior insights, creating teamwork, and providing career paths. Multi-year investment horizon. To outperform, managers must be willing to take off-consensus positions they believe will likely to play out over several years. Controlled costs. Management fees and portfolio turnover levels must be consistent with overall objectives. Solid quantitative analytics. Thoughtful analysis can challenge thinking, highlight priority areas, and assess risks. Steady money. A stable client base is essential for orderly and thoughtful portfolio management. 17

18 The Courage Of Our Convictions Active Share = The percentage of the portfolio that is different from the relevant index: High overlap with index 0% 20-60% % Index Closet indexers High Active Share funds Bessemer Large Cap = 82% Bessemer Mid Cap = 92% Bessemer International = 76% Low overlap with index Study by Martijn Cremers and Antti Petajisto published August 7, Bessemer portfolio data as of March 31, Source: Yale School of Management, Empirical Research Partners, Bessemer Trust 18

19 Bessemer Large Cap Portfolio: Top 10 Active Holdings Prudential Financial Mellon Financial P/E Current 1 13x 17 P/E Normalized 2 7x 8 Portfolio Weighting of Bessemer Top 10 Charles Schwab 20 9 Staples % Amgen 13 8 Hudson City Bancorp 24 6 EOG Resources 16 9 United Technologies 16 8 Celgene Thermo Fisher Scientific % Top 10 Median Overall Portfolio 17x 18x 9x 10x Bessemer S&P 500 S&P 500 Index 16x 12x ¹Current P/E reflects price-to-earnings ratios based on consensus estimates for calendar 2007 earnings. ²Normalized P/E reflects price-to-earnings ratios based on Bessemer s estimates of each company s projected earnings for Reflects top 10 holdings in Bessemer s Old Westbury Large Cap Equity Fund as of March 31, Excludes Biomet, which has agreed to be acquired. Top 10 holdings are based on targeted portfolio weightings and may vary within individual client portfolios. Source: FactSet, Bessemer Trust 19

20 Active Investing Summary Passive investing is a viable investment strategy for many investors, but its inherent wrinkles may reduce its allure. Talented active investors can add value if they develop independent research conclusions and implement their convictions. Trading must be based on thoughtful assessments of investment potential not inflows and outflows instigated by trend-following investors. A careful balance must be struck between fundamental industry research and quantitative analysis. All portfolio actions must tie into clear objectives measured over an appropriate time frame. 20

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