Investment Commentary 4Q 2018

Transcription

1 1/14 Asset Management / Quality Growth Boutique For institutional investors only / not for public viewing or distribution Investment Commentary 4Q 2018 Vontobel Fund - European Equity What s Inside? Key Takeaways... 2 Market Review... 3 Outlook... 3 Perspectives... 6 Retail: Can Brick and Mortar Deliver for the Right Franchise?... 6 Performance Drivers... 9 Portfolio Data as of December 31, About Us Vontobel Asset Management s Quality Growth Boutique is the New York-based global investment management business dedicated exclusively to managing global and regional long-only equity portfolios. We seek to invest in high-quality growth companies with the goal of outperforming the benchmark, with less risk, over a full market cycle. Our goal isn t unique what sets us apart is our execution. One team of experts consistently applies the same approach to all of our global equity products. Vontobel Asset Management is a global multi-boutique asset manager with Swiss roots and investment boutiques in Zurich, New York and London. Vontobel Asset Management is one of the three business units of Vontobel Holdings AG. Approved for institutional investors in: AT, CH, DE, ES, FI, FR, GB, IT, LI, LU, NL, NO, SE, SG (professional investors).

2 2/14 Investment Commentary / European Equity / 3Q 2018 Vontobel Key Takeaways European equity markets faced significant pressure as volatility escalated in the fourth quarter. The MSCI Europe Index declined 11.32%, bringing the index s year-to-date return from roughly flat at the beginning of the quarter into decisively negative territory for 2018 (in euros). Our European Equity strategy, which was also negative in the fourth quarter and the full year, modestly underperformed the benchmark in both periods. On a sector basis, our industrials holdings were the most significant positive contributors to relative returns. Over the past two years, we believe we have identified several attractive quality growth opportunities in the industrials space, many of which are asset-light business services companies. At the other end of the spectrum, our holdings in the health care sector were the most significant detractors from our relative performance. We anticipate that the end of quantitative easing (QE) from the European Central Bank (ECB), combined with a buildup of geopolitical issues, will lead to a weakening of the earnings outlook for riskier and more cyclically sensitive companies over the coming year. It is in this environment that, as quality growth investors, we look to deliver stable and predictable portfolio earnings to underwrite a pathway to long-term returns. The large majority of our companies continued to grow their underlying earnings, and outlooks remain healthy. This combination of positive earnings growth and weak markets makes for future return expectations that are brighter now than they were a year ago, despite continued threats to the region. We remain optimistic as we invest in individual companies not in countries. Performance (%) as of Q (I-share class) Net returns Rolling 12-month net returns EUR Fund Index EUR Fund Index QTD YTD years p.a years p.a years p.a Since launch p.a Launch date: ISIN: LU Index: MSCI Europe Index TR net. Net of fees. Source: Vontobel Asset Management. Past performance is no indication of current of future performance. performance data do not take account of the commissions and costs incurred on issue and redemption The

