Suite5VinceRivers– JOHCMUSSmall/Mid CapEquityFundVishalBhatia– JOHCMUKGrowth FundJamesSyme/ PaulWimborne– JOHCMGlobalEmergingMarketsOpportunitiesFund
JOHambroCapitalManagementAnnualUKInvestorDay2018
JOHCMUSSmall/MidCapEquityFundUSSMID:buytheearningsgrowthstory
VinceRiversSeniorFundManager
JOHambroCapitalManagementAnnualUKInvestorDay2018
Key Trump administration policies impacting the US economy
• Driving changes in fiscal policy, which isthe key to continued growth
• Aggressive trade policy
• Government deregulation
Image source: Hedgeye.
2
A method to his madness?
Can fiscal policy replace fading monetary stimulus?
3
• Monetary policy has been:› effective in preventing a global depression…
› …but has become less and less useful in supporting growth
› Especially as necessary structural reforms have been delayed
• US fiscal policy: › is very stimulative after tax reform and growth
impact will last well into 2019 and beyond
› EU faces similar challenges but with divided governments
• Risks:› US growth could actually overheat (wages!),
stoking inflation and forcing faster FED tightening
Trump administration wants strong job growth ahead of mid-term elections
Image source: www.frbatlanta.org.
Trump administration trade policy
4
• Trump believes past deals were giveaways
• Aggressive public tactic to push other countries to renegotiate “more balanced” deals
Trump tweeted…
“China, which is a great economic power, is considered a Developing Nation within the World Trade Organization. They therefore get tremendous perks and advantages, especially over the U.S. Does anybody think this is fair. We were badly
represented. The WTO is unfair to U.S.” April 18, 2018
“America first does not mean America alone”
Image source: Shutterstock.
Government deregulation
• Bureaucracy and red tape are being reduced and we think this will accelerate capital spending in the US.
• Trump administration:
› Claims 67 rules eliminated while 3 new rules implemented in FY17. A ratio of 22:1
› Claims $570m/year in savings
• In contrast, the Obama administration added an estimated 600 regulations during their tenure – roughly one per week
Image source: Businessinsider.com.
5
US regulation code is currently 185,000 pages vs. 20,000 in 1960
6
US – Key macro observations
Investors pay a premium for superior growth prospects
• The economy is gradually improving as evidenced by housing and employment data
• Economic strength = Fed tightening
› Interest-rate hikes are no longer a question of when – it’s happening now
• Capital-markets access, whether through venture capital or the IPO market, is unparalleled, driving innovation and growth potential
• Impacts of the Trump administration:
› Rhetoric vs. Reality
› Gridlock = incremental not dramatic change
› Trump’s early accomplishments
› Deregulation (Department of Labor Fiduciary, Dakota Access Pipeline)
› Tax reform
› Domestic capex investment
7
US – Better projected growth with earnings resilience
Source: Bloomberg, as at 17 September 2018. International Monetary Fund (IMF), World Economic Outlook Update July 2018.*Denotes estimates. Emerging and Developing Asia includes China, India and ASEAN.
Investors pay a premium for superior growth prospects
IMF World Output Projections Year-over-Year
2015 2016 2017 2018 2019
Japan 1.1 0.9 1.8 1.0 0.9
Emerging and Developing Asia 6.7 6.4 6.5 6.5 6.6
Euro Area 2.0 1.8 2.4 2.2 1.9
United Kingdom 2.2 1.9 1.7 1.4 1.5
United States 2.6 1.5 2.3 2.9 2.7
Year-over-Year Earnings Growth
Index 2017 P/E Multiple
2018 P/E Multiple
2019 P/EMultiple 2015-16 2016-17 2017-18* 2018-19*
MSCI ACWI (World) 19.6 15.7 14.3 4.2% 24.3% 24.5% 9.7%
MSCI Asia Ex Japan 13.3 12.5 11.3 -6.9% 28.4% 5.6% 11.0%
TOPIX 14.3 13.3 12.4 -8.0% 45.9% 7.3% 7.1%
MSCI Europe 17.2 14.3 13.0 6.7% 44.1% 20.7% 9.7%
S&P 500 23.6 17.9 16.3 30.5% 5.2% 31.6% 10.3%
Russell 2500 36.4 23.2 19.7 -2.6% 13.3% 56.7% 17.8%
Resilient R2500Growth
Continental Europe – you get what you pay for?
8
Why invest in US small/mid caps?
• Companies in the sweet spot of their life cycle
› Critical mass, rapid growth, M&A potential
• Innovative industries and technologies with real products and revenues
• Expansive opportunity set
• Inefficient market segment, offering compelling opportunities for alpha capture
9
Source: Mercer LLC, Small, Smid, or Mid?, April 2014 p.11.
