Credit Suisse (Lux) Global Security Equity Fund For a safer, healthier and cleaner world

Transcription

1 Credit Suisse (Lux) Global Security Equity Fund For a safer, healthier and cleaner world March 2016 Denis SCHMIDLI, CEFA Thematic Equity Specialist

2 Content Why invest in Safety & Security? Investment Process Portfolio Review & Outlook Conclusions Appendix March

3 Content Why invest in Safety & Security? Investment Process Portfolio Review & Outlook Conclusions Appendix March

4 Safety and security anything more relevant? The need for safety and security, e.g. health, order, boundaries is a basic human need. According to the US psychologist Abraham Maslow, it ranks second only to basic physiological needs such as food, water or sleep. Maslow s Hierarchy of Needs 1 Self Actualization Status (Esteem) Belonging Security and Safety Physiological (Biological Needs) Growth Needs Deficiency Needs 1 Maslow s Hierarchy of Needs is a theory in psychology that Abraham Maslow proposed in his 1943 paper A Theory of Human Motivation, which he subsequently extended. His theory contends that as humans meet basic needs, they seek to satisfy successively higher needs that occupy a set hierarchy. March

5 Safety and security defined 1. Personal Safety 2. Increasing Mobility 3. Increasing Use of IT Health Protection Transportation Safety IT Security Vaccines Diagnostics Food, water, air, soil testing, etc. Environmental Security (Hazardous) waste management Catastrophe protection Non-destructive testing, etc. Crime Prevention Alarms and surveillance systems Biometrics Video analytics and advanced surveillance Payment systems etc. Airbags Anti-collision systems for airplanes Airport/port security Bomb detection Control systems for high-speed trains or airplanes etc. Anti-virus and end-point security systems Next generation firewalls (NGFW) Intrusion detection and intrusion prevention systems Data loss prevention Datacenter security Compliance Intelligent access systems Medical device security etc. Source: Credit Suisse March

6 A strong case supported by long-term trends Strong secular growth drivers such as increasing world population, innovation and stricter regulation Governments increase efforts to control the flow of people and goods, fight crime and establish high quality standards for health, food, water and environment Corporates must adhere to mandatory quality and safety standards for their products Various innovations (e.g. mobile payment, new breakthrough in medical treatments, cloud computing) require more security and safety solutions All forms of security and safety-related aspects are an integral part in our daily lives and are taken as a matter of course The security and safety industry sector offers strong growth potential which is not reflected in the current valuations, in our opinion. Consolidation will be an important driver as well. March

7 Investment case: Transportation Safety Stricter testing standards in US/EU require more safety content, especially on smaller vehicles. Active safety technologies are rapidly being adopted across all vehicle class. Safety content of cars in emerging markets are rising from USD 150 toward USD (as in US/EU). Managing driver distraction is a «hot topic» among the regulators. Market-driven demand will increase penetration of advanced safety features: ABS, traction/stability control Crash detection/avoidance Emergency stopping, driver assistance. We believe safety regulation in travel and transportation will continue to rise. This provides attractive opportunities for leading players. March

8 Investment case: IT Security Global cybersecurity solutions market is estimated at USD 75-77bn in 2015 with YoY growth of c.8.2% from 2014 (source: Gartner) Fundamental shift from traditional approaches to cost-effective and scaleable solutions. Long term growth drivers in IT security: Innovation Identity access management, data security Bring your own IT (ByoIT) Compliance Mobility Cloud-based services/security Potential market share losers might be large incumbent technology companies. Global cybersecurity spending (in USD) Hacking, phishing and malicious attacks are attractive for criminals, ideologically driven protesters and for some governments. We believe leading companies will see attractive business opportunities. Source: Gartner, Bank of America Merrill Lynch, Gartner, Credit Suisse March

9 Content Why invest in Safety & Security? Investment Process Portfolio Review & Outlook Conclusions Appendix March

10 Security & Safety Industry broadly diversified in niches Healthcare ~20% market capitalization Vaccines Medical robotics Analysis of water, air and soil Patient monitoring systems Market capitalization Technology ~30% market capitalization Antivirus software Electronic payment systems Firewalls Big data Industrials ~50% market capitalization Airbags Airport and port security Surveillance systems Management of hazardous goods Industry 4.0 March

