The 10th anniversary ECR Europe conference & marketplace Evaluation.
10 Year Anniversary Tocqueville Value Europe
-
Upload
fitzgeralddon -
Category
Business
-
view
820 -
download
2
description
Transcript of 10 Year Anniversary Tocqueville Value Europe
Value investing and a decade of Value investing and a decade of outperformance:
the case of Tocqueville Value Europe
Sebastien Lemonnier / Don Fitzgerald
May 2010
Table of content
� The principles of Value Investing p 3
� Review of Value Investing p 14
� Outperformance of Tocqueville Value Europe p 17
� Outlook for Value Investing and TVE in this context (“TVE”) p 26
� Conclusion p 32
� Appendices p 35
The principles of Value Investing
The principles of Value Investing
“Value” investing: investing in a company that is trading at a substantial discount to its intrinsic value
� Independence of investment: no constraints in terms of sectors, geographical areas or
stock market capitalisation
4
� Contrarian stance
� Evaluation of company fundamentals at core of investment process
� Margin of safety as necessary condition for investing
The principles of Value Investing
� Independence of investment
“Don’t trust anyone over thirty. And don’t trust anyone thirty and under. Do your own work” Joel Greenblatt from the book “How to be a stock market genius”
� Be confident in your own judgement
5
� Be confident in your own judgement
� An investment consists of buying a small part of a company, not its shares on the stock market
� Ignore market’s noise to capitalise on occasional inefficiencies
� The composition of the index is not a factor in portfolio construction
The principles of Value Investing
� Independence of investment
� Investor perception:
• Distant Norwegian company with limited analyst coverage
• Competitive industry subject to discretionary consumption
6
• Competitive industry subject to discretionary consumption
• Uncommunicative management
• Conservative balance sheet
� The company’s intrinsic quality:
• Market leader with strong brands and exclusive relations with retailers
• Market share gains and geographical expansion
• Strong profitability and return on capital
• Management team that concentrates on organic growth
• Stable and attractive dividend policy
The principles of Value Investing
� Contrarian stance
“Be greedy when others are fearful, and be fearful when others are greedy” Warren Buffett
• Beware of passing fads
• Be prepared to be counter-cyclical
Our hunting ground:
7
Our hunting ground:
� A series of profit warnings
� Turnaround situations
� Fallen angels
� Limited coverage by financial analysts
� Disappointing IPOs
� Company break-ups
� Optimisation of balance-sheet structures
The principles of Value Investing
� Contrarian stance
8Source : Bloomberg
Bought Bought
The principles of Value Investing
� Evaluate the fundamentals
“Don’t confuse growth with sustainable competitive advantage” Warren Buffett
� Is it a solid and sustainable business model in terms of the structural environment, entry barriers and competitive advantages?
9
� Is it a solid and sustainable business model in terms of the structural environment, entry barriers and competitive advantages?
� What are the operational and financial risks?
� How credible and motivated is management?
� What are the principal catalysts?
The principles of Value Investing
� Evaluate the fundamentals
� Why is it a solid and sustainable business model?
• Strong brands: Omega, Breguet, Blancpain, Rado, Longines, Swatch…• High margins• Vertical integration• Near monopoly in the production of watch mechanisms
10
• Near monopoly in the production of watch mechanisms
� What are the operational and financial risks?
• Discretionary consumer spending• High fixed costs
� How credible and motivated is management?
• Family ownership structure: Hayek with a 38% stake• Nicolas G Hayek restructured the Swiss watch industry in the 1980s
� What are the principal catalysts and operating levers of the business?
• Market share gains• Bringing profitability back in line with historical standards• Possible optimisation of the group’s excess cash reserves
The principles of Value Investing
� Margin of safety
“Confronted with the challenge to distil the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY”
Ben Graham, Intelligent Investor
Why is margin of safety important?