Today’s small/mid-cap companies are tomorrow’s large-caps
Typical Business Lifecycle
Success stories – large-caps of the future
• Past their growing pains, but still have room to run
Source: http://thepresidentscouncil.org/are-you-sure-of-which-business-life-cycle-stage-youre-in/. Market capitalizations from Bloomberg as of 27 February 2018. Whole Foods capitalization reflects takeout price. The above information is presented for illustrative purposes only, is not intended as advice or recommendation to purchase or sell any security, and is not intended to predict the performance of any investment or market.
• Newer industries, best technologies, faster growth
• Targets for mergers and acquisitions
10
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US small caps – Consistent outperformance in the asset class
Source: Bloomberg as at 14 September 2018.
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
550%
600%
Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 18
R2500 S&P 500 MSCI ACWI
Annualised returns
20 Year 10 Year 2018 YTD
Russell 2500 (smid cap) 11.0% 11.0% 9.2%
S&P 500 (large cap) 7.7% 10.9% 7.9%
MSCI ACWI (large & mid cap) 6.8% 7.3% 1.7%
12
Trump impact on US smaller companies
• More leveraged to growth in the US economy vs larger companies which are more
leveraged to the global economic growth
• Less impacted by trade wars
› For example, a regional bank in the state Arkansas
• Have historically paid higher tax rates
• Have less lobbying power and are more impacted by government regulation
JOHCM US Small/Mid Cap
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US Small Mid Cap team
*Includes 10 years experience in the consumer sector.
• Have worked together for 10 years and have managed approximately $10 billion in active equity portfolios at prior firm
• Joined JOHCM in June 2014
Thorsten BeckerSenior Fund Manager
Vince RiversSenior Fund Manager
Arun DanielSenior Fund Manager
Industry experience
Fidelity tenure
Investment focus
21
1996-2013
Financials, Energy, Materials, Utilities
26*
2007-2013
Consumer, Industrials
22
2006-2013
Technology, Telecoms, Healthcare
Fundamental investors with differentiated, complementary approaches to their sector research
Investment philosophy
• Small/mid cap asset class is the most attractive segment of the market
• Sector specialisation:
› Best way to focus the research agenda – focus stock list
› Employs the most appropriate analytical methodology specific to the sector
• A fundamental, bottom-up approach finds uncorrelated ideas across different sectors
• Concentrated portfolio (~50 names) of high conviction names overlaid with comprehensive risk oversight
15
Investment process overview
16
Investment process I – identifying opportunities
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• Identify themes through interactions with industry participants• Look for potential cross-sector synergies among team PMs• Review individual themes for investable ideas
Results:
• Themes narrow a sector’s investment universe and focus our research agenda• We create a focus stock list based on factors such as:
› Market cap
› Business trends and balance sheet
› Management
Leverage portfolio manager experience in each sector to:
Investment process I – sector expertise
We believe that the correct approach to identify the best performing names differs materially among sectors and demands a flexible sector-specific approach.
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Key Drivers
Appropriate valuation metric
Management
Patience
Where we are in the cycle• Yield Curve• Credit Quality• Regulation
Trend Analysis• Consumer Spending• Consumer Credit• Housing/Mortgage
From P/E to P/B to stressed P/B to burn-down P/B depending on circumstances
Varies by subsector - retailers’ valuations are driven by forward P/E, while media and leisure are valued by EV/EBITDA
Understanding the motivation and incentive structure of management is crucial to the success of businesses across all sectors
Longer-term approach as cycles play out over years, but noise around quarterly results and macro trends can produce opportunistic trade possibilities
Financials Consumer
Sector expertise: Multi-sector theme identification
• Ageing of America: According to the Department of Health and Human Services, the population of those over 60 years old is projected to increase from 56 million in 2010 to 92 million in 2030. Potential beneficiaries include:
› Consumer discretionary: rising demand for funeral services
› Financials: increased number of people seeking financial advice
› Health care: greater need for medical devices
• Cyber security: Increased need for investment in IT security due to more prevalent and sophisticated network attacks over the past decade, coupled increased security requirements related to the implementation of GDPR in Europe. Potential beneficiaries include:
› Information Technology: providers of cyber security solutions
• Energy revolution: All facets of energy production and use are changing dramatically:
› Energy: unconventional energy extraction; US becoming an Energy exporter (LNG; fuels)
› Materials/Transportation: Electrification of transportation
› Utilities: Gas replacing coal; decentralization of power generation; transmission bottlenecks
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Investment process II – fundamental research
• Detailed due diligence on our Focus Stock list
• Engage with diverse sources including SEC filings, industry publications, senior management teams, competitors and suppliers
• Produce company-specific financial model to quantify differentiated view on the stock relative to market expectations
› Stock thesis = “Where are we different?”
› Target price based on what would the market pay assuming our view is correct
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Investment process III – buy / sell decisions
• Discuss all names before purchase
• At purchase, the initial position size of 100bps to 500bps
• Team forms a consensus opinion based on:
› Target price
› Risk evaluation
› Conviction
• Concentrated portfolio of approximately 50 names
• Sell discipline:
› Stock reaches our target price
› Our thesis changes negatively
› We find better opportunities
Source: JOHCM as of 31 August 2018.
