P F S Q 1 I N C O M E & VA L U E I N V E S T I N G Chris Johns National Development Manager Q1 2017 ON THE PLANET TO PERFORM
Learning objectives Advisers will be able to. 1 Explain some of the screening processes for value investing. 1 Understand the implications to income portfolios of a company s ability to maintain their dividend policy. Discuss the merits of value vs. growth investing with clients. 3 For professional audiences only. Not for retail investors.
Dec-1993 Dec-1994 Dec-1995 Dec-1996 Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 UK 10 year bond yields UK10 Year Gilt Yield 2 10 9 8 7 6 5 4 3 2 1 0 Monthly average yield from British Government Securities, 10 year Nominal Par Yield Source: Bank of England, December 2016. http://www.bankofengland.co.uk/boeapps/iadb/index.asp?travel=nixirx&levels=1&xnotes=y&c=5tu&xnotes2=y&nodes=x4051x4052x4053x4058§ionrequired=i&hidenums=- 1&ExtraInfo=true&G0Xtop.x=38&G0Xtop.y=10
People are overwhelmed by the enormity of the task 3 Happy to have freedom to please myself and lie in on cold winter mornings... acknowledging others with a wave, but not needing to be surrounded by others or spend every moment with my partner. I feel overwhelmed and drowning with the information and choices. I m looking forward to retirement. I m worried the wrong decision could have a major impact on my future wellbeing. Image source: Jupiter, January 2017.
Alternative Sources of Wealth 4 Image source: istock. Jupiter has purchased the copyright to this image.
Agenda 5 The case for Income from Equity Where can I get Value Income Investing?
Large funds dominate the IA s Equity Income Sector 6 Image source: istock. Jupiter has purchased the copyright to this image.
Questions 7 What issues could arise that make us have to reconsider our selection? What risks are there to the continuation and sustainability of the UK Dividend? What kind of manager do we need? Are we invested in the right place for the market now? What correlation risk do we run with our investment choice?
IA Equity Income Sector 8 Image source: istock. Jupiter has purchased the copyright to this image.
IA Sector definition under review Options 9 Maintain the current Definition Produce more than the FTSE All-Share Fund Managers to produce more in-depth statistics 1 For professional audiences only. Not for retail investors.
IA Sector definition under review But we can look further afield 10 Image source: istock. Jupiter has purchased the copyright to this image.
Return Wide Dispersion of Returns and Volatility Top 20 Funds by AUM Return vs Volatility All companies UK Equity Income Sector 20 11 15 10 5 0-5 -10 0 5 10 15 20 25 Volatility Source: FE Combined sectors IA Equity Income/IA All Companies Top 20 funds by AUM with yield => of 3.0% as at 09.12.16 Volatility 1 year Annualised 09.12.16.
Return Wide Dispersion of Returns and Volatility Top 20 Funds by AUM Return vs Volatility All companies UK Equity Income Sector 20 12 15 10 5 0-5 -10 0 5 10 15 20 25 Volatility Source: FE Combined sectors IA Equity Income/IA All Companies Top 20 funds by AUM with yield => of 3.0% as at 09.12.16 Volatility 1 year Annualised 09.12.16.
Return Tighter Yield Top 20 Funds by AUM Yield vs Volatility All companies UK Equity Income Sector 5.5 13 5.0 4.5 4.0 3.5 3.0 2.5 2.0 4 6 8 10 12 14 16 Volatility Source: FE Combined sectors IA Equity Income/IA All Companies Top 20 funds by AUM with yield => of 3.0% as at 09.12.16 Volatility 1 year Annualised 09.12.16.
Dec-84 Nov-87 Oct-90 Aug-93 Jul-96 Jun-99 Apr-02 Mar-05 Feb-08 Dec-10 Nov-13 Sep-16 10-year annualised relative return of MSCI Value vs. Growth Unprecedented underperformance by value 14 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% MSCI UK Value vs. Growth Source: Bloomberg, 30.09.16.
15 UK Value opportunity: A clear trend is forming Value outperforming growth significantly for first time in 10 years Market return by investment style (discrete years from 1999) 40% 30% 20% 10% 0% -10% -20% -30% -40% FTSE UK Growth FTSE UK Value FTSE All Share 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Morningstar 31.10.16.
Investment approach avoids some popular areas of endeavour 16 Macroeconomics IMF forecasts: failed to predict single recession for 189 countries (1999 2014) in April of preceding year* Forecasting Analysts Chance of a stock s earnings being ±5% of forecast 5 years out is 1 in 30 billion** The views expressed are those of the presenter at the time of presenting and may change in the future. *Source: The Economist, 09.01.16. **Source: Dreman Value Management, LLC, First Call Estimates, IBES, AN Research Group, Q1 1973 Q4 2008.
