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Q&A roadshow 2016 June 2016 | For professional advisers only. This material is not suitable for retail clients European Equities James Sym | Fund Manager #QAroadshow2016
Q&A roadshow 2016
June 2016 | For professional advisers only. This material is not suitable for retail clients
European Equities
James Sym | Fund Manager
#QAroadshow2016
Over the last 5 years is your main European fund:
1. First quartile
2. Second quartile
3. Third quartile
4. Fourth quartile
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Questions
1. How do European Equities stack up against other assets?
2. Is the value rally the start of a trend or a dead cat bounce?
3. How are you positioning the fund?
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14/06/2016 15:22:22
How do European
Equities stack up
against other assets?
March 2016 ** Remove from final presentation **
Investing with Mr Nonsense… …or how to lose money in real terms
Source: Bloomberg, Schroders. As at 31 March 2016. For illustrative purposes only and not a recommendation to buy or sell shares
Bonds Duration
(Years)
Bond
Yield
Equity Yield
Government
Swiss Gov’t 10 -0.4% n/a
German Bund 10 0.1% n/a
Corporate
BASF 8 0.8% 5%
Sanofi 9 0.9% 4%
Zurich 10 0.3% 8%
Unsecured Banks
Intesa 14 2.4% 8%
Santander 6 1.0% 5%
March 2016 ** Remove from final presentation **
Value bias Extremes within Global Equities
5
Source: Bloomberg, as at 08 February 2016
40 years of Value vs. Growth
March 2016 ** Remove from final presentation **
Europe looking cheap vs America again…
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Source: JPMorgan. As at 30 April 2016
Almost back to
crisis levels
Eurozone sector neutral P/E vs the US
March 2016 ** Remove from final presentation **
Renewed European discount unjustified…
Relative economic outlook is better
Relative earnings growth is better
Relative political risk is better
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Is the value rally the
start of a trend or a
dead cat bounce?
March 2016 ** Remove from final presentation **
Defensive growth versus global and domestic value in Europe
Beware the safe consensus
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Source: Kepler Cheuvreux, as at March 2016
So extreme is the underperformance, being overweight Commodity, Financial and Industrial stocks has become a ‘sackable
offence’ since 2008
“I buy good quality companies” is the mantra to attract assets
The result: These are incredibly crowded trades
Relative performance to Stoxx Europe 600. Index: 01 January 1995 = 100
70
90
110
130
150
170
190
210
230
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
(Healthcare + consumer staples)/Stoxx 600 (Commodity-Sensitive+Financials+Industrials)/Stoxx 600
March 2016 ** Remove from final presentation **
Composite valuations
How cheap is cheap? Answer – (almost) as cheap as they ever have been!
Cutting to the chase, Value stocks offer significant double-digit upside from mean reversion
Earnings inflection is the trigger
This will come from higher inflation
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Source: Morgan Stanley. The composite valuation is the P/E, dividend yield and Price to Book Value. Percentages are the upsides from reverting to the average discount/ premium. Staples is the Food, Beverage and
Tobacco sector, as at March 2016
+50%
Banks Staples
-20%
60
80
100
120
140
160
180
50
100
150
200
250
300
350
Feb
64
Feb
66
Feb
68
Feb
70
Feb
72
Feb
74
Feb
76
Feb
78
Feb
80
Rel perf of nifty fifty S&P perf (RHS)
The nifty fifty theme – analogous with the current secure global growth theme – was a resounding success in the build up to the crisis of the 1970s
The relative performance peak coincided with the negative ‘event’ (the oil shock)
The underperformance of the style from the market low was massive
The nifty fifty beat the market by 15% p.a. for eight years Nifty fifty valuations eventually hit bubble levels…
The precedent of the ‘nifty-fifty’
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Source: FactSet, Morgan Stanley Research. February 1980
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0
5
10
15
20
25
30
35
40
45
50
Ja
n 6
4
Ja
n 6
6
Ja
n 6
8
Ja
n 7
0
Ja
n 7
2
Ja
n 7
4
Ja
n 7
6
Ja
n 7
8
Ja
n 8
0
Dividend yield (RHS) Price to earnings
Price to earnings of nifty fifty Nifty fifty stocks relative to S&P S&P performance Dividend yield of nifty fifty
How are you
positioning the fund?
March 2016 ** Remove from final presentation **
Different Schroder European Alpha Income Fund
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Source: Morningstar Direct, as at 31 December 2015. For illustrative purposes only and not a recommendation to buy or sell shares
Our alpha franchise has a genuinely different approach to peers
Core-Growth Core Core-Value
Gia
nt
Larg
e
Mid
Schroder European Alpha Income Fund
Selected peer group funds*
Index
High-Growth
*Funds shown are sector portfolios over £2bn AUM including Blackrock European Dynamic, Fidelity European, Henderson European Selected Opportunities, Jupiter European, Standard Life European Equity Income, Threadneedle European Select. The Index is represented by Vanguard FTSE Europe ex-UK tracker
March 2016 ** Remove from final presentation **
How can we help your clients? What we own – a balanced European Value fund
Financials
– More Insurance than Banks
Commodities
– Integrated Oil over Mining and Oil services
Telecommunications
– Incumbents over challengers
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Not expensive
Not over-owned
Not bond proxies
Not excessively cyclical
Inflation beneficiaries Source: Schroders
March 2016 ** Remove from final presentation **
Share price performance of ENI, Weir and Richemont
Who were the beneficiaries of the oil boom?