0
25
50
75
3 Years(annualised)
12 Months 6 Months 3 Months
Portfolio turnover in %
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Risk control process
Investment process III – risk management
• Risk review at stock level before purchase
• Portfolio guidelines:
› Number of stocks: 45-60
› Maximum stock weight at purchase: 5%
› Average market capitalization: +/- 50% versus the Russell 2500
› Sector exposure: +/- 10% versus the Russell 2500
› Cash holding: maximum is 5% - we expect to be fully invested
• Quarterly portfolio review with Risk team
Investment process: summary
• Thematic review of sectors allows for:
› The identification of differentiated themes through interactions with industry participants
› The creation of Focus Stock lists
• Deep fundamental bottom-up analysis identifies high quality companies with competitive advantages
• Develop thesis for each stock with focus on long-term opportunity for value creation
• Assess upside/downside potential and impact of each stock on the portfolio
• Target price, risk and conviction determine position sizes
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Sector Holding Portfolio Weight
Consumer Discretionary
Burlington Stores 1.9%
Caesars Entertainment 1.4%
Tapestry 1.5%
Lions Gate Entertainment 1.6%
Service Corp International 2.3%
Servicemaster Global 1.7%
Toll Brothers 1.6%
Financials
Bank of the Ozarks 2.2%
First American Financial 2.8%
First Republic Bank 2.4%
Great Western Bancorp 2.1%
Raymond James Financial 2.3%
SEI Investments 1.4%
SVB Financial Group 2.3%
Real EstateJones Lang LaSalle 1.9%
MGM Growth Properties 1.7%
Healthcare
Biomarin Pharmaceutical 1.4%
Conmed 2.4%
Heska 2.1%
Jazz Pharmaceuticals 1.4%
Pacira Pharmaceuticals 1.3%
Syneos Health 2.4%
Wright Medical 1.7%
Telecoms Zayo 2.6%
Portfolio holdings as of 31 August 2018
Results – JOHCM US Small & Mid Cap equities portfolio
Sector Holding Portfolio Weight
Consumer StaplesHain Celestial 1.5%Nomad Foods 1.9%Post 2.0%
Energy Helmerich & Payne 1.5%Newfield Exploration 1.6%
Industrials
Allegion 3.0%HD Supply 1.7%Jacobs Engineering 2.8%Masco Corporation 1.8%Mastec 2.5%Terex 2.4%Woodward 2.4%
MaterialsFMC 1.8%Martin Marietta Materials 1.7%Mosaic 1.3%
Technology
Benefitfocus 2.4%Commvault Systems 2.0%Forescout Technologies 2.2%Hubspot 1.4%Integrated Device 2.2%Leidos 2.9%Rapid7 3.3%Sabre 2.0%Tableau Software 2.5%
Cash 2.8%
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Source: JOHCM. Data as of 31 August 2018. Data may not add to 100.0% due to rounding. Portfolio relative sector weight is shown against the Russell 2500 NR Index. This information does not constitute investment advice. Portfolio holdings may vary from time to time from what is shown.
Results – sector and industry exposures
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Source: JOHCM as of 31 August 2018 (excludes cash of 2.81%). Portfolio relative sector weight is shown against the Russell 2500 NR Index. This information does not, in any way, constitute investment advice. Portfolio holdings may vary from time to time from what is shown. Please see the Disclosures on the back of this presentation.
Relative sector exposures Top 10 Holdings
Security % weight
Rapid7 3.29
Allegion 3.03
Leidos Holdings 2.88
First American Financial 2.78
Jacobs Engineering Group 2.78
Zayo Group Holdings 2.57
Mastec 2.54
Tableau Software A 2.53
Syneos Health 2.44
Woodward 2.41
27.25
3.95
2.652.05
1.31
-0.14-0.57 -0.69
-1.17-1.38
-3.31
-5.51-6.5
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
%
High active share with risk concentrated in stock specifics
Source: Style Research as at 30 June 2018.
Most portfolio risk is stock-specific; systematic risks (e.g., GDP, oil, rates) are reduced through diversification.
Percentage of Portfolio Risk Attributable to Equities
Active Share
26
0
10
20
30
40
50
60
70
80
90
100
Sep 14 Jun 15 Mar 16 Dec 16 Sep 17 Jun 180
10
20
30
40
50
60
70
80
90
100
Sep 14 Jun 15 Mar 16 Dec 16 Sep 17 Jun 18
7.305.41
38.64
8.10
15.8718.79
10.09
2.03
40.17
6.22
15.0118.16
-5
0
5
10
15
20
25
30
35
40
45
2014* 2015 2016 2017 YTD 2018 Since Inception(annualised)
Perf
orm
ance
%
JOHCM US Small/Mid Cap Equity Fund
Russell 2500 NR Index
JOHCM US Small and Mid Cap Equity Fund
Net performance in GBP as at 31 August 2018
1st quartile since inception1
Source: JOHCM/Russell 2500. NAV of share class A in GBP, net income reinvested, net of fees, as at 31 August 2018. All fund performance isshown against the Russell 2500 NR Index. Performance of other share classes may vary and is available upon request. Inception date: 30September 2014. *Performance from inception date 30 September to 31 December 2014. 1Source: Lipper Hindsight, IA North America & Lipper UKOffshore Fund: Equity North America Smaller Combined Sector Rankings to 31 August 2018.