17 Thinking about portfolio construction in a different way Relative measures of risk: Beta Tracking error Value at Risk (VaR) Absolute measures of risk: Strong balance sheets Low valuations Diverse set of uncorrelated risks Encourages momentum investing and offers false certainty More appropriate to longterm capital growth? The Big Short* Question from William Tanona to John Mack: I am surprised that your trading VaR stayed stable in the quarter given the level of loss The views expressed are those of the presenter at the time of preparation and may change in the future. *Source: Page 218, The Big Short by Michael Lewis following a Wall Street record trading loss of $9.2bn.
Value vs Growth 18 Value Quality of Company Under Valued Reversion to Mean Temporary Discount Sustainable Dividend Growth New Ventures Retain Dividends Quick Growth More Volatility Higher Valuations The views expressed are those of the presenter at the time of presenting and may change in the future.
Recycling 19 Image source: istock. Jupiter has purchased the copyright to this image.
Maths for the Value investor Greenblatt screen Joel Greenblatt value investor, hedge fund manager Buy good, buy cheap Return on capital True measurement of a good business Earnings yield Measure of cheapness Buying cheap stocks at bargain prices is the secret to making lots of money 20 Trackers Buy too much of the wrong company, too little of the right company The views expressed are those of the presenter at the time of presenting and may change in the future.
Maths for the Value investor Growth at a reasonable price GARP Jim Slater Mixture of growth and value investing Key measure Price to earning growth factor Price Earnings EPS Price to Earnings Growth (PEG) I prefer small quoted companies to large ones. Mammoth companies rarely double their market capitalisation in a year. In contrast, small companies often do this and more. That is why I coined the expression Elephants don t gallop. Jim Slater 21
Maths for the Value investor Graham and Dodd A valuation process that arose from the lessons of the Wall Street crash in 1929 23 Deeply depressed price High earnings to price ratio Low P/E (historically speaking) High dividend yield Negative net asset value
Valuation can be a major determinant to future returns 24 50 Price/earnings ratio (CAPE, P/E10) [lhs] Long-term interest rates [rhs] 2000 20% 40 1929 1981 16% 30 1901 1966 2015 12% 20 8% 10 4% 0 1921 0% Jan-00 Aug-10 Apr-21 Nov-31 Jul-42 Feb-53 Oct-63 May-74 Jan-85 Aug-95 Apr-06 Dec-16 The views expressed are those of the presenter at the time of presenting and may change in the future. Source: Robert Shiller: Graham & Dodd P/E (10 year moving average earnings), December 2016.
Graham & Dodd P/E by sector 25 <10x 10x 16x 16x 22x 22x 30x >30x Household/ Mining 6.3 Banks 11.4 REITS 17.9 Packaging 25.2 Personal Care Energy 7.7 Aerospace/ Commercial 15.2 Media 18.1 Tobacco 25.3 Defence Services Food Retail 8.9 Retail 15.3 Airlines 18.7 Chemicals 26.8 Technology 33.6 Telecoms 15.6 Industrials 18.8 House Builders 27.2 Pharma 15.7 Insurance 20.3 Apparel / Luxury Goods Utilities 21.5 Beverages 28.3 Healthcare Products 21.6 Financial Services 30.6 30.9 34.4 27.8 Food 34.6 Hotels / Restaurants / Leisure 35.0 Source: Jupiter, 30.09.16.
Correlation Everybody holds the same thing! 26 AstraZeneca Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.
How diversified am I? UK dividend distribution Q2 2016 27 10.20 bn 36% 10.80 bn 37% Top 5 Next 10 The Rest 7.70 bn 27% Source: Capita UK Dividend Monitor, Issue 27 Q4 2016
Dividend Cover Pension Cover! 28 FTSE 100 dividend cover 2.0x 1.8x 1.6x 1.4x 1.2x Pension liabilities as % of market capitalisation 40% 38% 36% 34% 32% 30% 1.0x 2013 2014 2015 2016E 2017E 28% Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Source: FTSE 100 dividend cover. Mercer, as at 31.12.15. http://www.uk.mercer.com/newsroom/db-pension-schemes-cash-contributions.html
Value in Practice Tesco Market share leader in the UK Graham and Dodd P/E of 8x Previous management pushed prices too high, opportunity for discounters to take market share New management team are addressing issues UK business currently under-earning, but scale advantage should lead to higher margin than peers 29 The views expressed are those of the presenter at the time of preparation and may change in the future. Any stock examples are used for illustrative purposes only and should not be viewed as investment advice. Source: Jupiter, Bloomberg, 11.05.16.
Value in Practice 30 450 Tesco 206.8p 400 350 300 250 200 150 100 50 0 Feb-11 Apr-12 Jun-13 Aug-14 Oct-15 Dec-16 Any stock examples are used for illustrative purposes only and should not be viewed as investment advice. Source: Bloomberg, 31.12.16.