3 3/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Market Review European equities were hit hard across the board in the fourth quarter. Nearly every sector in the MSCI Europe Index was negative, with the majority in double-digit territory. Economic data reflected slowing growth: GDP for the EU 28 expanded at a 1.7% clip year-on-year, a slowdown from the prior quarter s 2.1%. The ECB indicated that weak economic data would not deter its plan to halt its stimulative bond-buying program at yearend. Meanwhile, an unresolved Brexit agreement between the UK and EU continued to add uncertainty as Parliament s vote on Prime Minister May s plan was delayed until January. On the Continent, the Italian government passed a budget late in the quarter. Although this assuaged the European Commission for the moment, Italy s fiscal woes continue to attract the market s attention. Outlook Uncertainty continues The gears of change engaged in 2018, and European markets felt the turbulence. The upheaval was multi-faceted, arising from shifts in trade, politics, and Brexit, to name but a few. However, the euro area economy only slightly weakened and forecasts for many European companies have held up, thanks largely to the ECB s continued provision of low interest rates. We anticipate that the end of QE from the ECB, combined with a buildup of geopolitical issues, will lead to a weakening of the earnings outlook for riskier and more cyclically sensitive companies over the coming year. It is in this environment that, as quality growth investors, we look to deliver stable and predictable portfolio earnings to underwrite a pathway to long-term returns. In 2018, the European markets experienced many disruptive elements, from politics, trade and monetary policy to volatile commodities and movement in the direction of the economy. Despite all of this, the large majority of our companies continued to grow their underlying earnings, and outlooks remain healthy. The combination of positive earnings growth and weak markets makes for future return expectations that are brighter now than they were a year ago, despite continued threats to the region. Going into the year, politics were expected to play a central role in the markets. Italy was expected to have an election, and the Brexit process needed to progress. Surprises abounded, however, from a change in the Spanish government to Macron losing his luster in France and Merkel s position weakening in We anticipate that the end of quantitative easing from the European Central Bank, combined with a buildup of geopolitical issues, will lead to a weakening of the earnings outlook for riskier and more cyclically sensitive companies over the coming year. GLOBAL MARKETS PERFORMANCE (%) AS OF DECEMBER 31, 2018 FOURTH QUARTER 1 YEAR MSCI All Country World Index MSCI All Country World ex U.S. Index MSCI EAFE (Europe, Australasia, Far East) MSCI Europe Index MSCI Japan Index MSCI All Country Asia Pacific ex Japan Index MSCI Emerging Markets Index S&P 500 Index Source: FactSet, MSCI, S&P Expressed in euros MSCI EUROPE INDEX SECTOR PERFORMANCE (%) AS OF DECEMBER 31, 2018 FOURTH QUARTER 1 YEAR Communication Services Utilities Health Care Consumer Staples Real Estate Financials Consumer Discretionary Materials Energy Industrials Information Technology Source: FactSet, MSCI Expressed in euros As of December 1, 2018, MSCI adopted changes to the GICS sector classification which includes the newly renamed Communication Services (formerly Telecom Services) and other changes to Consumer Discretionary and IT sectors.

4 4/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Germany. Entering 2019, politics should remain front and center. European Parliamentary elections will take place in May, with nationalists likely taking more seats. Brexit is coming down to the wire, and yet the range of outcomes is wide, from hard Brexit to no Brexit at all. Trade remains another open question. Though the U.S. is mainly focused on China, it is also trying to rebalance the terms of trade around the world, including with Europe. This is important for many European industries, such as autos. While there is a current détente with the U.S., it would not be a surprise if friction flared up again, though the timing is unknowable. Like the U.S., Europe is looking to protect itself against China s trade practices, its purchasing of European companies and its funding of European infrastructure projects to gain political clout. Escalating conflicts with big trading partners will not lead to a smooth ride. Separating structural growth from cyclical tailwinds QE in Europe is over. Rates, however, are likely to remain low for some time, especially now that macro trends are wobbling. Financials will have to wait to get their extra earnings kicker from higher interest rates. In this environment, as always, we look for companies that should grow earnings through the cycle. Despite the cloudy backdrop, we remain optimistic as we invest in individual companies not in countries. In 2018, the markets were weak on the expectation of a turn in the cycle, but the cycle has not turned yet. When it does, we expect the earnings of our portfolio holdings to exceed those of the market. Valuations have compressed across the market, but as earnings forecasts have not generally declined, there has not been much separation between high-quality and low-quality companies. Lower prices without correspondingly lower earnings estimates create lower price-to-earnings valuation multiples, bringing the appearance of value to riskier and more cyclical companies. However, as we have observed many times before, the pencils will come out and earnings forecasts will get slashed. Investors often fall for the illusion of cheap cyclicals right before a pullback. After a long economic cycle, market observers often find it hard to separate structural growth from cyclical tailwinds. Structural growth does not get the valuation premium that is warranted by its lower risk attributes. Oil and other commodities have had several strong years, but when the cycle turns, no one knows what the earnings for those companies will be. Despite the oil pullback at the end of the year, energy was still one of the best performing sectors in Europe this year. Energy s impact on the benchmark is yet to come, and we are not invested in the sector. We have also remained notably underweight to financials, another cyclical sector, with an average of 10.2% exposure in the fourth quarter of 2018 compared to 19.0%, the benchmark s largest sector weight. We used the weak market environment to upgrade the portfolio by shifting capital to higher-conviction names that have become cheaper along with the market and by selling out of lowerconviction holdings. For instance, we sold out of British American Tobacco (BAT), a company we have held for over a decade, on lowered visibility, along with DKSH, which is exposed to trade and Southeast Asia. On the other hand, we increased the weight of steady compounders like RELX and Safran, which have become even more attractive at current prices 1. We believe this should improve returns for the portfolio going forward. Despite the cloudy backdrop, we remain optimistic as we invest in individual companies not in countries. We believe we are positioned for durability, regardless of the economic environment We are underweight autos, which sit squarely in the crosshairs of trade issues and, as mentioned, we are underweight financials. Return on equity (ROE) for many of these companies remains low, both in absolute terms and relative to markets such as the U.S., and we do not see a near-term path to improvement. Furthermore, banks continue to get the benefit of a zero-risk weighting for sovereign holdings, despite various levels of government debt and the volatile tenor of the political landscape. We fear this will continue to weigh on many periphery banks. In the U.K., we are underweight underlying revenue exposure due to Brexit, though we continue to hold a number of U.K. multinationals. There are top-notch companies based in the U.K. that we believe should not be disrupted significantly by any type of Brexit. Energy remains an area we avoid as the stocks will rise or fall with an unpredictable commodity price. On the other hand, we maintain significant exposure to consumer staples companies that should continue to sell their products to consumers regardless of the economic environment. We also own industrials, though the companies in the strategy are less cyclical than typical industrial companies. Information technology remains an overweight despite the recent weakness in the space. The companies we own there continue to grow earnings and trade at reasonable multiples. When sector ETFs are sold, stable growth companies are sold along with more risky businesses. However, as earnings for the less cyclical companies come through, this value creation should be recognized by the market. The future looks bright for our companies. Many stocks were weak despite growing their embedded value through continued earnings increases. For example, despite continued earnings growth, Domino s Pizza Group (U.K.) declined approximately one-third, Inditex (Spain) was down about 20%, and Eurofins (France) toppled more than one-third this year. With earnings outlooks largely unchanged and the market selling based on sentiment, we believe the underlying value of these companies 1 Please see full list of top and bottom 5 contributors at the end of this commentary.

