Invesco Perpetual Global smaller companies: an attractive asset class for active investors
Citywire
May 2013
Erik Esselink This presentation is for Professional Clients
only and is not for consumer use. Fund Manager, European Equities
Contents
2
Why global smaller companies?
Why have global smaller companies outperformed?
Invesco Perpetual Global Smaller Companies Fund
Appendix
Why global smaller companies?
Why global smaller companies? Key reasons
Fertile hunting ground for active managers
Strong long-term performance
Lower volatility than regional small cap equities and comparable volatility to global large cap equities
Diversification potential against bonds and large cap equities
4
Why global smaller companies? They provide a fertile hunting ground
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Source: Bloomberg as at 31 March 2013.
MSCI World index 1608 members US$31.38 trillion market cap.
MSCI World Mid Cap index 879 members US$5.64 trillion market cap.
MSCI ACWI Small Cap index 6016 members US$6.38 trillion market cap.
MSCI Emerging Markets index 823 members US$7.73 trillion market cap. MSCI
Frontier Emerging Markets index 185 members US$0.82 trillion market cap.
Economic growth
Emerging Developed
Corp
ora
te g
row
th
Cap
italisati
on
By capitalisation
By number of companies
75%
13%
12%
25%
13%
62%
Large cap
Mid cap
Small cap
Why global smaller companies? They have a history of outperformance
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Source: Choi et al & Howard University, Journal of Business & Economics Research, October 2010
Over the long-term…
Smaller companies have outperformed bonds and larger companies
10-year performance 1926 to 2007 (%)
Why global smaller companies? They are not as volatile as you might think…
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Past performance is not a guide to future performance Source: Bloomberg as at 31 March 2013. Performance figures are in GBP and represented by the respective MSCI indices.
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0 5 10 15 20 25 30 35
An
nu
ali
sed
retu
rn
Annualised risk
Global small caps
Global large caps
Singapore small caps
Canada small caps
Australia small caps
EAFE large caps
Emerging markets large caps
US small caps
UK small caps
EAFE small caps Japan small caps
Hong Kong small caps
German small caps
Return to risk (standard deviation) – small versus large companies 15 years to 31 March 2013
Why global smaller companies? They offer diversification potential
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Source: Choi et al & Howard University, Journal of Business & Economics Research, October 2010. Bottom chart source: Bloomberg as at 31 March 2013
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-0.10 -0.05 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00
Stoxx 600 Stoxx 50
Stock correlation: European smaller & larger companies
Lower correlation Higher correlation
5 year correlation (1926 to 2007)
Treasury bills Intermediate government
bonds
Long government
bonds
Long corporate
bonds
Large cap equities
Intermediate government bonds
0.85
Long government bonds
0.68 0.93
Long corporate bonds 0.70 0.95 0.98
Large cap equities -0.03 0.03 0.13 0.13
Small cap equities -0.37 -0.28 -0.19 -0.17 0.63
Over the long-term…
Smaller companies have demonstrated diversification potential against bonds and larger companies
Why have global smaller companies outperformed?
Why have global smaller companies outperformed? Overview
Smaller companies are less well researched
Smaller companies demonstrate greater alignment of interest through management/family/employee ownership
Investing in smaller companies helps to avoid investing in valuation bubbles
Smaller companies have attractive growth potential
Smaller companies have made quicker recoveries from market crises
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Why have global smaller companies outperformed? Smaller companies are under researched
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Source: Bloomberg as at 31 March 2013.
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20
25
30
35
Decile 1
Decile 2
Decile3
Decile4
Decile5
Decile6
Decile7
Decile8
Decile9
Decile10
MSCI World Small Cap MSCI World
Research – coverage by number of analysts Smaller companies are less well
covered by sell side analysts
Smaller companies require more in-house research by fund managers
The result is a less efficient market
Why have global smaller companies outperformed? Ownership and the alignment of interests is greater
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Source: Bloomberg as at 30 June 2012.
