Challenging Conventional Wisdom in Global Equities Schroder - - PowerPoint PPT Presentation
Challenging Conventional Wisdom in Global Equities Schroder Educational Series Stephen Kwa Senior Client Portfolio Manager March 2013 For Broker/Dealer Use Only. Schroder Fund Advisors LLC, Member FINRA, SIPC Not for use with the general
Stephen Kwa Senior Client Portfolio Manager March 2013
For Broker/Dealer Use Only. Not for use with the general public or clients under any circumstances.
Schroder Fund Advisors LLC, Member FINRA, SIPC 875 Third Avenue, New York, NY 10022-6225 (800) 730-2932 www.schroderfunds.com
1
2
Source: newslettercartoons.com
3
Stock rank
Company Weight
1
APPLE INC 3.94%
2
EXXON MOBIL CORP 3.10%
3
GENERAL ELECTRIC CO 1.73%
4
CHEVRON CORP NEW 1.66%
5
INTL BUSINESS MACHINES 1.60%
6
MICROSOFT CORP 1.59%
7
JOHNSON & JOHNSON 1.52%
8
AT&T INC 1.50%
9
GOOGLE INC 1.48%
10
PROCTOR & GAMBLE 1.46%
496
FIRST SOLAR 0.01%
497
BIG LOTS 0.01%
498
THE WASHINGTON POST 0.01%
499
AUTONATION INC 0.01%
500
ADVANCED MICRO DEVICES 0.01%
S&P 500 stock weights Dec 31, 2012
Stock rank
Company Weight
1
NESTLE SA 1.92%
2
HSBC HLDGS 1.76%
3
NOVARTIS AG 1.32%
4
ROCHE HLDGS AG 1.29%
5
BP 1.20%
6
ROYAL DUTCH SHELL 1.17%
7
TOYOTA MOTOR CORP 1.17%
8
BHP BILLITON LTD 1.14%
9
VODAFONE GROUP 1.13%
10
SANOFI 1.03%
900
KINDEN CORP 0.01%
901
SQUARE ENIX HOLDINGS 0.01%
902
TOYOTA BOSHOKU CP 0.01%
903
SYDNEY AIRPORT 0.01%
904
BANKIA SA 0.005%
MSCI EAFE stock weights Dec 31, 2012
Source: Schroders. Companies mentioned are shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell .
4
Source: Schroders
Technology/Telecoms bubble of 1999/2000
Source: Schroders, MSCI. These views and opinions are of the QEP Team and are subject to change.
0% 10% 20% 30% 40% 1994 1996 1998 2000 2002 2004 2006 2008 IT sector weight in MSCI World
36% of MSCI World is comprised of tech stocks here
5
Source: Schroders as of December 31, 2012 based on stocks within the MSCI AC World Index. Countries mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The percentages shown represent the weights, as measured by market capitalization, of the indicated stocks of each country within the MSCI AC World Index. These weights are subject to change and should not be viewed as an investment recommendation. Top Dogs” is defined as the single largest company in the sector-country combination.
0% 20% 40% 60% 80% UNITED STATES JAPAN HONG KONG CANADA UK GERMANY FRANCE SINGAPORE AUSTRALIA BRAZIL TAIWAN SWITZERLAND ITALY SPAIN SOUTH KOREA
% weight in country total market cap
6
Apple Exxon GE BHP Commonwealth Bank Westpac
Weight of largest 3 companies by country
Source: Research Affiliates; Source: Arnott, Wu (2012): “The Winner’s Curse: Too Big to Succeed?” The authors use SIC codes to define the 12 sectors. These definitions may vary from GIC definitions. Countries/sectors shown are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. “Top Dogs” is defined as the single largest company in the sector-country combination.
United States Australia Canada France Italy Germany Japan New Zealand United Kingdom Average Across Countries Non Durables 15% 28% 42% 39% 32% 26% 13% 36% 18% 28% Durables 43% 59% 46% 49% 78% 49% 25% 88% 34% 52% Manufacturing 7% 33% 18% 19% 29% 14% 5% 71% 20% 24% Energy 31% 31% 21% 57% 91% 77% 31% 78% 49% 52% Chemicals 24% 63% 49% 60% 54% 48% 11% 65% 45% 47% Business Equipment 20% 21% 25% 28% 47% 58% 12% 59% 30% 33% Telecommunication 29% 70% 40% 40% 40% 76% 64% 78% 60% 55% Utilities 5% 63% 30% 70% 44% 34% 27% 45% 30% 39% Shops 16% 36% 18% 24% 43% 32% 10% 43% 20% 27% HealthCare 13% 47% 39% 50% 60% 42% 19% 76% 45% 44% Finance 6% 20% 14% 18% 24% 20% 9% 25% 14% 17% Other 8% 25% 13% 13% 34% 23% 7% 36% 11% 19% Average Across Sector Top Dogs 18% 41% 30% 39% 48% 42% 19% 58% 31% 36%
The Relative Cap Weight Market Share of Top Dogs (1982-2010)
7
Source: Arnott, Wu (2012): “The Winner’s Curse: Too Big to Succeed?” Graph shown are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Past performance is no guarantee of future results. The value of an investment can go down as well as up and is not guaranteed. “Top Dogs” is defined as the single largest company in the sector-country combination.