5 5/14 Investment Commentary / European Equity / 4Q 2018 Vontobel has continued to improve. In our view, this will eventually be appreciated by the market. Sentiment breeds opportunity. When sector ETFs are sold, stable growth companies are sold along with more risky businesses. However, as earnings for the less cyclical companies come through, this value creation should be recognized by the market. We remain committed to our quality growth discipline The market gives and takes, and this year it took more than we would have liked. We have not changed the team and how we manage the strategies, nor have we altered our stock picking process. We sidestepped some of the worst-hit areas of 2018, such as autos and banks, but this success was offset by a few missteps in health care and consumer staples. Looking ahead, we expect that the embedded value built up in 2018 should start to assert itself in performance. Our focus on investing in quality companies with strong earnings growth and that trade at reasonable multiples (yet still got punished by the market) is, in our opinion, a recipe for outperformance ahead. Sincerely, Donny Kranson, Portfolio Manager

6 6/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Perspectives Retail: Can Brick and Mortar Deliver for the Right Franchise? Traditional brick and mortar stores have received terrible press over the past few years. Companies such as Kmart and J.C. Penney in the U.S. and Debenhams in the U.K. have been eclipsed by e-commerce and a changing retail landscape, despite a strong economy. Many others, such as Toys R Us and Brookstone, have filed for Chapter 11 bankruptcy. However, for businesses with the right offerings, expansion through traditional stores can deliver faster growth, high returns, and strong free cash generation. Space growth can also provide a good level of predictability. By owning and operating the end retail space, and generating incremental growth from e-commerce, owners of strong branded products can benefit from much better control over pricing, inventory, display of that inventory, and service quality. Areas where we find the successful use of stores include: 1. Direct to Customer (DTC) channels for powerful brands owned by companies such as Nike, Adidas, LVMH, and Inditex 2. Convenience store chains, such as Couche-Tard, 7- Eleven and Casey s General Store 3. Food and beverage, including Starbucks and Yum China 4. Off-price retail, particularly TJX As investments, we have a strong preference for companies that own brands, as opposed to distributing brands (such as traditional department stores). Clear competitive advantages As with any company we seek to invest in, we look for a clear and distinct competitive advantage that can sustain over the long term. A compelling offer is critical. The guiding principle of successful retailing used by Walmart founder Sam Walton was to give your customers what they want. But how do retailers adapt as those wants change? In apparel, it means having a contemporary fashion offering that evolves with changing consumer tastes. Many companies start out contemporary, but fail to evolve. To us, a company that exemplifies the ability to adapt is Spanish global fast-fashion retailer Inditex, owner of the Zara brand among others. Inditex is able to quickly provide high street fashion directly from designs inspired by catwalks in Milan and New York, but importantly at affordable prices. It can adjust collections within 15 days if a product isn t selling, which is a rate three to four times faster than typical retailers. In order to do this, it uses a fast response logistics and supply chain. Through centralized manufacturing and working closely with suppliers in and around Spain, it can deliver products from manufacturing to storefronts at an unparalleled pace. This results in consistently achieving mid-single digit plus same-store sales (growth in sales from stores open more than one year), while competitors have been flat to negative. It also results in higher realized gross margins (58% to 60%), helped by less mark-downs. This has also proven to be very difficult to emulate. TJX, the leading player in off-price retail, is one of the exceptions we like as a distributor of other brands. Its consumer proposition is compelling as it provides attractive brands at significant discounts and can do this through its leading store network, strong merchandising capabilities, and relationships with a diverse merchant base. Buying scale is a crucial factor, and in terms of scale TJX has an unparalleled lead versus the competition with two and a half times the purchasing scale of the number two player Ross Stores, and nearly seven times that of the number three player Burlington. And we can also get defensive growth Areas like food retail and convenience stores can bring the benefit of attractive growth as well as cyclical protection. Convenience stores are an attractive segment as they have strong, consistent repeat traffic, tend to differentiate through stronger fresh food offerings, and are less impacted by e-commerce given the more immediate consumption. The convenience store market is consolidating rapidly with the scale and service of chains taking market share through both acquisitions