SOLACTIVE EUROPEAN DEEP VALUE SELECT 50 INDEX Marketing C ommunication For professional clients only This document has been prepared for discussion purposes only and does not constitute an offer or a solicitation to engage in any trading strategy or the purchase or sale of any financial instrument CORPORATE & INSTITUTIONAL BANKING GLOBAL MARKETS JUNE 2019
1. VALUE INVESTING June 2019 2
THE CONCEPT OF VALUE INVESTING (1/2) HOW IT STARTED BENJAMIN GRAHAM (1894 – 1976): THE FATHER OF VALUE INVESTING LESSONS BY BENJAMIN GRAHAM Value Investing is an investment philosophy that emphasises the need to perform in-depth 1 fundamental analysis Value Investors regard securities as a fractional ownership in the actual business, with an 2 underlying value that does not depend on its share price These investors seek stocks they believe the market has undervalued. 3 Since intrinsic value is an elusive concept, one must invest with a margin of safety: a big enough 4 discount to allow some room for error, imprecision, bad luck or the vicissitudes of the economy and the stock market Photo by Equim43 / CC BY-SA 4.0 Benjamin Graham was an economist and a professional investor. He began teaching the “ “ Value investment approach at Columbia Business School in 1928, which he refined “The investor's primary interest lies in acquiring and holding suitable through the various editions of his famous securities at suitable prices. ” (Benjamin Graham) books. Sources: “Security Analysis” Benjamin Graham and David L.Dood, and Preface to the Sixth Edition by Seth A. Klaman. June 2019 3
THE CONCEPT OF VALUE INVESTING (2/2) DOES IT WORK? FOR BENJAMIN GRAHAM A long track record and experience � � Benjamin Graham started his investment career in 1914 and made it through the 1929-1932 Great Crash � From 1936 until he retired in 1956, his Graham-Newman Corp. 1 gained 20% annually, versus 12.2% for the stock market as a whole: one of the best long-term track records on Wall Street history 1 Modern equivalent of a closed-end mutual fund. FOR HIS STUDENTS Graham’s students have achieved impressive performances: � Warren Buffett, Tom Knapp and Ed Amongst others: Walter Schloss, Bill Ruane, Graham’s student at Anderson, were also Charles Munger, followed Sequoia Fund Columbia Business Benjamin Graham Graham’s disciples Rick Guerin, Manager, met School , described courses at night (9% annual Stan Perlmeter, lifelong friend him as the second at the New York outperformance etc. All very Warren Buffett most influential person Institute of over the S&P 500 successful at a Benjamin Finance (8% from 1968 to 1983) investors Graham in his life after his own father annual outperformance over the investment seminar (7% annual (6.1% annual outperformance S&P 500 Index from 1956 to outperformance over the S&P over the general stock market 1968) 500 Index from 1970 to 1984) from 1976 to 2011) June 2019 4
2. THE SOLACTIVE EUROPEAN DEEP VALUE SELECT 50 INDEX June 2019 5
THE INDEX STRATEGY IN A NUTSHELL SELECTION PROCESS THE STRATEGY SELECTS STOCKS OF EUROPEAN COMPANIES THAT AIM TO PROVIDE: Low volatility Strong and stable results over time By removing stocks with the highest volatilities in By choosing robust companies that demonstrate order to enhance the risk/return profile high standards in terms of Valuation, Solvency and Stability Long term replicability Stable source of income By selecting highly liquid stocks that have proven By selecting stocks that are expected to pay dividends in the coming month their capacity for endurance and dependability Currency Type of index Bloomberg code Reuters code Launch date EUR Price Return SOLEDVSP Index .SOLEDVSP 7th July 2015 A RIGOROUS INVESTMENT METHODOLOGY THAT AIMS TO SELECT SOUND COMPANIES, WHATEVER THE MARKET CONDITIONS June 2019 6
