56
International Equities The view across the oceans!
International EquitiesThe view across the oceans!
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2
Five Oceans
Five Oceans corporate overview:
• A boutique funds management company
• Focus on managing international shares
• Established in 2005
• Sydney based
• Majority owned by executives
• Committed to sustainable investment principles
2
33
Investment philosophy
Overview:
• We look to buy good sustainable international businesses at an attractive price
• We look to take the signals from our company research to inform us regarding historic valuation levels and the overall macroeconomic environment
• This research generates insights which are expressed through stock selection, portfolio construction and risk management strategies
• We do not focus on indexes but rather focus stock selection and capital protection
• We are equipped to use a range of hedging instruments including cash to manage risk and portfolio volatility
• We believe that Environmental, Social and Corporate Governance Issues should be incorporated into fundamental research.
44
Investment process
Fundamental research
• Franchise analysis• Growth prospects • Competitive position (Five Forces) • Value chain • ESG approach • Business sustainability
Ideageneration Research Portfolio
constructionInvestment
universeResearch process
5
3 years agoOctober 2007
5
6
Now!!!August 2010
6
7
Bear market recovery
Source: dshort.com
8
Market now believes in a V-shaped recovery
Fund managers’ growth expectations & OECD leading indicator
Source: Bank of America Securities – Merrill Lynch
8
9
Investors move into Bonds, out of Equities
9
10
Old vs New cycleOld cycle1. Fed cuts rates2. Value of financial assets rises3. US consumer and property rebound4. US$ strengthens5. Exports from Europe and ASIA pickup6. Europe and Asia come out of
recession lagging the US7. End point… Fed raises rates
This cycle1. Fed cuts rates and prints money 2. Value of financial assets rises3. US consumer and property stalled4. China stimulates5. Chinese consumption expands6. Commodity prices rise7. Income to commodity producers rise,
funding inter-regional trade8. US$ weakens9. Exports from developed world pick up10. World comes out of recession
emerging markets leading11. What is the end point?
Source: Five Oceans Asset Management
10
11
Industrial production rebound started in Asia this time
11
12
AustraliaOne Legged Table?
Australia's Monthly Exports
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
Jul-7
7
Jul-7
9
Jul-8
1
Jul-8
3
Jul-8
5
Jul-8
7
Jul-8
9
Jul-9
1
Jul-9
3
Jul-9
5
Jul-9
7
Jul-9
9
Jul-0
1
Jul-0
3
Jul-0
5
Jul-0
7
Jul-0
9
Rural Goods Mining Related Other
Source: ABS
13
Australia Buried in Mortgage Debt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-02
Sep-0
2Mar-
03Sep
-03
Mar-04
Sep-0
4Mar-
05Sep
-05
Mar-06
Sep-0
6Mar-
07Sep
-07
Mar-08
Sep-0
8Mar-
09Sep
-09
Mar-10
Aussie Mortgage Debt to GDP US Mortgage Debt to GDP
Source: ABS (Australian Data) & BEA and US Federal Reserve (US Data)
14
Housing StockOvervalued?
Source: ABS, RBA, Treasury, Morgan Stanley Research
15
Australian PropertyDriven by Supply Squeeze
Source: ABS, Morgan Stanley Research
Why International and the benefits of benchmark unawareglobal equity investing
1717
Why International?
• Diversification, Diversification, Diversification!
• Opportunity Set
• Sector Exposure
• China and Emerging Markets
• Australian Dollar
18
Local vs Global Stocks
11.877,998Commonwealth Bank
15.133,501Woolworths
9.5213,066BHP Billiton
13.836,642Carrefour
7.3161,441Vale
9.4142,831Wells Fargo
10.113,513Macquarie Group
8.967,168Barclays
16.48,889Coca-Cola Amatil
15.7118,097Femsa
11.157,046Telstra
9.5139,505Vodafone
Forward P/E (x)Market Cap (AUD$m)Company
Source: Factset, Five Oceans Asset Management 31/07/10
18
19
2012 – 15: Mobile Convergence
• More users will be connected via mobile devices than PCs within 5 years• The five key trends: 3G; Social Networking, Video, VOIP and Apps
Source: Morgan Stanley
19
20
Smart Phone Revolution?
58%60%82%270%Growth / CAGR
9%12%-1%6%19%15%Growth / CAGR
788261172140128530Smart Phones
45%52%23%9%55%Growth / CAGR
158.040.025.013.73.7Apple iPhone
17561,3561,2111,2251,153818415Total Phones
2013201020092008200720052000Mobile Phones
20
Source: Five Oceans Gartner
21
Apple Inc
• Premium technology based franchise• Strong revenue and earnings growth
since the early 2000’s• “Game changing” product
development – iPad, iPhone, iPod and iTunes
• iPad penetration could disrupt status quo with respect to traditional PC usage
• Achieved attractive entry point given growth profile
Past performance is not a reliable indicator of future performance. Other stocks held in the Fund have not necessarily produced the same return.Source: Challenger, Bloomberg March 2010.
