The power of dividendsGlobal equity income investing

March 2013

Piers HillierHead of Overseas EquitiesKames Capital

Why an income strategy?y gy

The importance of dividends and dividend growth8.0

4.9%5.7% 5.5%

4.5%3.7% 5.3%

2 7%4 0

6.0

2.7%

0 0

2.0

4.0

%

-2.0

0.0

-4.0UK US France Germany Australia Canada Japan

Dividend Yield Dividend growth Multiple expansion Total annualised returns

Source: SG Cross Asset research, MSCI AC Real total returns since 1970.

Dividend income is a significant driver of long-term returns

2

Intellectual overconfidenceIs it different this time or will returns revert to mean?

Source: Bloomberg & CIRA

3

Why an equity income strategy?The search for quality yield has reduced the opportunity in fixed incomeUS Inv Grade Bond Yield (%) and Non- Fins Inv Grade Net Issuance

25% Kames Capital Global Equity Income Strategy

500

600

700

7

8

9

10

15%

20%

25% Kames Capital Global Equity Income Strategy

Barclays Global High Yield Index

300

400

4

5

6

$bn

Yie

ld U

S$

5%

10%

15%

0

100

200

0

1

2

3

0%

5%

A/A

aa+/

Aa1

A/A

a2A

-/Aa3

A+/

A1

A/A

2A

-/A3

/Baa

1/B

aa2

/Baa

3+/

Ba1

B/B

a2B

-/Ba3

B+/

B1

B/B

2B

-/B3

/Caa

1/C

aa2

/Caa

3C

C/C

aC

/C DN

R

00

200020012002200320042005200620072008200920102011

Non-fins Inv Grade Net Issuance (RHS)US Inv Grade Bond Yield (LHS)

AA

AA

A AA

AA A

BB

B+/

BB

B/

BB

B-/

BB B

BB

B B

CC

C+/

CC

C/

CC

C-/ C

Credit rating

Source: Citi Research, Datastream, Dealogic. Net issuance figures are Europe + US.

Sustainable equity income offers yield and growth with credit quality

4

The importance of real returnsUS real annual returns by decade (%)20%

Equity cult

15%

Equity cult begins here Equities

Bonds

10%

5%5%

0%

-5% 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s Total

Equities only decade of real underperformance relative to bonds

Source: Global Financial Data, Factset, CIRA

q y f p ffollows equity bull markets - 1930’s and 2000’s

5

Stock selection: What we’re looking forg

Compounders

Consistent dividend

Hoarders

Ability to substantially

De-equitisers

Equity for debt arbitrageConsistent dividend growers

• Long term record of l th i

Ability to substantially raise payout ratios

• Operational success l b l h t

Equity for debt arbitrage

• Scope for equity retiralith th h M&Aannual growth in

dividend per shareleaves balance sheet firepower to materially increase shareholder remunerations

either through M&A or share buybacks

remunerations

6

Performance since inceptionp

130

Since strategy launch return

100

110

120

80

90

0 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 3

Dec

10

Jan

1

Feb

11

Mar

11

Apr

11

May

1

Jun

1

Jul 1

Aug

1

Sep

1

Oct

11

Nov

1

Dec

1

Jan

12

Feb

12

Mar

12

Apr

12

May

12

Jun

12

Jul 1

2

Aug

12

Sep

12

Oct

12

Nov

12

Dec

12

Jan

13

Global Equity Income Strategy MSCI AC World

3 months 1 year Since launch (31/12/10)Global Equity Income Strategy 11.03% 19.84% 25.83%MSCI AC World 10.23% 14.93% 12.41%G t i R l ti 0 73% 4 27% 11 94%

Source: Kames Capital, All returns in GBP gross of fees. 31 January 2013. Index source: LIM. The strategy is a carve-out of a balanced mandate and excludes cash.

