GLOBAL EMERGING MARKETS: IT IS THE STOCKS THAT MATTER ANWAAR WAGNER Portfolio Manager at Electus
AGENDA Emerging Markets (EM) Crises? EM vs Developed Markets (DM) OM GEM Fund It s the shares that matter Conclusion 2
EM 1997?
Japan Ireland Spain UK Portugal India USA France South Africa Canada Italy Brazil Greece China Russia Germany China Russia South Africa Brazil India Canada UK Germany France Spain USA Ireland Portugal Italy Greece Japan EM IS LESS CONSTRAINED BY DEBT 1.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0-7.0-8.0-9.0 Budget balance as % of GDP 2013E Emerging Markets Developed Markets 250 200 150 100 50 0 Debt as % of GDP 2013E Emerging Markets Developed Markets 4 Source: Electus & Global Insights, 2013 estimates
EM CURRENT ACCOUNT BALANCES IN A BETTER POSITION TODAY (4Q) 5 Source: Electus, Haver Analytics, Morgan Stanley Research
EM EACH COUNTRY HAS ITS OWN FUNDAMENTALS We are overweight India and underweight Brazil Brazil Real is expensive India Rupee is cheap 6 Source: JPM/BCA/ELECTUS
EM VS DM RATES DM NOT MAKING STRUCTURAL ADJUSTMENTS 20 % Policy interest rates % 20 15 15 10 5 Brazil Turkey India Indonesia Russia China SA 10 5 0 Europe USA Japan 00 02 04 06 08 10 12 14 16 0 7 Source: ELECTUS/Global Insights
EM VS DM
EM ALREADY PERMANENT ASSET CLASS - WILL BE TOO LARGE TO IGNORE IN THE FUTURE The top 10 largest economies in the world (in trillions 2010 PPP USD) 9 Source: Citi Investment Research and Analysis
MARKETS CURRENTLY DO NOT REFLECT GEM SHARE OF WORLD GDP Share of world GDP (PPP) Weighting in global equity indices 80% 16% 70% 14% GEMs 60% 50% 51% 12% 10% 10% 40% 30% 49% 8% 6% BRIC 20% 10% Advanced economies Emerging & developing economies 4% 2% 4% 0% 80 83 86 89 92 95 98 01 04 07 10 13 16 0% 02 03 04 05 06 07 08 09 10 11 12 13 14 10 Source: UBS, Datastream, MSCI
Contribution to YTD Total Return (%pt) DM RETURNS BOOSTED BY P/E MULTIPLE EXPANSION IN 2013 35% Breakdown of 2013 Equity Returns 30% 25% 20% 15% 10% 5% 0% -5% EPS Growth FWD PE Growth Dividend Yield Total Returns -10% MSCI USA MSCI Europe MSCI UK MSCI Asia Pacific ex Japan MSCI Emerging Markets 11 Source: Morgan Stanley, January 2014
STRONGER ECONOMIC GROWTH LEADS TO STRONGER EARNINGS AND SHARE PRICES? 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Sales Growth World Ex-GEM GEM 2007 2008 2009 2010 2011 2012 2013E 2014E 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 EM/DM Earnings relative (lhs) EM/DM Price relative (rhs) 90 92 94 96 98 00 02 04 06 08 10 12 14 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 12 Source: UBS, Datastream & MSCI
BUT VALUATION MATTERS AS WELL! 400 CHINA: STOCKS RELATIVE TO GLOBAL* GDP RELATIVE TO GLOBAL +/- TWO STANDARD DEVIATIONS Expensive China P/E 32 400 300 300 200 200 100 Undervalued China P/E 9 100 BCA Research 2014 2002 2004 2006 2008 2010 2012 2014 *IN US$ TERMS NOTE: ALL SERIES REBASED TO JANUARY 1, 2001 = 100. 13 Source: MSCI
EM IS CHEAP ON P/E AND PRICE TO BOOK RATIOS EM and DM Forward P/E EM vs. DM Price to Book 14 Source: BCA, Datastream, IBES, UBS GEMs Strategy
OLD MUTUAL GEM FUND
16 ELECTUS GEM INVESTMENT PHILOSOPHY We are fundamental, long term investors who invest in companies that have: quality business models, high margin of safety in their fundamental valuation, and that meet minimum corporate governance standards
Cons Discr Financials IT Cons Staples Materials Energy Cash Industrials OLD MUTUAL GEM FUND DIVERSIFIED ACROSS COUNTRIES AND SECTORS As at 13 March 2013 Cash, 3.9% Brazil, 5.5% Russia, 7.0% Country Weights Thailand, 3.8% Turkey, 3.6% Taiwan, 2.9% Mexico, 0.7% China, 17.8% 30% 25% 20% 15% 10% Sector Weights Indonesia 7.6% South Korea, 8.1% Other, 9.8% India, 12.1% South Africa, 17.2% 5% 0% 17 Source: Electus
TOP 10 OM GEM FUND HOLDINGS (13.03.2014) Excess Returns should be delivered by share selection Holding Name Country Sector % of Fund Samsung Electronics South Korea Information Technology 5.5 Tata Motors India Consumer Discretionary 5.3 Lenovo Group Ltd China Information Technology 5.2 Anglo American plc South Africa Basic Materials 4.6 Banco Santander (Brasil) SA Brazil Banks 4.1 Brilliance China Automotive China Consumer Discretionary 4.1 Global Mediacom Indonesia Consumer Discretionary 4.0 Carlsberg Russia/Denmark Consumer Staples 3.9 Charoen Pokphand Foods Thailand Consumer Staples 3.8 Baidu Inc China Information Technology 3.7 18 Source: Electus
DELIVER PERFORMANCE BY STOCK SELECTION
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 SAMSUNG ELECTRONICS 110% OUTPERFORMANCE VS MSCI GEM Since OM GEM Fund inception 1.1 High: 1.05 1 0.9 0.8 0.7 0.6 0.5 0.4 Low: 0.48 20 Source: Bloomberg Finance
SAMSUNG ELECTRONICS THE ELECTRONICS COMPANY 21 Source: IDC
LENOVO WORLD CLASS LEADER IN PC MARKET 22 Source: IDC