Value in Practice? Company B Graham and Dodd P/E of 4x Appears to be cheap Highly leveraged Likely not to be able to avoid a re-rating due to the debt levels 31 The views expressed are those of the presenter at the time of preparation and may change in the future. Source: Jupiter, Bloomberg, 11.05.16.
32 Value in Practice Company B Company B 14.5% Source: FE FTSE All Share TR (GB) Vs Company B 5/1/16 5/1/17 data source FE. Company B is for presentations purposes only. The views expressed are those of the presenter at the time of preparation and may change in the future.
Agenda 33 The case for Income from Equity Where can I get Value Income Investing?
Introducing Ben Whitmore 34
Annualised performance Jupiter Income Trust Return/volatility over 5 years 16% Jupiter Income Trust 14% 35 12% 10% 8% 6% 4% 2% FTSE All-Share IA UK Equity Income IA UK All Companies 0% 6% 7% 8% 9% 10% 11% 12% Annualised volatility (standard deviation) Past performance is no guide to the future. Source: FE, bid to bid, net income reinvested, net of fees, in GBP, to 09.12.16. Fund: Jupiter Income Trust Inc. Benchmark: FTSE All-Share Index. Sector: The Investment Association UK All Companies/Equity Income
Dec-12 May-13 Sep-13 Feb-14 Jun-14 Oct-14 Mar-15 Jul-15 Nov-15 Apr-16 Aug-16 Dec-16 Growth Jupiter Income Trust Fund Performance since Ben Whitmore took over the Jupiter Income Trust 60% Jupiter Income Trust I Acc 61.3% FTSE All-Share 44.1% 36 50% 40% 30% 20% 10% 0% Past performance is no guide to the future. Source: Morningstar, bid to bid, net income reinvested, in GBP, 31.12.16. Ben Whitmore has managed the fund since 01.01.13.
37 Biography and awards Ben Whitmore Fund Management Director 22 years Awards and ratings Morningstar rating Ben Whitmore Current role Current responsibilities Fund Manager, UK Equities Team Manager, Jupiter UK Special Situations Fund (Unit Trust), Jupiter Income Trust (Unit Trust) and institutional assets Note: Years of industry experience as at 31.12.16. Awards and ratings should not be taken as a recommendation.
38 Useful resources www.barcap.com/egs Equity-Gilt Study www.morningstar-obsr.co.uk Ratings and fund information www.msci.com/real-estate Property www.bpf.org.uk/reits-and-property-companies REITS information www.trustnet.com Performance and Multi-Manager guide www.citywire.co.uk Fund Manager news, views, ratings www.apcims.co.uk Asset allocation model www.morningstar.co.uk Performance & risk data www.fundslibrary.co.uk Factsheets and reports www.fundcalibre.com Ratings and fund information www.jupiteram.com Fund information, event information
Learning outcomes Advisers will be able to. 39 Explain some of the screening processes for value investing. 1 Understand the implications to income portfolios of a company s ability to maintain their dividend policy. Discuss the merits of value vs. growth investing with clients. 3 For professional audiences only. Not for retail investors.
40 Disclosure This presentation is intended for investment professionals and not for the benefit of retail investors. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Any data or views given should not be construed as investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Past performance is no guide to the future. Company examples are for illustrative purposes only and are not a recommendation to buy or sell. Quoted yields are not guaranteed and may change in the future. Awards and ratings should not be taken as a recommendation. Jupiter UK Special Situations Fund: The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. Jupiter Income Trust Fund: The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. All of the fund's expenses are charged to capital, which can reduce the potential for capital growth. Industry Classification Benchmark ( ICB ) is a product of FTSE International Limited ( FTSE ) and all intellectual property rights in and to ICB vest in FTSE. Jupiter Asset Management Limited has been licensed by FTSE to use ICB. FTSE is a trade mark owned by the London Stock Exchange Plc and is used by FTSE under licence. FTSE and its licensors do not accept liability to any person for any loss or damage arising out of any error or omission in ICB. This document contains information based on the FTSE All-Share and FTSE 350 Indices. The FTSE All-Share and FTSE 350 Indices are calculated by FTSE. FTSE does not sponsor, endorse or promote the product referred to in this document and is not in any way connected to it and does not accept any liability in relation to its issue, operation and trading. All copyright and database rights in the index values and constituent list vest in FTSE. This document contains information based on the MSCI Value and MSCI Growth Indices. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI s express written consent For your security we may record or randomly monitor telephone calls. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this presentation may be reproduced in any manner without the prior permission of JAM or JUTM. 12685_67855_PFS_Q1_INCOME_AND_VALUE_INVESTING_CJ_1216 ON THE PLANET TO PERFORM