Geometric Relative 0.73% 4.27% 11.94%

7

Summary – harnessing the power of dividends

18%Average yield Realised yield• Global approach maximises

opportunity set and helps

y g p

12%

14%

16%

yiel

d

pp y pdiversify risk

• Targeting companies in the Di id d

8%

10%

12%

Div

iden

dyg g p

dividend sweet spot

• Focus on sustainability of

Dividend sweet spot

2%

4%

6%y

dividend growth

• Buy and hold philosophy0%

2%

<4% 5%-6% 7%-8% 9%-10% 15%-20%

y p p y

Dividend yield groupingSource: SG Cross Asset Research, Factset, I/B/E/S. Realised and forecast dividends.

8

Appendicespp

9

Investment processp

2. AnalyseDevelop conviction

3. ConstructBuild an efficient portfolio

1. ScreenNarrow the universe e e op co ct o u d a e c e t po t o oa o t e u e se

U i * Id C i ti P tf liUniverse*c. 2500 STOCKSwith >£1bn free float market cap

Ideasc. 250 STOCKSmany of which we have already researched or own

Conviction20 PROPRIETARY Insight notes per month

Portfolio30-50 HOLDINGSStock-specific risk >75%Yield 150% of

Portfolio Monitoring

benchmark

Multi-Factor ScreenFundamentals, Valuations

and TechnicalsRisk optimisation of

best ideas

* Universe established based on a comprehensive understanding of client requirements – in this example constrained by free float size

Global Equity Income process tailored for client requirements

10

The screening process

• Kames Capital-designed proprietary model

– Universe of c.2,500 stocks from 45 country indices (24 developed and 21 emerging markets)

g p

– Six screens capturing yield, growth, affordability, sustainability and quality

Name Sector Country FY1 DY > 3%

FY2 DY > 3%

Div Gth FY0 - FY1

> 0%

Dividend Cover >

1 3

Net Debt / EBITDA <

2 5

ROE > 12% TOTAL (Max 6)

> 0% 1.3 2.5CEZ CESKE ENERG. ZAVODY Utilities CZECH REPUBLIC

ROYAL DUTCH SHELL B Energy UNITED KINGDOM

GLAXOSMITHKLINE Health Care UNITED KINGDOM

NOKIAN RENKAAT Consumer Discretionary FINLAND

LOCKHEED MARTIN CORP Industrials UNITED STATES

BASF Materials GERMANY

NOVARTIS Health Care SWITZERLAND

MICROCHIP TECHNOLOGY Information Technology UNITED STATES

KEPPEL CORP Energy SINGAPORE

CHINA MOBILE Telecommunication Services HONG KONG

COMFORTDELGRO I d t i l SINGAPORECOMFORTDELGRO Industrials SINGAPORE

PHILIP MORRIS INT Consumer Staples UNITED STATES

JOHNSON & JOHNSON Health Care UNITED STATES

BRITISH SKY BROADCASTING Consumer Discretionary UNITED KINGDOM

NESTLE Consumer Staples SWITZERLAND

MCDONALD'S CORP Consumer Discretionary UNITED STATES MCDONALDS CORP Consumer Discretionary UNITED STATES

Please note the snapshot of our proprietary screen is purely for illustration.

11

Finding the right companies

• Quantitative screening

g g p

• Qualitative analysis - fundamentals, valuations and technical

Take a long term view• Take a long-term view

– Actively managed

G f f– Global diversification from relative concentration

– Aim for low portfolio turnover

• Focus on sustainable and growing dividend income

– Yield alone is insufficient

12

Portfolio construction

Screen

APT & Algorithmics

Benchmark

Initial portfolio (30-50 holdings)Analysis Initial portfolio (30 50 holdings)

Parameter– Target yield 150% of MSCI AC World– Optimise stock-specific riskC i ti

Analysis

Portfolio construction

Optimise stock specific risk– Limit unintended risks– Country and sector unconstrained

Conviction ideas

GEIF portfolio

Restrictions– Maximum stock size 10%– Market cap £1bnpo t o o

Optimising best ideas

13

Designed to meet client objectives• Number of holdings 44

• Portfolio yield 4.3%

g jPortfolio (%) MSCI AC World (%) (+/-)

North America 35.6 50.0 -14.4Europe 46.9 25.8 21.1

• Yield relative to reference index 147%

Japan 1.8 7.4 -5.6Asia/Pacific Ex Japan 15.7 12.9 2.8Latin America 0.0 2.8 -2.8Africa/Mid East 0.0 1.2 -1.2