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Source: Bloomberg. As at January 2016. Examples are for illustrative purposes only and are not a recommendation to buy or sell
Case study: value stocks: big oil
Big oil stocks didn’t really benefit from the boom times
$10 oil $100 oil
Supplier
Luxury Goods
Big Oil
March 2016 ** Remove from final presentation **
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
ENI operating costs rose substantially over the last decade
Who were the beneficiaries of the oil boom?
16
Source: Bernstein. As at 29 January 2016. For illustrative purposes only and are not a recommendation to buy or sell. Forecast risk warning: Please see the information slide at the end of this presentation
Case study: why we overweight big oil
($/bbl)
These costs are falling rapidly
Future?
At $50 oil, this level
of operating costs
would give an 18%
free cash flow
yield!!
March 2016 ** Remove from final presentation **
How we can help your clients in Europe
Concentrated European Funds around 40 stocks, Pan Europe and Ex-UK
A pragmatic business-cycle approach
Focussed on company meetings and local knowledge from our network of local brokers
Medium term (3 – 5 year) horizon – necessary in Europe to escape the short term noise
Income fund offers around 3.5% yield currently
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Source: Schroders, as at 30 April 2016
March 2016 ** Remove from final presentation **
Schroder European Alpha Income Fund As at 30 April 2016
Performance
in GBP %
YTD 2016 2015 2014 2013 2012† Since launch**
Schroder European Alpha
Income Fund ‘Z Acc’ +1.0 +13.0 +0.6 +40.1 +15.2 +85.3
FTSE World Europe Ex UK +0.8 +5.3 +0.2 +25.2 +14.4 +52.4
Relative +0.2 +7.7 +0.4 +14.9 +0.8 +32.9
Quartile Q2 Q1 Q2 Q1* Q1 Q1*
†Since launch, 02 May 2012 to 31 December 2012 *Top decile. **Launch date: 02 May 2012
Source: Morningstar, bid to bid with net income reinvested to 30 April 2016, net of fees in GBP, Z Acc. Quartile rankings are based on A share class (main unit share class), IA Europe ex UK peer group. Past performance
is not a guide to future performance and may not be repeated
On 24 March 2014, the fund previously named Cazenove European income Fund, changed its name to Schroder European Alpha Income Fund. Prior to 24 March 2014 the fund uses the track record of Cazenove
European income fund (launched on 02 May 2012) as a performance track record
Source of ratings: Morningstar, Trustnet, Citywire and Rayner Spencer Mills, as at 30 April 2016
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March 2016 ** Remove from final presentation **
Conclusion
Key Points
On a relative basis European Value is outstandingly cheap
This is relative to Growth stocks but especially compared to other asset classes
Inflation rising will be the key to unlocking this Value
In this scenario many stocks offer significant double digit upside
Other considerations
Inflation rising and value outperforming will be very painful for many European funds.
The challenge is to access this without going too far down the quality curve or taking excessive cyclical risk
The Schroder European Alpha Income Fund and Schroder European Alpha Plus Fund are reliable ways to
access this opportunity
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Source: Schroders
March 2016 ** Remove from final presentation **
For professional advisers only. This material is not suitable for retail clients
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally
invested
Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This
presentation is intended to be for information purposes only and it is not intended as promotional material in any respect
The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or
investment recommendations. Information herein is believed to be reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or
opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.
Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions
The forecasts included in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no
responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors
Schroder European Alpha Income Fund: The fund primarily invests in equities and as such tends to be more volatile than a fund investing in bonds, but may also offer greater potential for growth. The value of the
underlying investments in equity funds may fluctuate quite dramatically in response to the activities and results of individual companies, as well as in connection with general market and economic conditions. Derivative
instruments may be used in the fund for the purposes of efficient portfolio management only. This should not lead to an increase in the risk to the fund. The managers will employ a risk management process to manage
any derivative exposure achieved for the purposes of efficient portfolio management. The levels and bases of tax assumptions may change. As a result of the fees being charged to capital, the distributable income of the
fund may be higher but there is the potential that performance or capital value may be eroded
FTSE International Limited (“FTSE”) © FTSE 2014. FTSE®” is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE
indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further
distribution of FTSE Data is permitted without FTSE’s express written consent
The views and opinions contained herein are those of James Sym, European Equities Fund Manager, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or
funds. Securities and sectors mentioned are for illustrative purposes only and not a recommendation to buy or sell
Source of ratings: Morningstar, Citywire, Trustnet and Rayner Spencer Mills, as at 30 April 2016
Issued in June 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. PEE00471
Important information
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