and organic growth. In the U.S., only around 30% of the convenience store market is still held by chains such as Alimentation Couche-Tard (ATD) or 7-Eleven. ATD is the largest convenience store operator in North America, with a 13% overall market share, and it is also the largest operator in Europe. We see this company able to lift its growth rate through acquisitions from solid mid-single digit organic growth to midteens. Across the emerging markets, convenience store operators that we believe have strong franchises include: CP All which has a 70% market share of the convenience store market in Thailand with its 7-Eleven franchise, coupled with the leading Cash and Carry format Makro. Femsa in Mexico operates the Oxxo convenience chain as the backbone of this powerful consumer staples company. Apart from solid space growth, there are longer-term margin expansion opportunities through an improved sales mix from freshly prepared food and new services.

7 7/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Direct to consumer (DTC) brand and products matter For DTC, the brand and product offering is vital. Few companies have the brand strength to profitably drive footfall. Athletic footwear is one area. It s a space where the two global players Nike and Adidas dominate market share across almost every region. On a combined basis, Nike and Adidas market share stands at 40% globally across overall sportswear, and within that, footwear is even higher, at 60%. Market share has steadily been increasing over the last 10 years. So why is this the case? It is very difficult to gain credibility in athletics or sport without investing a tremendous amount in marketing and product over decades. Over the last 30 years, Nike, which began as a challenger in running, successfully progressed to conquer basketball, and then soccer sportswear and footwear. Under Armour s inability to gain a meaningful presence outside either basketball or its home market in the U.S. is an indication of how high the barriers are. Nike is predominantly wholesale-dependent, with 70% of its revenues coming from this channel; however, it has strong control over the quality of its wholesale partners and is increasingly shifting its mix to DTC (retail and e-commerce). DTC is 30% of the mix now (versus 15% in 2008) but is expected to reach 50% over the next 5 to10 years, particularly as the e-commerce mix picks up. Luxury is another industry we find attractive. In luxury, the quality brands have a tremendous amount of history, stretching back more than a hundred years in cases like Louis Vuitton, Hermes or Bvlgari. These brands have also evolved over time and still produce high quality products that retain an element of desire among consumers. Hence, it is difficult for upstart brands to disrupt the established players. One thing we consider in this space is diversification of brands. Brands can go through cycles where they fall out of favor or don t sufficiently innovate. We like LVMH as it has a strong and wide portfolio of brands. Rate of space growth matters Space expansion is an important element in providing growth visibility. However, space growth needs to be measured we are wary of companies that have aggressive space growth targets. A variety of problems can result including: taking on sub-optimal locations, cannibalizing existing stores, and managing brand perception. While equity markets can get excited about the near-term growth outlook, there is a higher risk that it will lead to weaker same-store sales and margins down a track from which it can be hard to reverse. One such example is fashion retailer H&M, which stuck to its 10% to15% space growth target for a number of years despite evidence of cannibalization and a clear pick up in competition from the likes of Primark. In the case of luxury, controlling space growth is critical because overexpansion can lead to a loss of desirability and exclusivity. Companies like Hermes and LVMH have been disciplined in sticking to low single-digit space growth over a number of years, even when they could have grown faster. In luxury, it s better to have the top line driven by same-store sales rather than space growth. Prada is an example of a company that we felt expanded too aggressively after its IPO in 2011, where it targeted 15% to 20% space growth. Prada has faced negative sales growth since 2015, underperforming the sector significantly. We see Prada as still paying the price for its overexpansion strategy. The following chart illustrates the relationship between space growth, same-store sales, and margin expansion. The examples on the left are names we believe had a more thoughtful approach to space growth. To the right, H&M, Prada, and Magnit (Russia) have grown space quicker but are struggling with same-store sales and margins naturally this is combined with company-specific competition and trading factors, but we believe the relationship is related. Achieving balance between space growth and same store sales 20% 15% 10% 5% 0% -5% -10% -15% -20% LVMH (F&L)* Hermes Inditex Walmex TJX H&M Prada Magnit Space growth (5-yr avg) Like for like growth (5-yr avg) Margin change (5-yr) As of December 2017, Source: company data * F&L = Fashion and Leather division