2006 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E LENOVO THE NEXT SAMSUNG? 120% 100% 80% PC Penetration USA Western Europe Japan Eastern Europe 140 000 120 000 100 000 80 000 PC+ shipments Smartphone Feature phone Tablet Notebook Desktop 60% Latin America 40% China Asia Pacific 60 000 40 000 20% Middle East and Africa 20 000 0% India 0 23 Source: IDC, Electus
NZ Australia HK Korea Japan PHP Vietnam Malaysia China Singapore India Taiwan Thailand Indonesia Korea Hongkong India Singapore Malaysia China Thailand Philippines Indonesia GLOBAL MEDIACOM INDONESIA'S LEADING MEDIA COMPANY Long-term high growth potential 1.0% Adspend as % of GDP (2011) 120% Asia Pacific Pay-TV penetration % (2012) 0.9% 0.8% 0.7% 100% 80% 100% 86% 80% 0.6% 66% 0.5% 0.4% 60% 51% 49% 0.3% 40% 28% 0.2% 0.1% 20% 11% 7.0% 0.0% 0% 24 Source: Media Partners Asia, Citigroup
OLD MUTUAL GEM FUND (13.03.2014) Superior quality portfolio at attractive valuations Fund Benchmark (MSCI GEM) Return on Equity 15.1% 12.6% Operating Margin 12.0% 11.8% Free Cash Flow Yield 5.1% 2.9% Dividend Yield 3.1% 2.7% Forward P/E ratio Earnings Growth 10.0x 17.0% 10.4x 8.0% Price/Book ratio 1.6x 1.4x Beta 1.0 25 Source: Bloomberg, Electus
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 OLD MUTUAL GEM FUND PRICE RELATIVE TO MSCI GEM INDEX Since inception to 13 March 2014 160 150 OM GEM Fund 140 130 120 110 100 OM GEM Fund relative to MSCI GEM Index 90 26 Source: Electus
27 CONCLUSION Significant industry experience and proven skill set Clearly articulated and proven investment philosophy key focus on quality, valuation and corporate governance Disciplined investment process and portfolio construction Excellent proprietary research skills & systems within ELECTUS and top quality Old Mutual Investment Group platform All ELECTUS staff have their co-investing & ownership in ELECTUS aligned with Client interests Soundly built product after first two years
28 REGULATORY INFORMATION Old Mutual Investment Group (Pty) Limited Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405 Telephone number: +27 21 509 5022 Old Mutual Investment Group (Pty) Limited (Reg No 1993/003023/07) is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. The investment portfolios may be market-linked or policy based. Investors rights and obligations are set out in the relevant contracts. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Limited who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Disclosures: Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of the Old Mutual Investment Group are remunerated with salaries and standard incentives. Unless disclosed to the client, no commission or incentives are paid by the Old Mutual Investment Group to any persons other than its representatives. All inter-group transactions are done on an arms length basis. We outsource investment administration of our local funds to Curo Fund Services (Pty) Ltd, 50% of which is owned by the Old Mutual Investment Group. Disclaimer: The contents of this document and, to the extent applicable, the comments by presenters do not constitute advice as defined in FAIS. Although due care has been taken in compiling this document, Old Mutual Investment Group does not warrant the accuracy of the information contained herein and therefore does not accept any liability in respect of any loss you may suffer as a result of your reliance thereon. The processes, policies and business practices described may change from time to time and Old Mutual Investment Group specifically excludes any obligation to communicate such changes to the recipient of this document. Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information please visit www.oldmutualinvest.com.
APPENDICES
30 WHY ELECTUS GEM PRODUCT? >100 years investment experience (>20 years GEM) Emerging market presence provides greater insight 80% owned by Africa s largest life insurer, Old Mutual Rigorous and robust investment process Uniquely positioned to focus on pure fund management ELECTUS staff own 18% of their boutique Experienced and well regarded portfolio manager
WHY EM ASSET CLASS? Case for EM equity as a permanent asset class in the long term is clear Strong growth due to positive demographic and urbanisation trends Markets do not reflect GEM share of world GDP Political risk and corporate governance to improve over time Attractively valued Ratio of emerging to developed market volatility 31 Source: MSCI Barra and S&P/IFCG
EM ECONOMIC GROWTH TO OUTPACE DM FOR FORESEEABLE FUTURE Emerging economies average real GDP growth (%YoY) 2010-2050 Advanced economies average real GDP growth (%YoY) 2010-2050 32 Source: Citi Investment Research and Analysis
DM RELIANCE ON EM IS INCREASING 33 Source: Haver Analytics, Morgan Stanley Research