8
9
Source: Arnott, Wu (2012): “The Winner’s Curse: Too Big to Succeed?” Graph shown are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Past performance is no guarantee of future results. The value of an investment can go down as well as up and is not guaranteed. “Top Dogs” is defined as the single largest company in the sector-country combination.
Mega/Large 18% Mid 28% Small 30% Micro 24% Mega/Large, 95.8% Mid, 4.2%
Source: Schroders, MSCI. MSCI World as of December 31, 2012 Capitalizations mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The percentages shown represent the weights of stocks in the indicated ranges within the MSCI or the Schroder global universe. These weights are subject to change and should not be viewed as an investment recommendation.
Schroders global universe by number as of December 31, 2012 MSCI World by size as of December 31, 2012
10
MSCI All Country World >2,400 stocks MSCI World >1,600 stocks
Source: Schroders, MSCI as of December 31, 2012
S&P 500
All global stocks > 15,000 global stocks > 12,000 international stocks
11
> Buy & hold > Concentrations to market leaders and ‘Top Dogs’ which underperform > Restricts universe
12
Source: Schroders
13
Source: newslettercartoons.com
13
Concentration
– Reduce number of stocks
and increase bet size Drop constraints
– Non market cap stock
weights
– Allow greater flexibility in
stock, sector, region and currencies New sources of alpha
– Take off index bets – Emerging markets – Small and Micro caps
14
Source: Schroders
Source: Schroders. This is a stylized example is does not represent actual stock weights of the companies mentioned in any specific benchmark.
15
Source: eVestment. Portfolio holdings for Schroder International Multi-Cap Value Fund as of December 31, 2012 versus eVestment EAFE large/all cap managers. Active share is calculated versus MSCI EAFE.
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 200 400 600 800 1000 1200 1400 1600
Active Share (%) # of Holdings
16
Schroder International Multi-Cap Value Fund
Source: Morningstar Direct. Percentile ranking of the Fund's rolling 3 year performance versus foreign equity large cap peers. Total returns are based on NAV and compared to the Morningstar OE Foreign Large Value, Growth, & Blend universes assuming reinvestment of distributions. Time period is from September 1, 2006 (inception August 30, 2006) to December 31, 2012. Performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Please note outperformance is cumulative not .
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Sep‐09 Oct‐09 Nov‐09 Dec‐09 Jan‐10 Feb‐10 Mar‐10 Apr‐10 May‐10 Jun‐10 Jul‐10 Aug‐10 Sep‐10 Oct‐10 Nov‐10 Dec‐10 Jan‐11 Feb‐11 Mar‐11 Apr‐11 May‐11 Jun‐11 Jul‐11 Aug‐11 Sep‐11 Oct‐11 Nov‐11 Dec‐11 Jan‐12 Feb‐12 Mar‐12 Apr‐12 May‐12 Jun‐12 Jul‐12 Aug‐12 Sep‐12 Oct‐12 Nov‐12 Dec‐12
Schroder International Multi‐Cap Value Fund Median manager
17
Median
18
Source: Wall Street Journal, March 1, 2013
18
complements
without the return drag associated with purchasing more thematic glamour stocks
Source: Schroders. These views and opinions are of the QEP Team and are subject to change.
Quality
> Profitability > Stability > Financial Strength
Value
> Dividends > Cash Flow > Sales > Earnings > Assets
19
1
0% 5% 10% 15% 20% 25% 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Recessions Quality less Value (annual return spread)
Quality Outperforms Value Outperforms US Equity Rolling Annual Quality/Value Return
Credit Crunch - Risk aversion is high Global Recovery conditions normalised
Source: Schroders, QEP proprietary indicators. Global Quality less Value composite over 12 monthly rolling periods. In USD terms. As of December 31, 2012. Past performance is not a guarantee of future
the QEP Value and Quality ranking methodology. 20
0.0 0.1 0.2 0.3 Earnings To Price Dividend Yield Cash Flow To Price Book To Price Sales To Price Return On Equity Return On Assets Stability Equity To Debt Interest Cover Standard Deviations
MSCI World Value versus MSCI World
Value Quality
21
Source: MSCI. QEP Portfolio Scenario Analyzer for style skylines as of December 31, 2012. Standard Deviation is a measure of the exposure to a factor relative to a benchmark adjusted for the dispersion of that factor, ie it is a standardized z-score. For example if the portfolio dividend yield was 3% and the benchmark dividend yield was 2% and the dispersion or volatility of dividend yield within the benchmark was 4% then the dividend yield in the above chart would show 0.25 (3% - 2%)/4%.