21
0
50
100
150
200
250
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
Buying period
Hedging
22
Tech Product Cycle Gathers Pace
22
23
But investment has collapsed!
Despite significant growth potential in devices, capital expenditure in the Semiconductor Industry has fallen significantly
23
Source: Citi
24
Semiconductors…. Winners?
• Intel – Advanced chip design and leading edge manufacturing • Samsung – Dominant supplier of memory, screens• Micron – Leading supplier of memory, well managed, acquiror of distressed
Taiwanese capacity• Applied Materials – Leading semi equipment supplier
24
25
Emerging markets growth…
0% 20% 40% 60% 80% 100%
Population
Land mass
Foreign exchange
Energy consumption
GDP at PPP
Exports
GDP at market rates
Market cap (full market)
Market cap (float adjusted)
Emerging Markets Developed markets
Emerging economies as % of total world, 2008-09
Source: Banc of America Securities – Merrill Lynch
25
26
Asian Economies Are No Longer The “Basket Cases”
44.04.9Thailand
114.65.3Italy65.812.5Ireland
112.612.7Greece54.311.2Spain
77.48.0Portugal
42.05.9Taiwan109.53.5Singapore66.64.5Philippines54.87.6Malaysia29.30.8Korea33.41.4Indonesia81.810.3Indian.A2.8Hong Kongn.A2.2China16.02.3Australia
Public debtFiscal deficitAs a % GDPAsian and PIIGS government finances
Source: CLSA Asia-Pacific Markets 26
27
Examples of Consumer “Decoupling”
27
28
Yum! Brands: KFC in China
28
Source: Yum! Brands
29
Yum! Brands
• World’s largest restaurant company by number with over 34,000 Quick Service Restaurants (QSR’s) in more than 100 countries
• International is 60% of profits • Strong self funded growth potential
especially in China where it is the market leader in QSRs –internationally YUM is outgrowing McDonalds 2:1
• US Restaurant turnaround potential• Strong valuation support with FCF
yield > 6%, P/OpCF < 10x, yield 2.5%
20
25
30
35
40
45
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
BoughtBought
Hedging strategy
Hedging strategy
Past performance is not a reliable indicator of future performance. Other stocks held in the Fund have not necessarily produced the same return.Source: Challenger, Bloomberg August 2009.
29
30
European Luxury Brands Sales Share and CAGRs
Source: Company data, Morgan Stanley Research Estimates (FY10-12e)
*Note: Net Sales adjusted to reflect spending by consumer nationality (at home and abroad)
31
PPR SA
• Mix of French retail exposure and premium global luxury brands including Gucci
• 30% of Gucci sales in China with plenty of room for growth
• Restructuring potential likely to lead to earnings upgrades despite cycle pressures
• Valuation at historic lows• Attractive dividend yield• Continue to conservatively build long
position
Past performance is not a reliable indicator of future performance. Other stocks held in the Fund have not necessarily produced the same return.Source: Challenger, Bloomberg March 2010.
31
10
30
50
70
90
110
130
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
Bought Bought Bought
Hedging strategy
32
Raw materials - EnergyOil Cost Curve
0
20
40
60
80
100
120
140
160
0 5000 10000 15000 20000 25000 30000
Oil Cost Curve 2008Oil Cost Curve 2001
The last 8 Million Barrels per Day of production (~10% of global production) requires sustainable long term oil prices of $80-$140/bbl in order to achieve project financial returns.
32
Source: Goldman Sachs
33
Who Is Buying Energy?
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33
34
Devon Energy
20
40
60
80
100
120
140
Jan-
08
Feb-
08
Mar
-08
Apr
-08
May
-08
Jun-
08
Jul-0
8
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr
-09
May
-09
Jun-
09
Jul-0
9
Aug
-09
Past performance is not a reliable indicator of future performance. Other stocks held in the Fund have not necessarily produced the same return.Source: Challenger, Bloomberg August 2009.
• Leading US gas producer• Devon management has also been
able to identify value added acquisitions and leverage of distribution infrastructure
• The large scale reserves present in Barnett and Haynesville positions Devon to exploit a tightening market
• Energy stock valuations are at lows suggested by a forecast fall in energy prices based on overly bearish expectations
Buying period
Hedging
34
35
Financials’ Profits At Unsustainable Levels
35
36
California House Prices Starting To Turn Positive
YoY Change in Median House Price
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
Jan-0
3May
-03Sep
-03
Jan-0
4May
-04Sep
-04
Jan-0
5May
-05Sep
-05
Jan-0
6May
-06Sep
-06
Jan-0
7May
-07Sep
-07
Jan-0
8May
-08Sep
-08
Jan-0
9May
-09Sep
-09
Los Angeles County Orange County San Diego County San Francisco County
36
37
What Wells Fargo Might Be Worth?