11 Investment Process Idea Sourcing MSCI World and related companies Investment Universe Five main investment themes Security Universe: ~200 Stocks > 50% security/safety exposure Qualitative analysis: Market Leader Superior Technology Niche Player Quantitative screen: Momentum Valuation Growth analysis: Sustainable and significant above market growth rate Portfolio Construction Stocks Risk control, performance measurement and attribution Source: Credit Suisse March

12 Selected company examples Gilead Sciences (GILD US) Thermo Fisher (TMO US) Stericycle (SRLC US) Research-based biotechnology company. Develops therapeutics in the field of virology including HIV, HCV as well as serious cardiovascular and respiratory conditions. In the portfolio since inception of the fund in Oct Life science company, provides a complete range of scientific analytic instruments used for research, forensics, and diagnostics. Large market opportunity, especially in Asia. In the portfolio since inception of the fund. Leading provider of regulated hospital waste collection. Attractive long term secular growth rates. In our opinion the last quarter s earnings miss is a good long term investment opportunity. In the portfolio since inception of the fund. Historical performance indications and financial market scenarios are not reliable indicator for current or future performance. Source: Credit Suisse, Bloomberg Last data point: Dec March

13 Content Why invest in Safety & Security? Investment Process Portfolio Review & Outlook Conclusions Appendix March

14 Performance Review Investment Policy The fund assets are invested worldwide in companies that are primarily active in Technology, Healthcare and Industrials, and that offer products and services related to health and environ-mental safety, IT security, transportation safety, and crime prevention. Benchmark MSCI World NR Portfolio Manager Dr. Patrick Kolb Rating Morningstar TM (Jan. 29 st 2016) 2 Historical performance indications and financial market scenarios are not reliable indicator for current or future performance. Performance indications do not consider commissions levied at subscription and/or redemption. Where investments are made internationally, their values may fluctuate due to currency exchange rate movement. Source: IPS, LIPPER, Credit Suisse/IDC Last data point: Jan. 29th 2016 March

15 Portfolio Structure Source: Credit Suisse, February 29 th 2016 March

16 Top 10 Holdings Name Holding (in%) Transdigm 3.1 Thermo Fisher Scientific Inc. 3.1 Intertek Group Plc 3.1 Idexx Laboratories 3.0 Stericycle Inc. 3.0 Intuitive Surgical 2.9 Autoliv 2.8 Eurofins 2.8 Wirecard 2.7 Gilead 2.6 Source: Credit Suisse, February 29 st 2016 March

17 Bumpy start into 2016 Global stock markets tanking 4Q15: with positive absolute performance (+1.8%), fund lagged MSCI World index by 2.1% Especially healthcare under pressure (the Hillary Tweet on high drug prices) Major contributors: Autoliv (transportation safety), Intuitive Surgical, Mettler Toledo (Health protection); Major detractors: Fortinet (IT Security), Wabtec (Transportation safety) Stericycle (Health protection) 1Q16tD: global stock markets tanked till mid February; fund ended in line with reference index MSCI World (NR), with -0.8%, as per Feb 29 Main contributors: ADT Corp (Crime Prevention), Flir Systems (Crime Prevention); Main detractors: OSI Systems (Transportation safety), Wirecard (IT Security) Important: we have a long-term view, and stay patient Buy opportunities! Buy/Increase Why? Sell/Reduce Why? Halma Increased confidence Tyco Merged into Johnson Control irobots Historical performance indications and financial market scenarios are no reliable indicators of future performance. Left investment universe March

18 Outlook Global equity markets continue to stay volatile. Long-term investment thesis and drivers for the next 7-10 years intact Identify companies with relevant exposure to the theme superior management leading safety and security products resp. services superior growth potential Benefit from market over-reactions, opportunistically increase positions Cyberattack points in the connected car via smartphone Source: Frost&Sullivan, Bank of America Merrill Lynch, Credit Suisse March

19 Content Why invest in Safety & Security? Investment Process Portfolio Review & Outlook Conclusions Appendix March

20 Conclusions Investment opportunity Participation in early-stage and attractive secular development Investing in concentrated global portfolio with a strong focus on small and mid cap companies Long term growth drivers Securing critical infrastructure of countries and corporates Digitization of the society: connectivity creates new challenges Regulation: Increasing economic losses from crime/fraud or reputational issues due to failures in fulfilling regulatory requirements. Demographics: more people, and more people become wealthy Globalization: expanding global reach of corporations into Emerging Markets March