11
� Over time market price should converge to intrinsic value
� Valuation is an imprecise art
� The future is unpredictable
� Protects against bad luck, poor investment timing and errors of judgement
The principles of Value Investing
� Margin of safety
� Replacement value of the group’s assets �65
� 8.7x 2009 EV/EBITDA, average private market transaction multiple �€75
� If shares traded in line with peers � €70
� 7.0x EV/EBITDA on normalised earnings � €72
12
BoughtBought
Intrinsic valueIntrinsic value
Source : Bloomberg
� Independent thought beats the consensus
� The best ideas are the least appreciated
� Dissociate fundamental investment from speculation
The principles of Value Investing
� Value investing: Applying common sense
� Dissociate fundamental investment from speculation
� Protect capital using margin of safety
13
Review of Value Investing
Review of Value Investing
� Value Investing has outperformed over the last decade
15Source : Bloomberg
Review of Value Investing
Strengths Weaknesses
• “Mr Market” is stronger in the short term
• Short-term prospects are often
disappointing
• Risk of a “value trap”: cheap for good
reasons
• Common sense approach
• Margin of safety
• Investment independence allows one
to outperform indices
• Takes account of company strengths
16
An attractive risk/return ratio over time
• At times invest in shares with limited
liquidity
• A rigorous value approach can lead to
lost opportunities
• Takes account of company strengths
and weaknesses in valuation
• Valuation of company over the
economic cycle
Tocqueville Value Europe’s outperformance
Tocqueville Value Europe’s outperformance
18Source: Europerformance, past performance is no indication as to future performance and is not constant over time
Tocqueville Value Europe’s outperformance per 30/04/2010
Volatility
VolatilityTocqueville Value
EuropeMSCI Europe
1 month 14.43 18.74
19
1 month 14.43 18.74
1 year 13.47 16.59
3 years 19.19 20.57
5 years 16.13 17.36
Since inception 14.98 17.07
Source: Europerformance at 30/04/10, past performance is no indication as to future performance and is not constant over time
3,47%2,93%
0%
5%
Tocqueville Value Europe’s outperformance
Market sensitivity
-4,14%
-2,76%
-5%
0%
Bear market Bull market
MSCIE Total return TOCQUEVILLE VALUE EUROPE
Participation rate in araising market: 84.53%
Participation rate in afalling market: 66.73%
20Source: Tocqueville Finance Europe, past performance is no indication as to future performance and is not constant over time
Tocqueville Value Europe’s outperformance
Performance/Volatility since inception
20,00
40,00
60,00
80,00
21
Moyenne
-80,00
-60,00
-40,00
-20,00
0,00
0,00 5,00 10,00 15,00 20,00 25,00Volatility
Source : Europerformance from 31/03/2000 to 31/03/2010
Tocqueville Value Europe’s outperformance
2000-2002: bursting of the TMT bubble
Tocqueville Value Europe -10.8%* versus MSCI Europe -48%*
� Limited exposure to telecoms, media and technology
22
� Limited exposure to telecoms, media and technology
� Small and mid caps out of favour
� Invested in companies with resilient margins
� Takeovers and structural changes in 2001: Britax, Isis, Européenne de Casino, Cristaleria, Rolo Banca…
� Prudent management with a cash reserve up to 15% in 2002
*Source: Europerformance, past performance is no indication as to future performance and is not constant over time
Tocqueville Value Europe’s outperformance
2003-2006: stock market and economic recovery
Tocqueville Value Europe +93.8%* versus MSCI Europe +75.4%*
� Restructuring and turnaround stories were important investment themes
23
� Restructuring and turnaround stories were important investment themes
� Market recognition of the undervaluation of small and mid caps
� Began to find more investment opportunities among large caps from 2005 onwards
� Several takeovers: Mecatherm, Urbium, Beru, McCarthy & Stone, Société du Louvre…
� Successful investments: Fielmann, Ekornes, Carillion, K+S, OPG, BASF…
*Source: Europerformance, past performance is no indication as to future performance and is not constant over time
Tocqueville Value Europe’s outperformance
2007: the start of a financial crisis
Tocqueville Value Europe -9.4%* versus MSCI Europe +0.1%*
� Underperformance limited to the second half of the year (TVE -15.5% vs. MSCI Europe -7.2%)
24
� Underperformance limited to the second half of the year (TVE -15.5% vs. MSCI Europe -7.2%)
� Exposure to small caps was detrimental
� Excessive exposure to UK consumer spending
� Value Investing forsaken in favour of growth stories (emerging markets and commodities) and financial