$20
$30
$40
$50
$60
$70
$80
$90
0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2%Possible Normal Return on Assets
WFC
Sto
ck P
rice
9x 13xCurrent Price
25 Yr Avg
37
Source: Five Oceans, Wells Fargo
38
Wells Fargo
• Highly profitable US banking franchise characterized by lower funding costs, tight cost control, high deposit growth, fee income streams and focused management
• Acquisition of Wachovia (major east coast bank) doubled earnings potential but was essentially at no cost
• Market became highly concerned about the credit cycle and feared dilution
• At maximum panic WFC was trading on 2x normal earnings and even now is trading at 6x
Past performance is not a reliable indicator of future performance. Other stocks held in the Fund have not necessarily produced the same return.Source: Challenger, Bloomberg August 2009.
38
0
5
10
15
20
25
30
35
40
45
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
Bought
Hedging strategy
39
Benefits of Benchmark UnawareGlobal Equity Investing• Bottom up stock work drives portfolio• Signals from stock work indicate risk• Not tied to benchmark weights for stocks, sectors, countries, regions and
currency – the index is just another portfolio of stocks!• Greater freedom and ability to undertake risk management through hedging• Ability to hold cash to increase defensiveness of portfolios • Active management of currency exposure reduces risk, protects capital and
takes advantage of long term currency trends• Low correlation with traditional styles increases diversification benefits• Improved risk/return characteristics when used in blended portfolio
39
40
Correlation comparison Five Oceans versus Morningstar Average Manager
Low to negative correlations result in stronger diversification benefits
As at 31 July 2010
40
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10
Correlation of Excess Monthly Returns
Correlation between Five Oceans W/S World Fund and Morningstar Wholesale Trust Equity World Blend Index
41
AUD versus EquitiesA Changed Relationship
1985 1989 1993 1997 2001 2005 2009
Correlation AUD SPX
42
Risk adjusted comparisonFive Oceans World Fund
42
43
PerformanceWorld Fund (Wholesale class) Performance to 30th June 2010 in AUD*
0.56-2.245.6710.94-1.09Net return
+11.15
-5.48
6.99
2 Yrs%
+6.97+8.57+4.91+2.61Difference
-10.81
-0.91
3 Yr% pa
2.0012.33-0.47Gross return
-6.416.03-3.70MSCI World Unhedged AUD
6 mths%
1 Yr%
Since incep% pa*
* Inception: 3 July 2006. Five Oceans Wholesale World Fund. Gross returns assume the reinvestment of distributions and exclude the impact of ongoing management fees. No allowance is made for tax. Past performance is not a reliable indicator of future performance.
43
44
Excess Returns
As at 31 July 2010
Portfolio represents equal weights in Platinum International Fund and Five Oceans W/S World Fund, Rolling 3 year excess returns, since inception of Five Oceans W/S World Fund
44
-15
-10
-5
0
5
10
15
Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10
Exc
ess
Ret
urn
(%)
Month Ended
Excess Returns 36 Month Rolling Period vs MSCI World Ex Australia Net Div Reinvested $A
Portfolio
45
Why International?Snail Trail - Five Oceans
-50
-40
-30
-20
-10
0
10
20
30
40
50
-10 -8 -6 -4 -2 0 2 4 6 8 10
Exc
ess
Ret
urn
(%)
Excess Risk (%)
Five Oceans W/S World Fund
As at 31 July 2010Rolling 1 year returns, since inception of Five Oceans W/S World Fund
46
Why International?Snail Trail - ASX 200
-50
-40
-30
-20
-10
0
10
20
30
40
50
-10 -8 -6 -4 -2 0 2 4 6 8 10
Exc
ess
Ret
urn
(%)
Excess Risk (%)
S&P/ASX 200 AI
As at 31 July 2010Rolling 1 year returns, since inception of Five Oceans W/S World Fund
47
Risk adjusted performanceSnail Trail - Five Oceans and ASX 200
-30
-20
-10
0
10
20
30
-8 -6 -4 -2 0 2 4 6 8
Exc
ess
Ret
urn
(%)
Excess Risk (%)
Portfolio
As at 31 July 2010Rolling 1 year returns, since inception of Five Oceans W/S World FundPortfolio represents equal weighting of Five Oceans World Fund and S&P/ASX 200 AI
48
Investing Requires Patience
48
Appendix
5050
Ross Youngman CEOFive Oceans Asset Management
Ross co-founded Five Oceans and has over 25 years’ international experience in the finance industry covering stockbroking, financial planning and asset management. Ross spent 12 years with Bankers Trust and Deutsche Bank in both Sydney and New York and was most recently Chief Executive Officer of Deutsche Asset Management in Australia.