8 8/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Controlling distribution By owning and operating the end retail space, companies have much better control over pricing, inventory, and displays. While the fixed costs are higher, ultimately the benefits of controlling the inventory more than compensate, and for manufacturers they gain the wholesale and retail margins that would otherwise have gone to third party sellers. In luxury, it is even more important to control retail as brand perception is a major selling point. This was one of the problems that has impacted Michael Kors in recent years. Retail brands such as LVMH, Inditex, and Lojas Renner (Brazil fast retail) control their end distribution, which we believe gives them an important advantage. As the table below shows, they re operating earnings held up well and continued to grow even through the financial crisis. Retail Inditex Rev 10.3% 6.5% (Jan year end) EBIT 1.8% 8.6% LVMH (F&L)* Rev 6.9% 5.0% (Dec year end) EBIT 6.1% 4.2% Source: Factset, *F&L = Fashion and Leather division Adapting to e-commerce Lojas Renner Rev 13.0% 8.0% (Dec year end) EBIT 3.0% 16.0% E-commerce is becoming an increasingly important channel for retailers and comprises 10% to 20% of retail sales in most developed markets. One of the key elements that determines whether a retailer can benefit from e-commerce is if it owns the key brands it sells. Multi-brand distribution formats like department stores or even specialty sportswear formats tend to be more at risk from e-commerce, as the brands they distribute can go directly through those e-commerce channels. Hence, e-commerce often becomes cannibalistic. The key is to ensure that e-commerce can be done in a way which is neutral or incremental to returns, and that it integrates well with the brick and mortar store base. Being able to offer click-and-collect as well as effective handling of returns both on-line and through the stores are important elements of this strategy. Having inventory systems that are integrated between off-line and on-line stores is critical and has been a challenge for a number of retailers. We regard companies such as Inditex and Nike as companies which have made the transition well and are now generating a meaningful percentage of faster growing sales on-line, and at margins which are at least the same if not better than off-line. Attractive and sustainable returns We always look for high returns, but the question of whether a company can sustain those high returns ultimately hinges on successfully meeting several of the above criteria. We generally look for mid-teens or better ROICs from retailers, as illustrated by the chart below. These companies are sustainably managing store growth, and have been consistently generating high returns over the last decade. Stores as a growth driver select companies after-tax ROIC 50% 40% 30% 20% 10% 0% LVMH Inditex Nike Renner Walmex CP All Yum China Couche Tard Starbucks Source: Factset. ROIC is return on invested capital. Note CPALL s ROIC has fallen since 2012; however, this was due to the Makro acquisition and not because of any fundamental deterioration in the business. Its incremental ROIC has been improving.