1 year to 31 Aug 2018 1 year to 31 Aug 2017 1 year to 31 Aug 2016 1 year to 31 Aug 2015 1 year to 31 Aug 2014
25.34 12.98 24.39 n/a n/a
JOHCM US Small and Mid Cap Equity Fund – Discrete performance (%)
Past performance is not necessarily a guide to future performance
27
Appendix
Biographies
Thorsten BeckerSenior Fund Manager21 years industry experience, joined JOHCM in June 2014Thorsten is a Senior Fund Manager on the JOHCM US Small and Mid Cap Equity and the JOHCM Global Smaller Companies Strategies. He previously served as a Portfolio Manager atFidelity Institutional Asset Management (formerly Pyramis Global Advisors), a unit of Fidelity Investments. In that role, he managed the global financial sector portfolio. Before theformation of Pyramis in 2005, Thorsten worked in the same role with Fidelity Investment’s institutional equity group. Since January 2004, he managed the financials andtelecommunications sectors of team-managed large cap, small/mid cap, and 130/30 strategies. Thorsten served as an Equity Analyst in Fidelity’s London office from 2000 to 2003,covering the securities of European banks, emerging market financial companies, and European business services firms. Prior to that, he covered Latin American equities, researchingthe retail, metals & mining, and utilities sectors while based in Fidelity’s Boston office from 1996 to 2000. He has 21 years' investment industry experience. He holds a Diplomkaufmannfrom the Koblenz School of Corporate Management in Germany. Thorsten, a native of Germany, speaks German, English and Spanish fluently, and has working knowledge of Russian.
Arun Daniel Senior Fund Manager26 years industry experience, joined JOHCM in June 2014Arun is a Senior Fund Manager of the JOHCM US Small and Mid Cap Equity and the JOHCM Global Smaller Companies Strategies. He previously served as a Portfolio Manager at FidelityInstitutional Asset Management (formerly Pyramis Global Advisors), a unit of Fidelity Investments. In that role, he managed the global consumer sector portfolio. Prior to assumingthat role in 2007, Arun was Vice President and Sector Head for the consumer sector at ING Investment Management, North America, managing growth, value, and 130/30 portfoliostrategies. He was a Senior Equity Analyst and Portfolio Manager for the consumer sector of a hedge fund portfolio at Principled Capital Group, and had responsibility for fundamentalsector research in the entertainment, gaming, lodging, leisure, and retail sectors. Arun has also served in senior management roles in the entertainment, retail, and resort divisions atWalt Disney Company. He has more than 15 years' experience in the investment industry and 25 years' experience related to the consumer sector. Arun holds a Master’s degree inBusiness Administration with a concentration in Finance from Regent University and completed advanced studies in entertainment and hospitality management at Cornell University.
Vince Rivers Senior Fund Manager22 years industry experience, joined JOHCM in June 2014 Vincent is a Senior Fund Manager of the JOHCM US Small and Mid Cap Equity and the JOHCM Global Smaller Companies Strategies. He previously served as a Portfolio Manager atFidelity Institutional Asset Management (formerly Pyramis Global Advisors), a unit of Fidelity Investments. In that role, he managed the global information technology and telecomsector portfolios. Vince joined Pyramis in 2006 as a Research Analyst focusing on the information technology and telecom sectors. Prior to joining Pyramis, he was a Portfolio Analyst atWellington Management Company, LLP from 2004 to 2006. He also has served as an Equity Research Analyst at Fidelity from 2000 to 2004 and, as a Portfolio Manager of the FidelitySelect Paper and Forest Products Fund from 2001 to 2004. He also has held positions at Fleet and BayBanks in Boston. He has 22 years' experience in the financial services andinvestment industries. He holds a Bachelor of Science degree in Business Administration from Boston College and a Master’s degree in Business Administration from the University ofChicago Booth School of Business.
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Sector performance
Source: JOHCM as of 31 August 2018. Relative performance is gross of fees, relative to the Russell 2500 Index, based on holdings in the portfolio during the time periods shown.