leverage
� Continued repositioning towards large caps
*Source: Europerformance, past performance is no indication as to future performance and is not constant over time
Tocqueville Value Europe’s outperformance
2008-2010: historical crisis followed by a market rally
Tocqueville Value Europe -15%* versus MSCI Europe -28.3%*
� Prudent management with liquidity ranging between 10% and 20%
� Portfolio diversification in terms of market capitalisation
25
� Portfolio diversification in terms of market capitalisation
� Limited exposure to banks and insurers
� Investments in companies with solid balance sheets were favourable
� Preference for companies with sound fundamentals
� Successful investments: Ansaldo, Parmalat, BASF, BHP Billiton, Ekornes, Michelin…
� Takeover: Elf Aquitaine
*Source: Europerformance, from 31 December 2007 to 30 April 2010
Outlook for Value Investing and TVE in this context
Outlook for Value Investing and TVE in this context
� The “Bears” point to:
� Government stimulus as not sustainable
� A move to a less favourable regulatory environment
� Industrial overcapacity
� Public deficits
27
� Public deficits
� Household deleveraging
� Demographic problems
Outlook for Value Investing and TVE in this context
� It is also easy to be a “Bull”
� The risk of a “systemic crisis is behind us”
� Company balance sheets are healthier
� Revival of mergers and acquisitions
� Attractive valuations in a low interest-rate, low inflation environment
28
� Attractive valuations in a low interest-rate, low inflation environment
� Equities are the most profitable asset class in this context
� Restructuring efforts and structural improvements in profitability
� Global growth driven by emerging countries
Outlook for Value Investing and TVE in this context
� Historical market valuations based on normalised earnings
29Source: FactSet, Exane BNP Paribas estimates – Cyclically adjusted market P/E, based on current price and 10-year moving average EPS - MSCI Europe
Outlook for Value Investing and TVE in this context
� It is time to be pragmatic by favouring stock-picking
� Beware of excessive optimism, as well as pessimism
• Market over-reaction to sovereign debt levels
• Sceptical of an infatuation with emerging market growth
30
� Look out where:
• Economic recovery is fully priced into valuations: BASF, ArcelorMittal, Rheinmetall…
• Restructuring efforts are largely reflected in valuations: Assa Abloy, Saab…
Outlook for Value Investing and TVE in this context
� The markets still contain some inefficiencies.
� We currently favour:
• Structural winners: Publicis, Lufthansa, Marr…
� It is time to be pragmatic by favouring stock-picking
31
• Structural winners: Publicis, Lufthansa, Marr…
• Quality companies that have been overlooked:
Nestlé, Vicat, Finmeccanica, DCC, Diageo, Adidas…
• Small caps that have been forgotten: Jungheinrich, Southern Cross Healthcare…
• Forced sellers: Irish Continental Group, HeidelbergCement…
• Disappointing IPOs: Gategroup…
Conclusion
Conclusion
� Our approach to Value Investing has many advantages:
� Solid historical performance
� Below average volatility
An approach that makes particular sense in the current context of:
33
� An approach that makes particular sense in the current context of:
• Uncertainty... • … but continued investment opportunities
Reasonable risk/reward ratio
Conclusion
� Tocqueville Finance has proven expertise in managing equity funds in:
� France: Ulysse ranked No.1 since its creation *
� Europe: Tocqueville Value Europe ranked No.2 since its creation **
� US: Tocqueville Value Amérique ranked No.1 since its creation ***
34
� US: Tocqueville Value Amérique ranked No.1 since its creation ***
* from 07/10/93 to 30/04/2010, source Europerformance, general French equities category
* * from 31/03/2000 to 30/04/2010, source Europerformance, general European equities category
*** from 31/12/1998 to 30/04/2010, source Europerformance, general North American equities category
Appendices
Tocqueville Value Europe…
�100% fundamental value fund
� Flexible and independently-managed mutual fund
• No limitations in terms of geography, sector or market capitalisation
European expertise established over the last decade
Conclusion
� European expertise established over the last decade
� Significant outperformance since inception
• The No.2 ranked fund out of 67 funds in its category since its inception (Source Europerformance, from
31/03/00)
� Lower volatility than indices since inception
� Common sense and transparent management
• No leverage or complex instruments (derivatives, etc.)