9 9/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Conclusion While the retail space is littered with names that have fallen by the wayside, we see great potential from physical stores for the right franchises as the market changes. Companies with a strong brand and product line-up are providing their customers with the opportunity to see, try out and discuss the products with well-trained sales people and are amenable to how the customer chooses to buy or return, whether in store or on-line. We look for industry structures that are attractive or improving, companies that have a healthy balance between space growth and same-store sales, and a strong control over brands and distribution. Finally, we need to ensure they are well placed to generate incremental growth at decent returns from e-commerce. Meeting these criteria is a tall order for retail companies, but having this high threshold for quality is essential to help ensure attractive rates of sustainable growth. There are not many of these businesses across the planet, but there are some that we are excited about. Any investments discussed in this presentation are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable Performance Drivers 1 In the fourth quarter, our European Equity strategy declined in Euro terms and modestly underperformed in a precipitously down market. On a sector basis, industrials was the most significant positive contributor to relative returns. Over the past two years we believe we have identified several attractive quality growth opportunities in the industrials space. As of December 31, 2018, industrials accounted for 20.8% of our portfolio versus 9.7% at the end of Many of our industrial holdings are asset-light business services companies. Among our industrials, RELX and Rentokil Initial were the top attributors in the quarter. RELX is a global provider of information and analytics across a variety of industries. Its products include risk analytics for property and casualty insurance companies, legal database LexisNexis, and medical resources Lancet and Scopus. RELX s nine-month trading update as of end-october showed a continuation of the 4% organic growth seen in the first half of the year. The share finished the quarter flat providing a strong relative outperformance vs. the index. Rentokil, a global leader in pest control, reported accelerating organic growth to 4.1% during the third quarter compared to 3.0% in the first half of Additional growth from bolt-on acquisitions exceeded expectations. Globally, Rentokil operates in a highly fragmented industry and management indicated in its trading update that the M&A pipeline going into the fourth quarter and 2019 remains strong. Health care was the most significant detractor from our relative performance. Fresenius Medical Care and its parent, Fresenius SE, each declined over 30% in euro terms. In October, Fresenius Medical pre-announced third quarter fiscal 2018 results and lowered its fiscal 2018 guidance citing weakness in its North American dialysis business and increased investment in home hemodialysis. Parent Fresenius SE followed suit and narrowed its guidance to the low end of its range on the back of the weakness in Fresenius Medical as well as some 1 Please see full list of top and bottom 5 contributors at the end of this commentary. softness in its German hospital business. We believe the magnitude of the reaction was overdone and we expect the stocks to recover. French health care company, Eurofins Scientific, was also weak in the quarter. Eurofins is a global leader in food, environment, and pharmaceutical product testing, as well as lab services. Growth is driven by secular trends including increasing wealth, expectations for protection/safety, and the need for standardization. The company has been an aggressive acquirer in a consolidating industry. The market expressed some concern that a global slowdown could impact Eurofins and that its acquisition path has led to higher leverage. We believe the company s technological expertise and industry leadership give it significant competitive advantages and are not concerned with its balance sheet. Eurofins has exhibited consistent organic growth (even in downturns), has a scale advantage and we believe a long runway of growth ahead of it. Portfolio Changes 2 We sold British American Tobacco and DKSH Holding over the quarter to reallocate capital to better opportunities. 2 Purchases provided are the new purchases with positions greater than 50 basis points in the Vontobel European Equity representative portfolio for the period. The holdings may not represent all of the securities purchased, sold, or recommended for advisory clients. Sells provided are all names that were fully liquidated in the Global Equity representative portfolio for the period.

10 Netherlands Ireland France Norway Finland Switzerland United States Belgium Spain Germany Industrials Materials Energy Consumer Discretionary Financials Consumer Staples Real Estate Utilities Communication Services Information Technology Health Care 10/14 Investment Commentary / European Equity / 4Q 2018 Vontobel 4Q2018 Sector Attribution Vontobel European Equity Fund vs. MSCI Europe Index Total Effect 4Q2018 Country Attribution Vontobel European Equity Fund vs. MSCI Europe Index Total Effect Source: FactSet, MSCI As of December 1, 2018, MSCI adopted changes to the GICS sector classification which includes the newly renamed Communication Services (formerly Telecom Services) and other changes to Consumer Discretionary and IT sectors. Based on cumulative gross performance (euros) of a representative portfolio. The basis upon which the representative portfolio was selected is that the portfolio is the oldest and most representative account. The gross rates of return are presented before the deduction of investment management fees, other investmentrelated fees, and after the deduction of foreign withholding taxes, brokerage commissions and transaction costs. An investor s actual return will be reduced by investment advisory fees. Country attribution based on top 5 / bottom 5 countries by total effect. Past performance is not indicative of future results. Total Effect: The net effect of the allocation and selection effects. A single-period sector or country s geometric total effect is calculated by multiplying the product of one plus the allocation effect (AE/ ) by one plus the selection effect (SE/ ) and subtracting one from the result before multiplying by 100.