Sectors change, but diversification drives steady portfolio gains
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2015 2016 2017 YTD 2018
Information Technology Consumer Staples Real Estate Information Technology
Consumer Staples Information Technology Consumer Discretionary Real Estate
Energy Industrials Industrials Consumer Staples
Consumer Discretionary Real Estate Financials Health Care
Industrials Telecommunications Consumer Staples Utilities
Telecommunications Energy Telecommunications Materials
Materials Materials Health Care Telecommunications
Utilities Health Care Utilities Energy
Financials Utilities Materials Financials
Health Care Consumer Discretionary Energy Consumer Discretionary
Real Estate Financials Information Technology Industrials
Relative Performance 511bp 48bp 351bp 199bp
Best
Worst
Thank you
JOHCMUKGrowthFundCapitalisingonmarketinefficiencies
VishalBhatiaSeniorFundManager
JOHambro CapitalManagementAnnualUKInvestorDay2018
Undistracted, bottom-up stockpicking process
• We have been investing in the same disciplined way for over 22 years
• Stable process with a stable team in a stable house
• A multi-cap product
• We invest in undiscovered and mispriced growth assets
• We invest in companies that invest in themselves
• We maintain a balanced portfolio construction and a strong selling discipline
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3
Portfolio characteristics
• Typically 50 – 60 stocks
• Maximum active positions ± 3.5%
• No sector constraints
• Two to three year investment horizon
• Typical size composition› 50 – 70% top 100 stocks
› 30 – 50% outside top 100 stocks including small
• Portfolio beta ≈ 1
• Consistently high active share
• Fund typically aims to be fully invested
Current observations
• Macro noise remains elevated – Brexit? Turkey / Iran? Trade Wars? Flattening yield curve precursor to a recession?
Result: Risk aversion & Short termism
• Rise of the quant machines, passives, ETFs and factor-based approaches
Result: Crowding
• Potential halving of investment research spend post MIFID II?
Result: Persistent anomalies
• Technology challenging structural market shares & sustainable returns
Result: Generic extrapolation will not work
4
Equities have become reactionary rather than anticipatory
Current observations
5
Investment performance is likely be more powerful & concentrated
0
5
10
15
20
25
30
35
40
45
Passive (%) of Global equity AUM
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
Cheap/Expensive
Relative PE cheap vs. expensive
500
600
700
800
900
1000
1100
Dry
Pow
der
($bn
)
Private Equity dry powder
Source: EPFR Global, Bernstein analysis, Ken French Data Library as at August 2018.
UKG Strategy
6
We back companies that prioritise medium and long-term value creation versus short-term earnings
We have exposure to technology or related assets & are avoiding areas of structural vulnerability
Not afraid to take (disciplined and consistent) risk; that is what we are paid for and what our investors expect
We have a rigorous valuation framework
Stock Market cap
Large
Large
Small
Small
Small
Large
Small
Large
Small
Small
Capital recycling has skewed mix further away from midcaps
7
Top 10 reductions (3 FTSE 100, 5 Small & 2 Mid Caps)Top 10 additions (4 FTSE 100, 6 Small & No Mid Caps)
Source: JOHCM/FTSE International/Bloomberg from 31 August 2017 to 31 August 2018.Benchmark: FTSE All-Share TR Index (12pm adjusted).
Stock Market cap
Small
Large
Mid
Small
Large
Small
Large
Mid
Small
Small
-1.6%
-1.6%
-1.5%
-1.5%
-1.4%
-1.1%
-1.1%
-1.1%
-1.0%
-0.7%
3.5%
2.9%
1.4%
1.2%
1.1%
0.9%
0.9%
0.9%
0.8%
0.7%
Large caps: the scale beneficiaries
R&D-driven cashflow inflection
Primark: the hidden global compounder
Financing emerging innovation
Massive technology driven productivity opportunity
Insurance goes digital
8
The global compounder
Perception Reality
9
Valuation Robust balance sheet, 5%+ FCFE yield, implied Primark EV of £11bn vs. EBIT potential of £1.5bn medium term
Sugar Oversupply Contributes < 5% of ABF Group profits
Online ThreatConsistent gainer of clothing market shareIncreasing leverage in rental negotiations
Primark Brand Value Most positively mentioned non-tech brand amongst millennialsOver 10mn followers across its social media platforms
ESG3000 ethical audits per annum80 experts in Ethical trade team
Source: JOHCM internal estimates.
Portfolio weight
14%Average Active
2.1%
Positions held for
>5 Years
Portfolio weight
14%Average Active
1.3%
Positions held for
~2–5 Years
10
Small caps – incumbency should prove a structural advantage
Source: JOHCM, Stocks over 0.5% of Fund as at 28 September 2018
Completed Take-outsAv. Premium 51%
Portfolio weight
13%Average Active
0.9%
Positions held for
<2 Years
11
We typically own stocks others do not own
Source: JOHCM/Bloomberg/FTSE International Limited as at 31 August 2018. Benchmark: FTSE All-Share TR Index (12pm adjusted).
Top 10 overweights (relative %) Top 10 underweights (relative %)
Market cap breakdown
49%
9%
43%
0%
Large Cap.
Mid Cap.
Small Cap.