OVERVIEW OF THE SELECTION PROCESS OVERALL SELECTION PROCESS Geographical Universe European stocks 1000 stocks Liquidity Filter Liquidity 1 500 stocks Deep Value Filter 200+ stocks Valuation, Solvency & Stability Quantitative Selection Dividend and Volatility filtering Final composition 50 stocks Monthly Equally weighted EUR rebalancing Source: BNP Paribas, for illustrative proposes only. 1 Average daily volume observed at or above € 10M over a 20 days period. June 2019 7
Step 1 - The Deep Value FILTER (1/2) HOW IT WORKS: THE 3 FUNDAMENTAL FILTERS 1 1 2 3 VALUATION SOLVENCY STABILITY Is the company’s price attractive Is the company’s financial position Are the company’s earnings stable? enough compared to its revenues and solid? Select companies able to generate � assets? Debt charge must be reasonable profit in any market condition: � Avoid overvalued names: a to avoid putting at stake the profits generated by the company must � reasonable price compared to company’s benefits: company’s be positive over the previous 10 years the benefits of the last 5 years financial expenses largely covered Target companies that are able to � (Shiller PE 2 ) by their revenues reward investors in all market Select efficient business models: Select companies able to conditions: filter on the dividends paid � � regularly posting solid profits decrease and reimburse their by the company in each of the compared to accounting value and debts: target companies with limited previous 10 years having an earnings yield high debt compared to their revenues enough to justify a long term investment Based on the stock selection criteria recommended by Graham in “The Intelligent Investor” 1 Please turn to slides 21 to 23 for more details. 2 Shiller Price Earnings, also called C APE «C yclically Adjusted Price Earnings», developed by R obert Shiller. A FUNDAMENTALS-BASED INVESTMENT METHODOLOGY June 2019 8
Step 1 - The Deep Value FILTER (2/2) HOW IT WORKS: THE DEEP VALUE SCORE A balanced but selective approach based on analyzing companies’ fundamentals according to three groups of criteria: � � Valuation, Solvency and Stability To move to the next step of the selection process, a company must comply with the following 3 constraints: � (note that only companies with an average daily volume observed at or above € 10M over a 20 days period appear on the Index calculator screens) � Deep Value Score ≥ 4 � Valuation score ≥ 1 � Solvency score ≥ 1 Non-Financial Financial Deep Shiller CAPE x Earning Past Past Valuation Financial Interest EBITDA 3 Solvency Earnings Stability Value PE P/B 1 Yield Dividends ROE 2 leverage Cover Growth Score Rexam PLC 1 1 0 2 1 1 - - 2 1 0 1 5 Munich Re AG 1 1 1 3 - - 1 0 1 1 1 2 6 BAE Systems PLC 0 0 1 1 1 1 - - 2 1 0 1 4 Compass Group PLC 1 1 0 2 1 1 - - 2 1 0 1 5 TeliaSonena AB 1 1 1 3 1 1 - - 2 1 1 2 7 Unilever PLC 0 0 1 1 1 1 - - 2 1 1 2 5 Roche Holding AG 0 0 1 1 1 1 - - 2 1 1 2 5 IMI PLC 1 1 0 2 1 1 - - 2 1 1 2 6 Standard Life PLC 1 1 0 2 - - 1 0 1 0 1 1 4 Wolters Kluwer 0 0 1 1 1 1 - - 2 1 1 2 5 ARM Holdings PLC 0 0 0 0 1 0 - - 1 1 0 1 2 SSE PLC 1 0 1 2 0 0 - - 0 1 1 2 4 Sources: BNP Paribas and Bloomberg. For illustrative purpose only, subject to change. A “ 1 ” score in the white columns means the company had a positive mark on that criterion, if there is a “ 0 ” it means the company has not passed. The grey columns make up the sum of each filter. In the Deep Value column, the scoring scale is from 0 to 7 and is made up of the sum of the grey columns. 1 Price-to-Book. 2 Return on Equity. 3 Earnings Before Interest, Taxes, Depreciation and Amortization. June 2019 9
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