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Transcript of Cazenove
Identifying growth in UK small cap
Paul Marriage
Prepared for professional advisers only
- 2 -
Agenda
• Team
• Performance
• Filtering & idea generation
• Portfolio construction, P3M & market cap split
• Stock characteristics
•The short-term opportunity
• Summary
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Investment team – Fund managers
Paul Marriage, fund manager
Paul Marriage joined Cazenove Capital in 2005. He is a member of the pan-European equity team
and Manager of the Cazenove UK Smaller Companies Fund and Cazenove Capital’s UK Dynamic
long-short funds (UCITS and Cayman domiciled hedge fund); the Cazenove Absolute UK Dynamic
Fund and the Cazenove UK Dynamic Absolute Return Fund. Paul joined from Insight Investment
where he was head of UK Small Cap investments valued at £750 million. Prior to this, he was an
analyst at GH Asset Management. Paul graduated from University College, Oxford with a degree in
Modern History. He is a member of ASIP and has 13 years of investment experience.
John Warren, fund managerJohn Warren joined Cazenove Capital in 2010. He is a member of the pan-European equity team
working with Paul Marriage on the UK small cap desk. John is back up manager on the Cazenove UK
Smaller Companies Fund and the UK equity dynamic short/long funds; the Cazenove Absolute UK
Dynamic Fund (a UCITS fund) and the Cazenove UK Dynamic Absolute Return Fund a Cayman
domiciled hedge fund. John has over 10 years of experience in the UK mid and small cap sector, having
previously been at UBS and Investec Bank. Before this John spent 3 years at PriceWaterhouseCoopers
where he qualified as a Chartered Accountant. John graduated from Loughborough University with a
degree in Economics and Accountancy. He holds the ACA and SFA qualifications.
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1 process – 3 products
Fund sizes at 30.09.11
£385mmanaged
in strategy
Offshore Hedge Fund
£100m
UK Smaller Companies Fund
£85m
Absolute UK
Dynamic Fund £200m
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Source: Lipper, net income reinvested.
Calendar year performance
What I do own, what I don’t
X No mining, no oil & gas
X No loss makers
Only UK/UK exposure
Investment universe: Hoare Govett Index including AIM
2,000 stocks
Now 1,000 companies to consider
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Source of stock ideas
Experience Trades
• Know what worksand when
• Met 5,000 co’s in the last 10 years
Execute investment decision within 24 hours
Research – Broker Notes, Annual report, Bloomberg data
Valuation, liquidity, technicals
One to One Meetings – CEO & CFO
Own Idea
• Company meetings
• Visits
• Observational
• Screens
Investment Banks and Brokers
• Ideas
• IPO’s
• Placings
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Portfolio construction
• Target 40-50 stocks (min holding 1%, max 5%)
• 75% core – P3M
• 25% value opportunity
• Define reason for holding – if this changes = sell signal
Stock
B
Stock A
Fund
Stock B
One in, o
ne out
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Creating long term performance
Product a differentiated product, R&D backed, IP preferred
Market market leader in chosen niche
Margin ability to grow the margin and generate cash
Management stock ownership, understanding of shareholder value
P3M
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P3M
Andor Technology
ProductDigital cameras for scientific research
MarketCompany is the tech leader with 10pc share of $400m market
MarginMargins have scope to grow with m/f scale up, company is strong cash generator
ManagementOwn 20% stock, understand shareholder value
Value Opportunity
Hogg Robinson
ValuePurchased in Q3 2010 on fwd p/e of 4.5x
OpportunityPoorly handled 2006 IPO with debt and pension fund issues, unpopular management but a strong market position globally in corporate travel agency
TriggerImprovement in corporate travel evident from other companies – BA, Menzies, BBA
ValidationsProfit upgrades, debt and pension deficit reduction drive rerating (now 7.5x fwd). Share price appreciation of 108% since purchase
Stock examples
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Major holdings
Holding Name Market Cap No. years held Analyst coverage Fwd P/E
Booker £1,114m 5 10 17.6
Staffline £48m 1 5 7.4
Perform Group £467m 1 4 21.1
DS Smith £741m 1 9 8
British Polythene £86m 3 2 6.64
Xaar £154m 5 4 22.8
Elementis £551m 5 8 9.1
Hansteen £471m 3 9 0.85x NAV
Menzies £282m 5 8 6.78
Source: Cazenove Capital Management 07/10/11
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18.6%
17.7%
38.4%
6.4%
18.9%
0-£50m £50-£100m £100-£250m £250-£500m >£500m
Hitting the ‘sweet spot’
Source: Cazenove Capital at 30/09/11
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It’s a small world - percentage of sales
Asia / RoW 13%
Americas 23%
Europe 25%UK 39%
Source: Cazenove Capital at 30/06/11
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The earnings scenario - 2011
Cons
Reality
Sensibly managed SC’s
Long
Short
Earnings Forecasts
2008 2009 2010 2011 2012
Source: Cazenove Capital Management
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fwd PE ex-loss fwd EPS growth fwd DY ex-nonpay fwd DPS growth
FTSE 100 8.4x 11.4% 4.4% 10.9%
Mid 250 9.7x 16.0% 4.1% 9.3%
Small Cap 7.9x 11.7% 4.4% 6.2%
Is the size, liquidity and efficiency trade being reflected in valuations?
Are earnings growth numbers realistic?
M&A maybe more prevalent going forward.
Source: Altium Securities at 06/10/11
Are UK smaller companies overvalued?
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Regulatory information and risk warnings
This document is intended for Independent Financial Advisers, Professional Intermediaries and non-private clients only.
Issued by Cazenove Capital Management which is the name under which Cazenove Capital Management Limited and Cazenove Investment Fund Management Limited both authorised and regulated by the Financial Services Authority provide investment products and services.
Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount originally invested and may be affected by fluctuations in exchange rates. The levels and bases of tax assumptions may change.
This is a specialist fund, which invests in small, less liquid companies. The fund is likely to provide a higher level of volatility and this may carry increased risk.
This document is for information purposes only and does not constitute an offer to enter into any contract/agreement nor is it a solicitation to buy or sell any investment or to provide any services referred to therein.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.