Cash
Rank Stock Relative weight %
1 First Derivatives 3.42 Standard Chartered 3.23 Sigma Capital 3.04 NCC 2.95 BP 2.86 Rolls-Royce 2.87 Standard Life Aberdeen 2.88 Chemring 2.69 Rank 2.610 Associated British Foods 2.5
Rank Stock Relative weight %
1 British American Tobacco -3.32 HSBC -3.33 GlaxoSmithKline -3.24 Royal Dutch Shell -2.95 Diageo -2.76 Unilever -2.17 Prudential -1.98 Vodafone -1.89 Lloyds -1.810 Reckitt Benckiser -1.7
Active share (%)
0
20
40
60
80
100
Sep 10 Mar 12 Sep 13 Mar 15 Sep 16 Mar 18
We are materially underweight staples & bond proxies
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Sector Relative
Software & Computer Services 14.9
Aerospace & Defence 5.7
Financial Services 5.2
Travel & Leisure 3.1
Food Producers 2.9
Media 2.1
Life Insurance 1.8
Banks 1.5
Industrial Engineering 1.5
Oil & Gas Producers 1.4
Mining 0.8
Electronic & Electrical Equip. 0.6
Bottom 12 relative sector weightsTop 12 relative sector weights
Sector Relative
Pharmaceuticals & Biotech. -6.2
Equity Investment Instruments -4.8
Tobacco -4.4
Household Goods & Home Constr. -3.1
Beverages -3.1
Support Services -2.3
Real Estate Investment Trusts -2.1
Gas, Water & Multi-utilities -2.0
Mobile Telecommunications -1.9
Food & Drug Retailers -1.7
Construction & Materials -1.7
Personal Goods -1.7
Source: JOHCM/FTSE International/Bloomberg as at 31 August 2018. Benchmark: FTSE All-Share TR Index (12pm adjusted).
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Conclusion
• Disciplined process has worked powerfully and consistently for 22 years
• Unique portfolio of compelling, differentiated positions in structurally attractive businesses that are investing for their future
• A portfolio that is cheaper than the market1, with stronger balance sheets2 and significantly faster growth3
• A portfolio with substantial potential upside
• Very confident the long-term record will continue
Source: Style ResearchTM as at 31 August 2018. 1Price to Book: The ratio of the company's Book Value (the sum of Shareholder's Equity plus accumulated Retained Earnings from the P & L Account) to its Share Price. Market: Benchmark; FTSE All-share TR Index. 2Low gearing: The negative of Debt to Equity. Low geared companies can be regarded as being of higher "Quality" as they are less burdened by debt repayment costs. 3IBES 12 month Growth: Consensus forecast growth of earnings over the next 12 months. The 12 month growth is calculated on a pro-rata basis from the forecasts for each of the company's next 2 annual reporting periods.
Thank you
JOHCMGlobalEmergingMarketsOpportunitiesFundLocation,location,location
JamesSymeSeniorFundManager
JOHambroCapitalManagementAnnualUKInvestorDay2018
PaulWimborneSeniorFundManager
Global Emerging Markets Opportunities team
2
James Syme, CFASenior Fund Manager
Paul WimborneSenior Fund Manager
• 24 years investment experience
• Former Head of Global Emerging Markets Equities at Baring Asset Management
• 20 years investment experience
• Former Fund Manager of Global Emerging Markets Equities at Baring Asset Management
Supported by other investment professionals at JOHCM
Ada ChanSenior Analyst• 18 years investment experience
• Ada spent three years at GMO LLC as an Investment Analyst for the UK. She previously worked at Baring AssetManagement (Baring) for eight years as an Equity Research Analyst in London and in Boston
Emerging markets go right or wrong at the country level
• Emerging Markets has far more diverse country universe than developed markets
• Wide variety of levels of economic development, political systems, natural resource endowments, industrial composition, openness…
• History (including present) of booms, crises and recoveries that occur at a country level
• Many drivers of companies/stocks are top-down factors (growth, interest rates, currencies, political risk, etc.)
• Bottom-up consensus alternatively ignores and then over-reacts to top-down developments, creating opportunity for focused country-driven EM investors
• In 1994 Israel, Portugal, Argentina, Venezuela and Zimbabwe were mainstream emerging markets...
3
4
Don’t buy a good house in a bad neighbourhood
• Top-down considerations are vital in EM
• In EM, top-down means country level
• Even bottom-up managers make material top-down assumptions
• Country effects massively important compared to region, industry or style
• Behaviour of stocks during macro-shock shows importance of country-level analysis
• Additional value in articulating our top-down view through sector and stock selection within the countries found to be attractive
5
Cannot avoid making country-level assumptions
FY 1 FY2 FY3 FY4
Market 1 growth 10% 10% 10% 10%
Market 2 growth 5% 5% 5% 5%
FX rate 1.20 1.25 1.30 1.35
Sales growth 7.50% 7.50% 7.50% 7.50%
Sales 100.0 107.5 115.6 124.2
Operating margin 12% 12% 12% 12%
Operating profit 12.0 12.9 13.9 14.9
Interest rate 3% 4% 5% 5%
Interest cost -0.8 -1.0 -1.3 -1.3
PBT 11.3 11.9 12.6 13.7
Tax rate 25% 25% 25% 25%
PAT 8.4 8.9 9.5 10.2
Capex 5.0 5.0 5.0 5.0
FCF 4.4 4.9 5.5 6.2
Risk free rate 1.75%
WACC 5.38% 5.88% 6.38% 6.38%
Terminal growth 2%
NPV 106.8
Top-down assumptions
Hypothetical company DCF model
6
EM is a different game
7
Developed markets Emerging markets
Cross sectional volatility, 12 month moving average Cross sectional volatility, 12 month moving average
Country effect on stock picking is highest in emerging markets
Source: MSCI Barra. Data from December 1997 to 30 June 2018.