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5
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30
35
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50
World North America Europe Asia Pacific EmergingMarkets
Small cap companies Large & mid cap companies
Ownership – management/founders/employees % of ownership shares outstanding
The alignment between shareholder interests and the management rises with insider ownership
Insider ownership is a positive internal control mechanism on decision-making
State ownership tends to be higher amongst larger companies
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97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Market
cap
(€
bn
)
Sh
are p
ric
e (
€)
Share price Market cap
Nokia - 1997 to present
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500
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800
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02 03 04 05 06 07 08 09 10 11 12
Market
cap
(U
S$
bn
)
Sh
are p
ric
e (
US
$)
Share price Market cap
Apple Inc. -2002 to present
Why have global smaller companies outperformed? They are better positioned to avoid valuation bubbles
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Source: Bloomberg as at 31 March 2013.
When smaller company share prices rise significantly, there is a natural ‘sanity check’. They become large companies - smaller company investors need to sell
When large company share prices rise significantly, there is no ‘sanity check’ – they become a larger weight in the index and more difficult for active investors to ignore.
In April 2000, Nokia comprised circa 3.6% of the MSCI Europe index
In September 2012, Apple Inc. accounted for 4.9% of the S&P 500 index
For smaller companies, the largest index weight is circa 0.20% - making it easier for active investors to ignore 0
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Mar 10 Mar 11 Mar 12 Mar 13
Market
cap
(U
S$
bn
)
Sh
are p
ric
e (
€)
Share price Market cap
Kabel Deutschland - 2000 to present
‘Sanity check’ when smaller companies become larger
Why have global smaller companies outperformed? Smaller companies have attractive growth potential
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10
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Energy Materials Industrials Cons Disc. Cons StaplesHealth Care Financials IT Telecoms Utilities
MSCI World Small Cap MSCI World
MSCI long-term EPS growth rates (%)
Source: Bloomberg as at 31 December 2012. Estimated long-term growth EPS aggregated.
Why have global smaller companies outperformed? Global smaller companies have recovered more quickly
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Source: Bloomberg as at 31 March 2013. Based on price data. Return multiple = price only basis returns.
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1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748
Retu
rn
mu
ltip
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Months
MSCI World Small Cap (2003 to 2007)
Russell 2000 (1982 to 1986)
Russell 2000 (1990 to 1994)
MSCI World Small Cap (2009 to today)
S&P 500 (1982 to 1986)
S&P 500 (1990 to 1994)
MSCI World (2003 to 2007)
MSCI World (2009 to today)
Market set-backs: post recession and correction (return multiples)
Invesco Perpetual Global Smaller Companies Fund
Invesco Perpetual Global Smaller Companies Fund Overview
Long-term focused, valuation driven and fundamental investors
Expert asset allocation combined with regional led, research driven, fundamental stock selection
Experienced and stable investment team (average of 24 years industry experience and 13 years tenure)
Regional expertise provides deep research capabilities, supported by regional equity investment teams
A dual fund manager/analyst role which provides ownership and accountability for each investment decision.
Demonstrable long-term track record with a consistent investment approach.
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Source: Invesco Perpetual as at 31 March 2013.