Prior positions included Head of Deutsche Asset Management’s US mutual fund business and Head of BT Funds Management’s US asset management business. Ross has an MBA from Columbia Business School, New York and a Bachelor of Commerce from the University of Tasmania.
Ross is a Fellow of the Financial Services Institute of Australasia, a board member of International House – New York and Earth Champions – Sydney and sits on the executive committee of the Investors Group on Climate Change.
5151
Investment personnel
5 Years Business AdministrationYvette Rolfe
2 YearsInvestment Analyst Duncan Anderson
7 YearsInvestment Analyst Tim Blake
5 YearsInvestment AnalystAndrew Plummer
9 YearsInvestment AnalystBen Zhong
14 YearsPortfolio ManagerRob Nunley
13 YearsPortfolio ManagerJoe Kaderavek
16 YearsPortfolio ManagerPiers Watson
17 YearsPortfolio ManagerKim Tracey
22 YearsCIO/ Lead Portfolio ManagerChristopher Selth
25 YearsChief Executive OfficerRoss Youngman
52
77
14.2
33.7
109.4
85.8
-11.8
97.6
Mar 10%
81
24.9
23.2
116.6
75.1
-20.8
95.8
Jun 10
9.78.6Cash
76
48.2
100.0
90.2
-4.8
95.1
Dec 09%
71
48.3
105.8
91.5
-7.2
98.6
Sep 09%
AUD Exposure
Gross Equity
Number of Long Stock Positions
Net Equity
Short Positions
Long Positions
Source: Five Oceans World Fund – Challenger 30/06/2010
52
Portfolio holdingsWorld Fund Historic exposures
53
Portfolio exposureWorld FundSector allocation at 30th June 2010
3.50%0.00%3.50%Telecommunications Service
15.50%-2.17%17.66%Consumer Discretionary
9.70%0.00%9.70%Consumer Staples
15.42%0.00%15.42%Energy
12.53%-0.87%13.40%Financials
13.08%0.00%13.08%Healthcare
7.83%0.00%7.83%Industrials
13.29%-0.97%14.26%Information Technology
0.98%0.00%0.98%Materials
-16.76%-16.76%0.00%Sector/market Hedges
75.07%-20.76%95.83%Total
NET TOTALHEDGELONGSECTOR NAME
Allocations calculated excluding cash holdings and based on net exposureSource: Challenger 30/06/2010
53
54
Portfolio exposureWorld FundCountry allocation at 30th June 2010
14.02%-5.93%19.95%Europe
0.00%0.00%0.00%Japan
7.33%0.00%7.33%Asia
3.03%0.00%3.03%United Kingdom
49.64%-14.83%64.47%United States
1.04%0.00%1.04%Others
75.07%-20.76%95.83%Grand Total
NET TOTALHEDGELONGREGION
Allocations calculated excluding cash holdings and based on net exposureSource: Challenger 30/06/2010
54
55
Portfolio holdingsWorld FundTop ten long positions at 30th June 2010
Source: Five Oceans World Fund - Challenger 30/06/2010
2.82Baker Hughes Inc
2.88Varian Medical Systems
3.92Devon Energy Corp
2.45Inditex SA
2.58Arch Coal
2.79Yum! Brands Inc
3.33Apple Inc
27.37Grand total
2.16Procter & Gamble Co
2.19Johnson & Johnson
2.25United Health Group Inc
Net weight%
Position
55
5656
Disclaimer
Information contained herein is current as at 30th June 2010 unless otherwise specified and is provided by Five Oceans Asset Management Pty Limited ABN 90 113 453 160 AFSL 290540 (Five Oceans). Portfolio and performance information contained in this presentation relates to the Five Oceans World Fund, an onshore Australian based unit trust denominated in Australian dollars and is provided by Challenger Managed Investments Limited (Challenger) ABN 94 002 835 592 AFSL 234 668, the issuer of the Five Oceans World Fund (Fund). Five Oceans Asset Management is the Investment Manager for the Fund. It is intended solely for the recipient who is a wholesale investor within the meaning of the Corporations Act 2001 (Cth). It must not be passed on without the prior written consent of Five Oceans. It should be regarded as general information only rather than advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of any particular investor. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain a copy of a current relevant offer document and consider that before making any decision to invest. Past performance is not an indication of future performance. For further information please call +612 99947490 or email [email protected] or see our website: www.5oam.com.