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dec 97 Jun 00 Jan 03 Jul 05 Feb 08 Sep 10 Mar 13 Oct 15 May 18
Style Industry Country
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec 97 Jun 00 Jan 03 Jul 05 Feb 08 Sep 10 Mar 13 Oct 15 May 18
Style Industry Country
Long-term trends in GDP growth are important
8
2002-17 GDP growth and equity market returns
2002
-17
annu
alis
ed U
SD m
arke
t re
turn
2002-17 annualised USD GDP growth
Source: Bloomberg, MSCI, IMF. Data as at 31 December 2017.
Brazil
ChileMexico CzechHungary Morocco
Poland Russia
TurkeyS Afr
China
India
Indo
Korea
Malay
Phili
Taiwan
Thai
Portugal
Peru
Egypt
Greece
Argent
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Chg in credit/GDP (Outer LHS) Nom USD GDP Growth (Inner LHS) MSCI India USD return (RHS)
Short-term cycle also important
9
Credit growth drives GDP and equities
Source: Bloomberg, MSCI. Data as at 31 December 2017.
Investment philosophy
Emerging Marketsgo right or wrong atthe country level
• Country allocation to be a major driver of outperformance
• High conviction country positioning
• Invest in companies that we like: top-down as well as bottom-up
Buy growth but watch valuation
The benchmark shows history, not future
• Benchmark agnostic at the stock level
• Very high active share
• Typically 20% in off-benchmark stocks
10
• Pay a little more valuation for a lot more growth and quality• Maintain valuation discipline in market overshoots• Consistent style tilt through market cycle
Country Allocation Process
• Five point analytical framework with a 24-month investment horizon
• Assess every factor for every market every month:
› Growth
› Liquidity and monetary environment
› Currency
› Politics and governance
› Valuation of equity market
• Score each factor from 1 (most positive) to 5 (most negative)
• Score overall market opportunity 1 to 5
11
Invest in reasonably valued equity markets with supportive economic and political conditions
Country allocation
• Country allocation targets are set relative to index weighting, country size and degree of conviction of outperformance
• Draft country allocations are created using the above matrix, but are adjusted during the risk budgeting process in portfolio construction
Country score 1 2 3 4 5
“Large” country* +6% +3% Index weight -3% -6%
“Small” country +3% +3% Index weight 0% 0%
12
High LowConviction of future outperformance
*A large country is defined as more than 6% of the MSCI Emerging Markets NR (12pm adjusted).
Our process is well suited to management by a tight knit team
13
Do we think the country is attractive?
Do we like the sector/theme in this country?
Does the stock trade over USD 1m/day?
Do we like the stock from a bottom-up viewpoint?
Yes
Yes
Yes
50 stocks in the portfolio
Yes
20-30 stocks on reserve list
~4,000 stocksrejected
No
No
No
No
Perhaps
• We are typically invested in only half the markets in the benchmark. Additionally, our top-down research identifies preferred sectors and themes in each of those countries
• We only research stocks that can make it into the portfolio. We do not cover stocks we are not going to buy because we dislike the corporate governance, business model, etc
• We hold fifty stocks with an average holding period of over two years. We typically buy only twenty new names per year
Previous performance (gross of fees)
Baring Global Emerging Markets from 31 October 2006 to 31 December 2010
12.78
41.17
-48.38
81.88
18.64 14.7412.27
39.39
-53.33
78.51
18.8811.09
-80
-60
-40
-20
0
20
40
60
80
100
2006* 2007 2008 2009 2010 Overall performance(p.a)
Baring Global Emerging Markets EquitiesMSCI Emerging Markets (net dividends)
Barings Median
Information ratio 0.74 0.12
Sharpe ratio 0.36 0.24
14
Source: eVestment Alliance via the eASE Analytics system as at 31 December 2010 for Baring Global Emerging Markets strategy (composite). Data is shown from 31 October 2006 to 31 December 2010, in which the fund was managed by James Syme and calculated gross of fees in USD. Analysis is shown against the MSCI Emerging Markets Index (net dividends reinvested). Track record may be used as supplemental information under GIPS® rules. *Partial year – 31 October 2006 to 31 December 2006.