Invesco Perpetual Global Smaller Companies Group Deep research capabilities and expert regional allocation
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Invesco Perpetual as at 31 March 2013
Specialist regional fund managers Company research and sub-portfolio construction
Name Role Years’ experience
Erik Esselink Europe ex UK - regional specialist 13
Juliet Ellis North America – regional specialist 32
Jonathan Brown UK – regional specialist 15
Ian Hargreaves Asia Pacific – regional specialist 19
Paul Chesson Japan – regional specialist 22
Dean Newman Emerging Markets ex Asia – regional specialist 28
Management Asset allocation
Nick Mustoe Chief Investment Officer, Invesco Perpetual 28
Strategy oversight and implementation
Martin Weiss Investment Strategist 22
Arwel Green Product Manager, Global Equities & Multi-Asset 12
Regional expertise provides deep research capabilities
Invesco Perpetual Global Smaller Companies Fund Investment process overview
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A portfolio of circa 400 names
Stock driven investment
approach
Expert, valuation-led regional asset allocation
Incremental, valuation-led asset allocation
Medium to long term
strategic asset allocation (not dynamic)
Conviction based asset allocation
Macro and micro inputs both factor into the final decision
Asset allocation
Stock ideas generated from the investment universes of each specialist regional investment team Stocks attractive given: Fundamentals Valuation Timeliness Outlook Risks
Stock candidates
Autonomously managed by specialist regional portfolio manager
Conviction weighted
portfolios Medium to long term
investment horizon Portfolio reflects macro
conditions, idea generation and confidence
Sell discipline Investment thesis no longer
valid Price target reached More attractive
opportunities elsewhere
Regional sub-portfolio Portfolio
Rigorous security selection meets valuation-led asset allocation
Invesco Perpetual Global Smaller Companies Fund Stock example - C&C Group
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Source: Invesco Perpetual/Bloomberg as at 30 April 2013.
Irish drinks group focused on Irish cider and Scottish beer
Strong, defendable market shares in Ireland and the UK
Growth opportunities in US and Australia could be game changing
Focused on profitable organic growth and smart M&A
Net cash (10% of market cap)
PER 13.1x 2012
14.5% ROCE (sustainable) 0.5
0.6
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0.9
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C&C Group share price (EUR) Relative to HSBC Smaller Companies ex UK (EUR)
C&C Group
Invesco Perpetual Global Smaller Companies Fund Stock example – Fondiaria-Sai
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Source: Invesco Perpetual/Bloomberg as at 30 April 2013.
Italy’s largest motor insurer, created via merger of 4 smaller companies in August 2012
Uncertainty was high during the merger period
We felt that the market was overly fearful and that the risk was lower
In our view, the valuation was compelling while industry fundamentals were (and are) improving
At the time of purchase, the stock traded at an extremely low price to book ratio, relative to an improving ROE
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Fondiaria-Sai share price (EUR) Relative to HSBC Smaller Companies ex UK (EUR)
Fondiaria-Sai
Invesco Perpetual Global Smaller Companies Fund Stock example - Nutreco
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Source: Invesco Perpetual/Bloomberg as at 30 April 2013.
A Dutch animal nutrition and fish feed company
Has a long history of good return on capital and consistent shareholder focus (good dividend growth)
We believe that management’s new five year plan is achievable and that the market does not yet recognise the potential
Dividend yield has consistently grown over last 10 years and is currently 3%
PER is 10.5x 2013 earnings
In our view, this is an attractive operational business with strong barriers to entry and disciplined capital allocation.
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Nutreco share price (EUR) Relative to HSBC Smaller Companies ex UK (EUR)
Nutreco
Invesco Perpetual Global Smaller Companies Fund Regional allocation
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Source: Invesco Perpetual as at 31 March 2013. *Emerging Europe, Middle East and Africa.
Asset allocation decisions
(Q1, 2013)
March
Trim Europe
Add Asia
February
Trim Japan
Add to US
Add to Asia
January
No change
30.50
21.07
9.30
16.00
12.94
1.82 3.65 4.05
55.79
11.04
7.25
10.27 9.27
3.16 1.93 1.27
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Invesco Perpetual Global Smaller CompaniesFund
MSCI ACWI Small Cap index
Portfolio breakdown (%)
Invesco Perpetual Global Smaller Companies Fund An attractive risk/return profile
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Past performance is not a guide to future performance Source: Bloomberg as at 31 March 2013. Performance figures are provided for the Acc share class of the Invesco Perpetual Global Smaller Companies Fund and are shown in GBP on a mid-to-mid basis, inclusive of net reinvested income and net of the annual management charge and all other fund expenses. The figures do not reflect the entry charge paid by individual investors. Other data points represented by the respective MSCI indices.