11 11/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Portfolio Data as of December 31, 2018 Sector Allocation 1 Country Allocation 1 Consumer Staples 24.7% Industrials 20.8% Consumer Discretionary 12.8% Financials 10.5% Health Care 10.2% Information Technology 9.4% Materials 5.9% Real Estate 0.9% Cash and Cash Equivalents 4.7% France 19.1% United Kingdom 19.0% United States 11.2% Germany 9.9% Netherlands 8.5% Switzerland 8.3% Spain 8.0% Ireland 4.8% Belgium 4.2% Sweden 1.3% Denmark 1.0% Italy 0.2% Cash and Cash Equivalents 4.7% TOP 10 HOLDINGS 1 SECTOR COUNTRY % OF PORTFOLIO Unilever NV Consumer Staples Netherlands 5.4 Nestle S.A. Consumer Staples Switzerland 4.7 SAP SE Information Technology Germany 4.1 Reckitt Benckiser Group Plc Consumer Staples United Kingdom 4.1 RELX Plc Industrials United Kingdom 3.7 Accenture Plc Information Technology United States 3.5 Safran SA Industrials France 2.9 VINCI SA Industrials France 2.8 L'Air Liquide Materials France 2.8 Medtronic Public Limited Company Health Care United States 2.7 Total 36.6 CHARACTERISTICS VONTOBEL EUROPEAN 1 MSCI EUROPE Market Capitalization (EUR bn), weighted average P/E - Forecast 12-month, weighted harmonic average Dividend Yield (%) Yr Historical EPS Growth (%) Return on Equity, weighted average (%) RISK STATISTICS (5 YEAR) VONTOBEL EUROPEAN 2 MSCI EUROPE 3 Annualized Alpha 2.5 Beta Sharpe Ratio Annualized Standard Deviation Source: FactSet As of December 1, 2018, MSCI adopted changes to the GICS sector classification which includes the newly renamed Communication Services (formerly Telecom Services) and other changes to Consumer Discretionary and IT sectors. 1 Based on a representative portfolio and shown as supplemental information to the composite presentation. Other accounts contained in the composite could have materially different statistics. The basis for which the representative portfolio was selected is that the portfolio is the oldest and most representative account. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Characteristics are denominated in euros. 2 Based on gross performance (euros) of the European Equity Composite. The composite s gross rates of return are presented before the deduction of investment management fees, other investment-related fees, and after the deduction of foreign withholding taxes, brokerage commissions and transaction costs. An investor s actual return will be reduced by investment advisory fees. 3 Based on the MSCI Europe Index (Total Return Net Dividends) in Euros.