21 Key future themes Big Data Artificial Intelligence/Robotics Healthcare IT Industry 4.0 Mobile security Autonomous vehicles Risk management & compliance March

22 Content Why invest in Safety & Security? Investment Process Portfolio Review & Outlook Conclusions Appendix March

23 Key Data Portfolio manager Dr. Patrick Kolb Fund manager since March 1, 2007 Location Fund domicile Fund currency Zurich Luxembourg USD, CHF, EUR Inception date Oct 19 th, 2006 Initial sales charge Max. 5% Management fee p.a. For unit class B and BH: 1.92% For unit class IB and EB: 0.90% For unit class UB and UBH: 1.15% Single Swinging Pricing (SSP) 1 Benchmark Unit classes Yes MSCI World (NR) Unit class B USD, IB USD, BH CHF, BH EUR, UB USD, UBH CHF, UBH EUR, EB USD ISIN USD unit class B: LU USD unit class UB: LU USD unit class IB: LU CHF unit class UBH: LU CHF unit class BH: LU EUR unit class UBH: LU EUR unit class BH: LU USD unit class EB: LU (QI only) Sales Registration Austria, Switzerland, Czech Republic, Germany, Spain, Finland, France, Hungary, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden Source: Credit Suisse, December 31, SSP is a method used to calculate the net asset value (NAV) of a fund, which aims to protect existing investors from bearing indirect transaction costs triggered by in- and outgoing investors. The NAV is adjusted up in case of net inflows and down in case of net outflows on the respective valuation date. The adjustment in NAV might be subject to a net flow threshold. For further information, please consult the Sales Prospectus. March

24 Benefits and Risks Benefits Globally diversified portfolio with exposure to an attractive secular growth theme. Expectation of strong long-term growth in security and safety-related products and services. Broad diversification across themes and sectors: health protection, IT security, environmental security, transport safety, crime prevention. Risks No capital protection. Focus on security and safety companies can lead to significant sector/regional exposures. A slowdown of the world economy might impact the security and safety sector. Liquidity risk (exposure to small caps). Equity markets can be volatile in the short term. Due to the possibility of increased exposure to the emerging markets the fund may be affected by political and economic risks in these countries. In cases of significant in- or outflows there might be a disparity in the value date among stocks from different countries, which can result in short-term currency exposure. March

25 Investment case: Health Protection Rapid spread of diseases and infections due to climate change and globalization. Increasing public and consumer concerns about various safety and quality issues. Example: E. Coli Outbreak in Germany, May 2011 The outbreak of Escherichia Coli was especially virulent, causing several deaths. In a first move, the origins of the e.coli strain had to be identified and sequenced by researchers for better understanding of its characteristics. The results show the infected sprouts were from one production site. Based on these findings, effective measures were taken by the government (shutdown of the contaminated production site). Companies within the field of sequencing, testing and inspection are essential in securing health protection. March

26 Investment case: Environmental Security Example: Waste A Global Megatrend World production of municipal waste is 1.2kg per capita and per day 1 and still growing There is no «throwing away»: Environmental challenges: Health, water and air pollution, ash disposal etc. Around 70% of waste ends up in landfills Long term growth drivers: Increasing volumes (population growth) Variety and complexity of waste streams Urbanisation Stricter regulation Attractive long term investment areas are testing & certification as well as medical and hazardous waste management. 1 Source: World Bank (2012): A Global Review of Solid Waste Management March

27 Investment case: Crime Prevention Global growth for commercial and residential safety as well as for security solutions. People are increasing the protection of their possessions against crime. Data-driven real time analytics (incl. advanced video surveillance, location tracking, voice/data recording and more) can address a wide range of security needs. We think the industry is expected to grow at higher single digit growth rate. The convergence of physical security and IT technologies will drive new business opportunities. Over the next couple of years we can expect the introduction of wireless or biometric technology such as: Wireless IP networking Video surveillance as a service (VSaaS) We believe in rising demand for surveillance infrastructure in public areas as well as for access control. This provides attractive business opportunities for leading companies. March