Isin : FR0010547067 (Part C)
Isin : FR0010600239 (Part I)
36
Fund structure per 30 April 2010
37
Evolution of weightings by region
50%
60%
70%
80%
90%
100%
38
0%
10%
20%
30%
40%
50%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
France UK Allemagne Italie Reste EuropeGermany Italy Rest of Europe
Evolution of weightings by market capitalisation
50%
60%
70%
80%
90%
100%
39
0%
10%
20%
30%
40%
50%
2001 2002 2003 2004 2005 2006 2007 2008 2009
< € 1bn between 1 and € 5bn between 5 and € 10bn > € 10bn
Evolution of the portion invested in equities
88%
90%
92%
94%
40
80%
82%
84%
86%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
95,3%
60%
80%
100%
Portfolio liquidity
1,4% 3,3%0,0%
0%
20%
40%
< 10 days between 10 et 50 days
between 50 and 100 days
> 100 days
95.3% of portfolio lines can be fully liquidated in less than 10 days…
41
Sébastien Lemonnier (30)
� Fund manager, TVE, since January 2006
� Since 2003 dedicated financial analyst Tocqueville Value Europe
� Master « Financial Management » from Université Paris I – Panthéon Sorbonne (2003)
Tocqueville Value Europe’s managers
Don Fitzgerald, CFA (35)
� Financial analyst, TVE, since February 2007 and fund manager, TVE, since January 2008
� 7 years expertise in identifying, analyzing and investing in undervalued securities in both the
European equity & high yield / distressed debt markets
� Prior to that 7 years experience in corporate & investment banking
� Degree in Business Studies and German from Trinity College, Dublin
� CFA charter-holder
� Cross-cultural experience having worked in Dublin, London, Frankfurt & Paris
� Irish national, fluent French & German speaker
42
• This document is strictly confidential and intended solely for the recipients. It must not be reproduced, distributed or published, in whole or in part, without the prior and written authorisation of Tocqueville Finance S.A.
• This marketing document should not be interpreted as a contractual or pre-contractual commitment by Tocqueville Finance S.A. It is provided for purely indicative purposes and may be modified at any time without notice.
• The information and analysis contained in this document, especially quantified information, is derived in part from external sources considered to be reliable. However, Tocqueville Finance SA cannot guarantee the complete, precise and up-to-date nature of this analysis and information.
Disclaimers
• Tocqueville Finance S.A. draws investors’ attention to the fact that the past performance presented is based on figures relating to past years and is not a guarantee of future performance.
•Tocqueville Finance S.A. does not guarantee in any manner the current or future performance of funds referred to in this document.
• This is a reminder that any financial investment involves risks (market risks, capital risks and currency risks) and may result in financial losses. Accordingly, Tocqueville Finance S.A. recommends that, prior to any investment, the recipient of this document reads carefully the prospectuses of the funds referred to, which are available free of charge at our head office at 8 rue Lamennais, Paris 75008 or on our internet site www.tocquevillefinance.fr, and ensure that he or she has sufficient experience and expertise to make an investment decision, particularly with regard to its legal and tax consequences.
43