12 12/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Portfolio Data as of December 31, 2018 TOP 5 CONTRIBUTORS BY SECURITY: 3 MONTHS SECTOR AVERAGE WEIGHT (%) CONTRIBUTION TO RETURN (%) Rentokil Initial plc Industrials Pernod Ricard SA Consumer Staples Diageo plc Consumer Staples RELX PLC Industrials Brunello Cucinelli S.p.A. Consumer Discretionary BOTTOM 5 CONTRIBUTORS* BY SECURITY: 3 MONTHS SECTOR AVERAGE WEIGHT (%) CONTRIBUTION TO RETURN (%) Fresenius Medical Care AG & Co. KGaA Health Care SAP SE Information Technology British American Tobacco p.l.c. Consumer Staples Reckitt Benckiser Group plc Consumer Staples Accenture plc Information Technology TOP 5 CONTRIBUTORS* BY SECURITY: 1 YEAR SECTOR AVERAGE WEIGHT (%) CONTRIBUTION TO RETURN (%) Coloplast A/S Health Care Safran SA Industrials Booking Holdings Inc. Consumer Discretionary Teleperformance SA Industrials Medtronic Public Limited Company Health Care BOTTOM 5 CONTRIBUTORS* BY SECURITY: 1 YEAR SECTOR AVERAGE WEIGHT (%) CONTRIBUTION TO RETURN (%) British American Tobacco p.l.c. Consumer Staples Philip Morris International Inc. Consumer Staples Anheuser-Busch InBev SA/NV Consumer Staples Fresenius Medical Care AG & Co. KGaA Health Care HeidelbergCement AG Materials Source: FactSet. All returns are expressed in euros. As of December 1, 2018, MSCI adopted changes to the GICS sector classification which includes the newly renamed Communication Services (formerly Telecom Services) and other changes to Consumer Discretionary and IT sectors. * Based on a representative portfolio. The basis upon which the representative portfolio was selected is that the portfolio is the oldest and most representative account. Past performance is not indicative of future results. European Equity Composite Performance (USD) as of December 31, 2018 PERIOD TOTAL RETURN COMPOSITE CHARACTERISTICS AT END OF PERIOD EXTERNAL STANDARD DEVIATION 1 GROSS OF FEE NET OF FEE COMPOSITE COMPOSITE MSCI EUROPE ND # ACCTS INTERNAL DISPERSION 2 MARKET VALUE (US$ MILLION) % FIRM ASSETS GROSS OF FEE COMPOSITE NET OF FEE MSCI COMPOSITE EUROPE ND % % % 3 N/A 758 2% 11.30% 11.30% 12.06% % 27.55% 25.51% 3 N/A 1,063 3% 11.31% 11.31% 12.39% % -5.33% -0.40% 3 N/A 964 3% 12.05% 12.03% 13.27% % 6.84% -2.84% 3 N/A 1,107 2% 11.88% 11.86% 13.73% % -3.88% -6.18% 4 N/A 1,355 3% 11.98% 11.96% 14.64% % 13.47% 25.23% 4 N/A 1,169 3% 13.75% 13.74% 18.43% % 25.55% 19.12% 4 N/A 981 3% 16.15% 16.16% 22.21% % 1.56% % 4 N/A 620 3% 17.47% 17.45% 25.39% % 8.18% 3.88% 4 N/A 466 4% 21.77% 21.76% 28.49% % 19.75% 35.83% 4 N/A 395 5% 19.79% 19.76% 25.24% The composite s gross rates of return are presented before the deduction of investment management fees, other investment-related fees, and after the deduction of foreign withholding taxes, brokerage commissions and transaction costs. An investor s actual return will be reduced by investment advisory fees. The composite s net rates of return are presented after the deduction of investment management fees, brokerage commissions, transaction costs, other investment related fees and foreign withholding taxes. Results portrayed reflect the reinvestment of dividends and other earnings. * Based on a representative portfolio. The basis upon which the representative portfolio was selected is that the portfolio is the oldest and most representative account. Past performance is not indicative of future results. 1 3 year annualized standard deviation based on monthly returns. 2 The measure of internal dispersion presented is an asset-weighted standard deviation based on gross of fee returns, and is calculated if the composite contains greater than five portfolios for the full year.

13 13/14 Investment Commentary / European Equity / 4Q 2018 Vontobel Donny Kranson, CFA Executive Director Portfolio Manager 20 years in industry 12 years with Vontobel Igor Krutov Sudhir Roc-Sennett Executive Director Executive Director Director of Research Head of Thought Leadership Group 25 years in industry 30 years in industry 17 years with Vontobel 9 years with Vontobel Quality Growth Our Investment Philosophy Our patient, growth-oriented investment approach is applied consistently across our global and regional strategies. It focuses on investing in high-quality companies that we believe will perform well during economic expansions, are resilient in difficult economic environments, and can compound our clients capital at a higher rate than the market over time. We believe that the earnings of a business will ultimately be reflected in its stock price. Since genuine high-quality businesses are scarce, our research team focuses on identifying those companies which they believe can sustain superior earnings growth over the long term, a feature which is underappreciated by the market. We believe that we can take advantage of this long-tail growth effect and add value for our clients by carefully constructing a portfolio of these types of businesses. This is a select group of companies, and, as a result, our portfolios are quite concentrated. By adhering to this investment approach, we seek to protect our clients assets in declining markets, while growing their assets in rising markets, thus driving superior longterm risk-adjusted returns.

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