28 Example of transaction: Axis Communications AB (AXIS SS) Takeout by Canon Inc. for SEK 340 Axis Communications AB is a developer of network surveillance video cameras. Sold We believed the market misunderstood the growth drivers as well as the strategy of the company. Bought Since launch of the fund in Oct. 19 th 2006, we hold a position in Axis Communications AB. Over the holding period it resulted a performance of %. In the same time period the performance of MSCI World Index was 70.4% Historical performance indications and financial market scenarios are not reliable indicator for current or future performance. Source: Credit Suisse, Bloomberg Last data point: February, 16, 2015 March

29 Investment Process Management of the Portfolio Based on various sources (e.g. daily newspapers, reports from academic institutions/think tanks, Bloomberg, internet etc.), we screen our investment universe on several criteria: Qualitative analysis Quantitative analysis Growth analysis Investment decisions are taken only after a careful analysis of these criteria supported by internal and external research, discussion with analysts and regular company visits We regularly meet with safety and security specialists. They give us their opinion about the security and safety sector but also try to anticipate new trends. We tend to have a high conviction portfolio. This leads to a relatively concentrated portfolio with between 40 and 60 stocks. The weight of each position is determined by a combination of qualitative and quantitative criteria such as: Technology leader Market leader Niche player Momentum Valuation Growth potential Source: Credit Suisse March

30 Investment Process: Qualitative Analysis (Illustration) Possible strategies for market leaders: Economies of scale/scope, operational leverage Switching costs Cost advantages Possible strategies for firms with a superior technology: Learning curve advantages Market entry barriers Presence of substitute products Possible strategies for niche players: Uniqueness of the products Key employees (e.g. in R&D) Buyer concentration Porter s Five Forces-Framework: Bargaining power of customers Threat of substitute products Competitive rivalry within an industry Bargaining power of suppliers The five forces model from Michael Porter is a highly valuable framework to understand the competitive intensity and therefore attractiveness of a market Threat of new entrants Source: Porter M.E.: Competitive Strategy: Techniques for analyzing industries and competitors, New York, March

31 Investment team Thomas Amrein, CFA Thomas Amrein, Vice President, has been a Portfolio Manager since October 2002, specializing in the healthcare and energy sectors. As Co-Manager, he has additionally supported the Portfolio Manager in managing the Credit Suisse (Lux) Global Security Equity Fund. Thomas joined Credit Suisse in 1996 as a Portfolio Manager for Special Mandates. He holds a master s degree in Business Administration from the University of St. Gallen and is a CFA charterholder since Matthias Düggelin Matthias Düggelin, Assistant Vice President, is responsible for managing the Credit Suisse (Lux) Global Security Equity Fund fund. In over 10 years with Credit Suisse, he has acquired an in-depth knowledge of fund management, trading and in managing small and mid caps equities. Matthias holds a bachelor s degree in Economics from the University of St. Gallen. Dr. Patrick Kolb Dr. Patrick Kolb, Director, is a Senior Portfolio Manager. He has been part of the Global Equities team at Credit Suisse since June Initially, he specialized in the industrial and technology sectors. He was also a Sector Analyst for industrials, materials and utilities in the US Equity team. Patrick began managing the Credit Suisse (Lux) Global Security Equity Fund in March Patrick studied at the University of Zurich. He completed his studies in 2001, specializing in Financial Economics. He then became a research assistant and PhD student in Financial Economics of the Department of Banking and Finance at the University of Zurich until Denis Schmidli, CEFA Denis Schmidli, Director, joined Credit Suisse in As Product Specialist for Thematic Equity Funds, he looks after commercial development of a wide range of thematic investment opportunities. He began his career in 1990 at Credit Suisse. In 1999, he went on to Banca del Gottardo and was heading the Products & Sales team. In 2001, Denis joined Pictet. As the Head of Thematic & SRI Product Management, he oversaw world-wide promotion activities for thematic and sustainability funds. Between 2014 and 2015, Denis was with Sectoral, a Montréal Canada-based healthcare investment boutique, responsible for business development for Northern Switzerland/FL, Austria, Germany, Netherlands and Nordics. Denis holds a Masters degree in International Relations from the University of St. Gallen and is a Certified European Financial Analyst (CEFA). March

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