100 0 100 0• Dividend growth 10%100.0 100.0

Energy 8.1 10.7 -2.5Consumer Staples 16.4 10.4 6.0Consumer Discretionary 12 7 10 7 2 0Consumer Discretionary 12.7 10.7 2.0Telecommunication Services 8.0 4.2 3.8Utilities 0.0 3.4 -3.4Health Care 12.8 9.5 3.3Financials 20.5 21.4 -0.9Information Technology 4.9 11.8 -6.9Materials 3.5 7.4 -3.9Industrials 12.4 10.4 2.1Cash 0.47 0.0 0.5

Source: Kames Capital, Citi Investment Research, FactSet. Unaudited data as at 31 January 2013. Div Yield is FY2, Div Gth is FY1/FY0.

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100.00 100.0

Portfolio monitoring and oversight

• Portfolio monitoring

– Review discipline

g g

The quantitative screen is run every 2 weeks

Weekly team meetings monitor existing positions and consider new ideas

Monthly Investment Policy meeting frames asset allocationMonthly Investment Policy meeting frames asset allocation

– Sell disciplineA i ti iti f il i it i th th i ld GDF S An existing position fails any screening criteria, other than yield: GDF Suez

Stock recommendation change: AstraZeneca

Geographical or industry tilts are altered: Emerson Electric

– Risk management

Continuous monitoring by Kames Capital’s Independent Portfolio Risk Management Group

Ensuring compliance with client objectives15

Important informationThis document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. All data in this presentation is sourced to Kames Capital unless otherwise stated. The views expressed and information provided is accurate at

f

p

the time of writing.The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice.Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteednot guaranteed.All yields are stated as at 31/01/2013. We calculate yields in compliance with the industry standard formula we are obliged to use which takes no account of potential future defaults. This may mean that, depending on future economic factors, the actual yield could be less than those shown.This document is accurate at the time of writing but can be subject to change without notification. Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the p p y ( ) p , yp p p y p gRepublic of Ireland (Company Number 442106), registered office at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: Andrew Bell (UK), Mike Kirby (Ireland) and Bronwyn Wright (Ireland). Kames Capital Investment Company (Ireland) plc is regulated by the Central Bank of Ireland. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House 3 Lochside Crescent Edinburgh EH12 9SA Kames Capital plc is authorised and regulated by the Financialregistered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Services Authority, (FSA reference no: 144267). Kames Capital plc is the Investment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an Aegon company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).

FP ID: 2013/15458

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Important informationFor Investors in Switzerland On March 26th 2009, the Swiss Financial Market Supervisory Authority FINMA authorised the distribution to the public of the shares of Kames Capital Investment Company (Ireland) plc (the “Company”) in or from Switzerland in conformity with article 120 of the Federal Law on Collective

f C C C S f

p

Investments of Capital dated June 23rd 2006. The Company was authorised as a Foreign Collective Investment Scheme. The articles of the Company, the Extract Prospectus for Switzerland, the Key Investor Information (Swiss edition), the annual and semi annual Report for Switzerland of the Company can be obtained free of charge on our website www.kamescapital.com or from the Representative in Switzerland, BGG Banque Genevoise De Gestion, 15, Rue Toepffer, 1206 Geneva, Switzerland, (Tel : + 41 22 3479040; Fax: + 41 22 3479327).

For Investors in Luxembourg Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in Luxembourg by the Commission de Surveillance du Secteur Financier. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (Ireland) plc are available from CACEIS Bank Luxembourg 5, allée Scheffer, L-2520 Luxembourg.

For Investors in the NetherlandsKames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in the Netherlands by the Netherlands Authority for Financial Markets in Amsterdam. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (I l d) l il bl f f h f b it k it l (D t h diti f th K I t I f ti l )(Ireland) plc are available free of charge from our website www.kamescapital.com (Dutch edition of the Key Investor Information only).

The Global Equity Income Fund is available in UK, Channel Islands, Ireland, Netherlands, Switzerland and Luxembourg.

FP ID: 2013/15458

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