Past performance is not necessarily a guide to future performance
JOHCM Global Emerging Markets Opportunities Fund
Net performance in GBP since inception to 31 August 2018
-15.00
5.292.10
6.23
-4.41
26.3428.23
-3.33
3.485.35
-16.19
13.27
-4.79
3.74
-10.61
34.03
25.15
-3.88-1.43
4.29
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
2011* 2012 2013 2014 2015 2016 2017 YTD 2018 Q2 2018 SI (p.a.)
%
JOHCM Global Emerging Markets Opportunities
MSCI Emerging Markets NR (12pm adjusted)
15
Source: JOHCM/MSCI Barra. NAV of share class A in GBP, net income reinvested, net of fees, as at 31 August 2018. All fund performance has been shown against the MSCI Emerging Markets NR Index (12pm adjusted). Performance of other share classes may vary and is available upon request. *Part period return since inception 30 June 2011 to 31 December 2011.
Past performance is not necessarily a guide to future performance
1 year to 31 Aug 2018 1 year to 31 Aug 2017 1 year to 31 Aug 2016 1 year to 31 Aug 2015 1 year to 31 Aug 2014
-0.93 25.46 32.34 -10.15 14.38
JOHCM Global Emerging Markets Opportunities Fund – 5 year discrete performance (%)
Why does this work?
16
• We manage focused, capacity-constrained portfolios, which we are personally invested in
• Unique, country-driven investment process
› High conviction country positioning, typically we own only 8-10 index countries at one time
› Macro views are a powerful filter to identify opportunities
› Hold 50 stocks that pass the team’s detailed bottom-up research criteria
• Significant outperformance in down markets (‘08, ‘11, ‘13)*
• Our process is suited to managing money with a small, experienced team – top down country bets, low turnover and concentrated portfolio construction
*Please refer to performance slides 14-15.
India – credit growth potential is huge
Source: World Bank, BIS, Bloomberg. Data as at 31 December 2017. 2017 estimates are based on banking system data.
-10%
+0%
+10%
+20%
+30%
+40%
+50%
+60%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e
China India LatAm SE Asia Turkey
Change in credit/GDP since 2008 (ppt of GDP)
17
Huge free cashflow… …is not returned to shareholders
60
80
100
120
140
160
180
200
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Cashflow from ops Capex
-40
-20
0
20
40
60
80
100
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Free cashflow Dividends
Source: MSCI, Bloomberg. Data as at 30 June 2018. Free cashflow is cashflow from operations less capex.
Corporate Korea: hoarding cash
MSCI Korea ex-financials (KRW trn)
18
20
30
40
50
60
70
80
90
20 40 60 80 100 120 140
Russia: cheap currency, improving economy
Source: Bloomberg. Data as at 31 August 2018. Date range for LHS chart is 15 April 2011 to 21 September 2018.
19
Latest
RUB/USD vs. Brent Crude oil price Retail sales vs. wages
-5%
0%
5%
10%
15%
20%
Jun 12 Apr 13 Feb 14 Dec 14 Oct 15 Aug 16 Jun 17 Apr 18
Retail sales YoY Wages YoY
Thank you
THIS DOCUMENT IS FOR PROFESSIONAL INVESTORS ONLY
J O Hambro Capital Management Limited . Registered in England No:2176004. Authorised & regulated by the UK Financial Conduct Authority. Registered office: Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB, United Kingdom.
The registered mark J O Hambro® is owned by Barnham Broom Holdings Limited and is used under licence. JOHCM® is a registered trademark of J O Hambro Capital Management Limited.
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Disclaimer
67
THIS DOCUMENT IS FOR PROFESSIONAL INVESTORS ONLY
The information contained in this presentation has been verified by the firm. It is possible that, from time to time, the fund manager may choose to vary self imposed guidelines contained in this presentation in which case some statements may no longer remain valid. We recommend that prospective investors request confirmation of such changes prior to investment. Notwithstanding, all investment restrictions contained in specific fund documentation such as prospectuses, supplements or placement memoranda or addenda thereto may be relied upon.Investments fluctuate in value and may fall as well as rise and that investors may not get back the value of their original investment.Past performance is not necessarily a guide to future performance.
Investors should note that there may be no recognised market for investments selected by the Investment Manager and it may, therefore, be difficult to deal in the investments or to obtain reliable information about their value or the extent of the risks to which they are exposed.
The Investment Manager may undertake investments on behalf of the Fund in countries other than the investors’ own domicile. Investors should also note that changes in rates of exchange may cause the value of investments to go up or down.
The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation and anyone who acts on it, or changes their opinion thereon, does so entirely at their own risk. The opinions expressed are based on information which we believe to be accurate and reliable, however, these opinions may change without notice.
Sources for all data: JOHCM (unless otherwise stated).
Information on how JOHCM handles personal data which it receives can be found in the JOHCM Privacy Statement on its website: www.johcm.com
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