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An
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Annualised risk
IP Global Smaller Companies Fund (GBP)
Global small caps
Global large caps
Singapore small caps
Canada small caps
Australia small caps
EAFE large caps
Emerging markets large caps
US small caps
UK small caps
EAFE small caps Japan small caps
Hong Kong small caps
German small caps
Return to risk (standard deviation) – small versus large companies 15 years to 31 March 2013
Invesco Perpetual Global Smaller Companies Fund Performance summary
25
Past performance is not a guide to future performance Source: Invesco as at 31 March 2013. Fund performance figures are shown for the Acc share class, in GBP on a mid-to-mid basis, inclusive of reinvested income and gross and net respectively of the annual management charge and all other fund expenses. The figures do not reflect the entry charge paid by individual investors. Benchmark source: Invesco, net return, in GBP.
Annualised gross regional returns (%)
3 years 5 years
Invesco Perpetual Global Smaller Companies Fund
Returns versus regional MSCI Small Cap benchmark
North America +1.90 -2.03
Europe ex UK +1.95 +3.59
UK +0.67 -1.14
Japan -6.94 +6.82
Asia ex Japan +10.07 +9.02
Latin America +10.10 +3.95
Emerging Europe +6.57 +5.12
Middle East & Africa - -
3 to 5 years
70%
30%
Target contribution to excess return
Security selection
Regional asset allocation
Annualised gross returns (%) 3 years 5 years
Invesco Perpetual Global Smaller Companies Fund
12.65 13.98
MSCI ACWI index 10.54 12.02
Out/Underperformance +2.11 +1.96
Annualised net returns (%) 3 years 5 years
Invesco Perpetual Global Smaller Companies Fund
10.77 12.08
MSCI ACWI index 10.54 12.02
Out/Underperformance +0.23 +0.06
Appendix
Invesco Perpetual Global Smaller Companies Fund Sector weightings
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Source: Invesco Perpetual as at 31 March 2013.
Sector Fund (%) Active weight MSCI ACWI Small Cap index (%)
Industrials 21.58 17.34
IT 13.55 12.38
Financials 22.98 22.28
Telecoms 1.13 0.87
Health Care 8.71 8.46
Consumer Discr. 15.30 15.86
Consumer Staples 3.71 4.55
Energy 4.64 5.94
Utilities 1.11 3.14
Materials 6.78 9.17
4.24
1.17
0.70
0.26
0.25
-0.56
-0.84
-1.30
-2.03
-2.39
Invesco Perpetual Global Smaller Companies Fund Top ten holdings
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Source: Invesco Perpetual as at 31 March 2013.
Stocks
Country Sector Fund (%)
Suruga Bank Japan Financials 1.11
Total Gabon France Energy 0.96
Daphne International China Consumer Discretionary 0.83
HAL Trust Netherlands Financials 0.83
Resona Japan Financials 0.74
Taiyo Yeden Japan Information Technology 0.66
Hutchison Whampoa Hong Kong Industrials 0.65
Lisi France Industrials 0.64
Daiwa Securities Japan Financials 0.64
Havas France Consumer Discretionary 0.64
Important information
This presentation is for Professional Clients only and is not for consumer use.
Where Erik Esselink has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals.
Past performance is not a guide to future returns.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell.
Smaller company funds are higher risk than funds that can invest in larger company sizes. Market conditions, such as a decrease in market liquidity, may mean that it is not easy to buy or sell securities.
The Invesco Perpetual Global Smaller Companies Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
For more information on our funds, please refer to the most up to date relevant fund and share class-specific Key Investor Information Documents and the Supplementary Information Document. This information is available using the contact details shown.
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Issued by: Invesco Fund Managers Limited. Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority