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LEGAL & GENERAL UK ALPHA TRUST MAY 2012
Richard Penny - Senior Fund Manager
This is not a consumer advertisement. It is intended for professional financial
advisers and should not be relied upon by private customers or any other persons
Legal & General UK Alpha Trust
Citywire South West Investor Retreat
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 2
L&G UK Alpha Trust
-50
-25
0
25
50
75
100
2006 2007 2008 2009 2010 2011 2012 YTD
Alpha Trust Sector Median
Source: Lipper as at 31st March 2012. Basis: net of fees, income reinvested.
(%) • High conviction, focused, unconstrained fund
- Best idea investments
- Micro – mega cap (FTSE All Share + AIM)
• Best ideas – typically 40-50 holdings
• Bottom-up stock picking fund
- Targets best of both strong growth & deep value
• Targets 5% out-performance vs. IMA UK All Companies
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 3
“If you want to outperform other people, you have got to hold
something different from other people.
If you want to outperform the market… the one thing you
mustn't hold is the market itself”
Anthony Bolton
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 4
51%51%
52%64%
78%80%
87%88%
92%102%
102%108%110%
116%144%
150%170%
194%195%
212%274%
344%
50%51%
Exillon
DSG
Johnson Service Group
3i
Gemfields
Globo
Smart M etering Systems
Endace
TT Electronics
Cap-XX
Ncipher
Nord Anglia
Eservglobal
Xaar
Redstone
iomart
Restore
Easydate/Cupid
Tepnel
Hutchinson China M
Coal of Africa
Supergroup*
Tanfield
Immunodiagnostics
L&G UK Alpha selected success stories
*Initial IPO purchase
Price increases calculated as per average prices as at 31st March 2012.
All figures represent absolute returns over holding period and may reflect realised or unrealised gains.
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 5
How we are different
Our Philosophy
• Owner of businesses
• Long term investments
• Aggressive stock picking
• Fundamental analysis (trust in valuations)
• Contrarian
Market behaviour
• Trader of shares
• Short term
• Benchmark hugger
• P/E upgrades
• Consensus
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 6 6
Seeking investments that could double over 3 years
Deep Value Organic sales growth
Macro Trends
Micro Trends
Refinancings
Asset Plays
Double
whammy
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 7
Blasts from the past – difficult markets lead to opportunities
0p
200p
400p
600p
800p
Nov 00 Nov 01 Nov 02 Nov 03 Nov 04 Nov 05 Nov 06
Datamonitor
Holding Period
Return +500%
0p
100p
200p
300p
400p
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
Xaar
Holding Period
Return +135%
0p
200p
400p
600p
May 06 May 07 May 08 May 09 May 10 May 11
Holding Period
Return +167%
Hutchinson China Meditech
0p
40p
80p
120p
160p
Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10
Coal of Africa
Holding Period
Return +235%
Source: Thomson DataStream/Bloomberg L.P. Holding period returns may reflect realised or unrealised gains.
Core Value
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 8
0
5
10
15
20
25
2009 2010 2011 2012 2013 2014
(£m)
Sales Profits
Smart Metering Systems Supercharged utility
Source: Company projections. *Grant Thornton Quoted Company Awards.
• Winner of IPO of the Year 2012
QCA awards*
• Defensive demand patterns
• Contracted recurring revenues
• Scope for earnings upgrades
• Smart meters have a significant upside
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 9 9
Current portfolio
Refinancings
Asset Plays
Double
whammy
Deep Value Organic sales growth
Ablon Group
Central Asia Metals
Corac
Firestone Diamonds
Johnson Service
Mecom
Noventa
Redstone
Restore
Rurelec
Skilport
Smiths Group
Snacktime
Sylvania Platinum
SQS
Vectura
Vernalis
Weatherly International
Eservglobal Plc
eXpansys
London Capital
Nature Group
Optimal Payments
CSF
Hutchinson Chi Med
iomart
OPG
Planet Payments
Avanti Comms
Brightside Group
Cupid
Endace
Globo
InternetQ
Progressive Digital Media
Rambler
Servicepower
Smart Metering Solutions
Zotefoams
Refinancings
Asset plays
Combination
Macro Trends
Micro Trends
Source: LGIM internal data as at 31st March 2012.
African Minerals
Allied Gold
BATM
Cap-XX
Conygar Investments
Corin
Gemfields
IFG
Independent Resources
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 10
Conclusions
• UK Alpha has performed strongly since launch*
• Seeking investments that could double over the medium term
• Different approach drives performance
• Compelling opportunities arising for the selective contrarian investor
*3rd out of 210 funds in IMA UK All Companies Sector since 27th May 2005, source: Lipper as at 31st March 2012, net of fees.
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 11
Appendix
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 12
Fund Manager, Richard Penny • Richard is a Senior Fund Manager of the UK
Smaller Companies team and the manager of the
L&G UK Alpha Trust.
• He has over 18 years of investment experience
across 3 economic cycles.
• Richard joined LGIM in 2002 having previously
worked for five years as a Fund Manager for
M&G Investment Management and four years as
a Fund Manager at Scottish Amicable Investment
Management. Richard began his career in 1992
at Scottish Amicable Investment Managers.
• Richard has a Masters degree in Engineering and
Economics, Oxford University.
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 13
The ingredients to our success
a Investment Process
Fund Manager & Resources
Market Position
Investment Approach
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 14
Mergers &
Acquisitions
Legal and General Investment Management AAA advantage from managing 4.5% of UK Stock market
• Access to build conviction
• Meetings when we want them
• Invited to participate in all Rights Issues and refinancing
• Management want a long term supportive shareholder
• Consulted when there is corporate activity
• Visibility helps to build picture of opportunity
Access
Allocation
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 15
Investment Approach
• Target investments that can double
• Bottom up stock selection
• Long Term: 2 – 3 years’ horizon
• Contrarian
• Unconstrained
• Whole market
• Hunting away from the index
• Target low financial risk
• Target low valuation
• Target consistent performance
We seek substantial upside
Price vs. Value Unconventional vs. Conservative
Target appropriate reward for risk
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 16
Investment Process
• Trusted network
• Company meetings
• AAA advantage
• Refinancing/Rights Issues
• Third party research
• Directors’ dealing
• Management owning
• Cross fertilisation
• Typically 40-50 best ideas
• Deep value and strong growth
• Set to double over 2-3 years
Target bottom decile of
• P&L based: P/E, EV/EBITDA
• BS based: P/B, P/Sales
• EV/FCF%
• Management
• Return on Capital
• Cash Conversion
• Predictability
• Growth
• Price targets continuously reviewed
• Automatic review when
target hit
• Momentum factors considered for
optimal timing for disposal
• Potential triggers: change in
management, corporate activity, a
high fair value score
Sell
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 17
“In the 20th century, the United States endured two world
wars and other traumatic and expensive military conflicts; the
Depression; a dozen or so recessions and financial panics;
oil shocks; a flu epidemic; and the resignation of a disgraced
president. Yet the Dow rose from 66 to 11,497.”
Warren Buffett
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 18
Exceptional uncertainty vs. exceptional valuation
Source: Thomson Datastream, Evolution Securities.
0
5
10
15
20
25
30
35
40
45
sub-8x 8x-to-12x 12x-to-16x 16x to 20x 20x-plus
% o
f m
on
thly
ob
serv
ati
on
s f
or
each
P/E
ban
d
sub-8x 8x-to-12x 12x-to-16x 16x to 20x 20x-plus
% of months equities have traded in
various P/E bands
-10%
0%
10%
20%
30%
40%
50%
sub-8x 8x-to-12x 12x-to-16x 16x to 20x 20x-plusA
vera
ge a
nn
ual co
mp
ou
nd
retu
rn s
ince 1
973 (
%)
1-year 3-year 5-year
UK: compound returns by P/E group &
time-period (%)
Source: Thomson Datastream, Evolution Securities.
LEGAL & GENERAL UK ALPHA TRUST MAY 2012 LEGAL & GENERAL UK ALPHA TRUST 19
Disclaimer
Important Information
This presentation, and any information it contains, has been produced for use by professional managers and advisors only and should not be distributed without the permission of Legal & General Investment Management Limited or Legal & General (Unit Trust Managers) Limited.
The UK Alpha Trust (“the Fund”) is authorised unit trust, established as UCITS fund, managed by Legal & General (Unit Trust Managers) Limited. Legal & General Investment Management Limited has been appointed as the Investment Advisor and Distributor of the Funds and its main function is to invest the assets of the Fund. Both companies are authorised and regulated by the Financial Services Authority.
The Fund is designed to be held for the longer term.
The risks associated with this Fund are set out in the Prospectus and these should be understood before making any investment decisions. Additional information in relation to the Risk Management process is available on request. A copy of the Prospectus can be obtained from:
Legal & General Investment Management Limited - Telephone number 020 3124 3583
All rights in the FTSE All Share (the “Index”) vest in FTSE International Limited (“FTSE”).“FTSE®” is a trade mark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. The Legal & General UK Alpha Trust has been developed solely by Legal & General (Unit Trust Managers) Limited. The Index is calculated by FTSE or its agent. FTSE and its licensors do not sponsor, advise, recommend, endorse or promote this fund and are not in any way connected to it and do not accept any liability (including in negligence or otherwise) to any person for any loss arising out of use of the Index by any person or in relation to the fund’s issue, operation or trading or as a result of an investment in the fund. FTSE makes no claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the fund or as to the fitness or suitability of the Index for the particular purpose to which it is being put by Legal & General Investment Management
The information in this document and the views expressed are provided by Legal & General Investment Management who act as investment adviser to the Legal & General UK Alpha Trust