“Distress” is usually the entry price for naïve Value
0.0 0.1 0.1 0.2 0.2 0.3 0.3 Earnings To Price Dividend Yield Cash Flow To Price Book To Price Sales To Price Return On Equity Return On Assets Stability Equity To Debt Interest Cover Standard Deviations
Portfolio Characteristics versus Benchmark
Value Quality
22
Source: Schroder International Multi Cap Value vs MSCI EAFE Analysis using Schroders Portfolio Analyzer as of December 31, 2012. This is illustrative only and does not represent Schroders’ recommendation to buy/sell. Performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
c
Source: Schroders – Performance represents Schroders International Multi Cap Value Fund in USD terms since inception to December 31, 2012. Batting average and upside/downside capture sourced from Morningstar Direct. Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investments can go down as well as up and is not guaranteed. The investment return and principal value of the International Multi-Cap Value Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For this and other information on any Schroders Fund, visit www.schroderfunds.com, call your financial advisor or call (800) 730-2932.
90 95 100 105 110 115 Upside market capture Downside market capture
Upside/Downside market capture vs MSCI EAFE (NDR)
23
63% 62% 65% 69% 60% 0% 25% 50% 75% 100% Overall Rising Falling Value Growth
Schroder International Multi-Cap Value Fund batting average since inception (August 6, 2006) NAV monthly returns vs. MSCI EAFE (NDR)
100 600 1100 1600 2100 2600 3100
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Cumulative Return
Steps To Higher Return
MSCI World
1. Diversified Value Cheap outperforms in the long run 2. Non-cap Weighting Avoid ‘Top Dog’ performance drag 3. Globally Unconstrained Maximize breadth 4. Blending With Quality Remember to favor stocks with stronger fundamentals
Source: Schroders, investment team proprietary systems. Attribution analysis was generated by TPA and should be considered indicative. **Estimated data shown is representative of 1987-2012. The graph above shows the successive impacts of the indicated elements of the QEP Global Blend Strategy on the performance of the MSCI World Index. The performance shown does not reflect all the elements of the QEP Global Blend Strategy, is gross of fees and trading costs and is not intended to reflect performance of the strategy. Impacts from (from 1/31/87 to 12/31/12) are simulated results. Value is the top 1/3rd value in each country. Non-cap stock weights are QEP market impact weights. Global unconstrained incorporates small and mid caps across both developed and emerging markets. Quality is the top 1/3rd of the QEP Quality Rank. Impacts are based on past performance and past performance is no guarantee of future performance. Please consult the disclosure at the end of the presentation for assumptions, etc.
24
> Buy & Hold > Bias to mega/large cap stocks > Big stocks are better > Concentrated portfolios
> Systematically rebalance > Embrace breadth > Drop size from stock weights > Diversification > Look for both Value and Quality
25
Source: Schroder
The results of the Steps to Higher Return Simulation on slide 25 shown in this presentation are based on a model portfolio built using a model that encompasses the following elements: 1. Value – Impact of creating a model which rebalances into cheap stocks as defined by the QEP Global Value Rank. Active stock positions, sectors and regions are constrained +/-0.5% relative to MSCI World weightings. 2. Non-Cap Weighting – Relax the constraint on individual stock weights and effectively disregard capitalization weighting. Instead we move to the QEP Market Impact Weight which permits stocks to be held up to a maximum of 75bp but is scaled back for less liquid or more volatile companies using a QEP Market Impact model which analyzes transaction costs and market impact by stock exchange. 3. Unconstrained – Relax the sector and region constraints and also expand the investment universe to incorporate stocks outside of the benchmark. 4. Quality – Model rebalances into quality stocks as defined by the QEP Global Quality Rank which is a composite measure of Profitability, Stability and Financial Strength terms. Model results are based on the QEP universe of mega to micro cap stocks subject to minimum liquidity criteria. Stocks are rebalanced at month end using closing prices with assumed turnover of 5% per month (one-way) which is broadly similar to the average turnover of our live strategies. Round-trip transaction costs are assumed to be 50bp for developed markets and 1% for emerging markets. There could be no assurance that any transactions actually performed in a managed portfolio could have been executed at the times or prices used for the purpose of calculating the performance in the model. No allowance was made in the model portfolio for advisory fees. The actual performance of managed accounts is also impacted by non-quantitative factors such as additional stock selection and risk management activities
simulated results. The model portfolio results are hypothetical results. They do not represent an attempt to show actual performance. They are used only to illustrate the impact of a quantitative model. They cannot be used to reflect actual or expected managed portfolio returns.
27
The views and forecasts contained herein are those of the QEP Team. and are subject to change. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The opinions stated in this presentation include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. This document is intended to be for informational purposes only and 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. Performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Principal value and investment returns will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.. Risks associated Quantitative Equity Product’s: All investments, domestic and foreign, involve risks including the risk of possible loss of
conditions, prospects of stocks in the portfolio, changing interest rates, and real or perceived adverse competitive industry conditions. Investing
valuation, and fluctuation) risk, market entry or exit restrictions, illiquidity and taxation. Emerging markets pose greater risks than investments in developed markets. Please consider a fund’s investment objectives, risks, charges and expenses carefully before investing. For a free prospectus, which contains this and other information on any Schroders Fund, visit www.schroderfunds.com, call your financial advisor or call (800) 730-2932. Read the prospectus carefully before investing. Schroder Fund Advisors LLC, Member FINRA, SIPC 875 Third Avenue, New York, NY 10022-6225 (800) 730-2932 www.schroderfunds.com
Size allocation Dividend yield Portfolio Style Characteristics vs Benchmark
27.1% 21.5% 32.2% 16.2% 3.1% 65.6% 28.0% 6.2% 0.0% 0.0%
0% 20% 40% 60% 80% Mega > $20bn Large $5bn - $20bn Mid $1bn - $5bn Small > $250m Micro < $250m
QEP Global ex US Value
0% 1% 2% 3% 4% 5% 6% 7% 8%
QEP Global ex US Value Long run average of 4.2% MSCI EAFE
Portfolio characteristics Global ex US Value MSCI EAFE Dividend Yield 4.2% 3.6% Ex-ante tracking error (not targeted)* 2.6%
54.5%
73.9%
0.93
1,336 909 Market Cap (Weight Average, $m) 26,224 58,874
0.0 0.1 0.2 0.3 Standard Deviations
Value Quality Momentum Glamour
Source: Schroders Investment team’s proprietary systems – Schroders QEP International Multi-Cap Value as of December 31, 2012. * Beta & Tracking Error sourced from PRISM (Barra) and lagged by 1 month. Weights will vary among accounts within the strategy, are subject to change and should not be viewed as an investment recommendation
28
Performance to Dec 31, 2012 1 year 3 Year Annualized 5 Year Annualized Since Inception Annualized* International Multi-Cap Value Fund (Investor shares - SIDNX) 19.45% 6.92% 0.56% 4.14%
MSCI EAFE NDR 17.32% 3.56%
0.29% MSCI EAFE Value NDR 17.69% 2.19%
MSCI AC World ex US NDR 16.83% 3.87%
1.80% MSCI AC World ex US IMI NDR 17.04% 4.18%
2.01%
Added value relative to MSCI EAFE +2.13% +3.68% +4.25% +3.85%
Lipper International Multi-Cap Value Peer Group Percentile** 17 3 4 2 Morningstar US Open Ended Foreign Large Value Peer Group Rank Percentile** 20 5 5 4
Source: Schroder International Multi-Cap Value Fund Investor shares, net of Fees in USD. TER capped at 1.15% until Mar 1, 2012 after which the TER has been capped at 0.96% pa. Benchmark: MSCI EAFE Index Net Dividend Re-invested. *Performance inception date: August 30, 2006. Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investments can go down as well as up and is not guaranteed. The investment return and principal value of the International Multi-Cap Value Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For this and other information on any Schroders Fund, visit www.schroderfunds.com, call your financial advisor or call (800) 730-2932. **Peer group comparisons according to Lipper and Morningstar Rankings.Source: Lipper Inc.and Morningstar Inc. Rankings in the Lipper International Multi-Cap Value and the Morningstar US OE Foreign Large Value universes and are based on average annual total returns assuming the reinvestment of dividends and capital gains as of Dec 31, 2012. Since inception peer group rankings are taken from month end Aug 31, 2006. Each fund is ranked within a universe of funds similar in portfolio characteristics and capitalizations, as defined by Lipper Inc. or Morningstar Inc. There are currently 95 funds in the Lipper International Multi-Cap Value universe and 369 funds in the Morningstar US OE Foreign Large Value universe as of Dec 31, 2012.
29