Citywire june 2011

Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. © 2011 Delaware Distributors, L.P.

Investing in U.S. Equities Today—Economic Backdrop,

Market Valuation and Expected Returns

Ty NuttTeam Leader, Portfolio Manager

Delaware U.S. Value

Nik Lalvani, CFAPortfolio Manager

Delaware U.S. Value

June 2011

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Presentation Outline

1. Investment Approach

2. Economic and Market Outlook

3. Portfolio Positioning

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Years of experienceRole

28Portfolio Manager, Team LeaderD. Tysen Nutt, Jr.

22Portfolio ManagerAnthony A. Lombardi, CFA

19Portfolio ManagerRobert A. Vogel, Jr., CFA

17Investment SpecialistCarl D. Rice, CFA

10Portfolio ManagerKristen E. Bartholdson

14Portfolio ManagerNikhil G. Lalvani, CFA

Delaware U.S. Value

– Strategy founded in 1978

– Only two team leaders since inception

– Process has remained consistent throughout

Our History

4

– We believe stock prices are influenced by human emotion and crowd psychology

– We seek to capitalize on discrepancies between estimated intrinsic value and price, buying at times of excessive pessimism and selling at times of undue optimism

– We develop relatively concentrated portfolios that reflect our deep conviction

Distinguishing Characteristics

– Team-based decision-making

– Disciplined multi-factor screening process

– Low turnover, long-term investment horizon (3-5 years)

– Mandated diversification across all 10 economic sectors

Delaware U.S. Value

Value Philosophy

5

Investment Process SellDisciplines

Opportunity Universe Screen

PreliminaryResearch

Portfolio Construction

In-DepthFundamental Research

Delaware U.S. Value

6

• Total credit market debt is still near all-time-high levels as a percent of GDP

• Higher debt levels have been associated with slower economic growth and lower employment growth during the past 60 years

(DAVIS144)

Quarterly Data 3/31/1947 - 3/31/2011 (Log Scale)

%

Debt High

Debt Low

Nominal GDP Gain/Annum When:

Gain/ % Debt/GDP is: Annum of Time

* Above 270% 4. 0 15. 6

Between 160% and 270% 6. 5 32. 8

Below 160% 7. 6 51. 6

Real GDP Gain/Annum When:


* Above 270% 1. 8 15. 6

Between 160% and 270% 3. 2 32. 8

Below 160% 3. 7 51. 6

Nonfarm PayrollsGain/Annum When:


* Above 270% -0. 1 15. 6

Between 160% and 270% 1. 8 32. 8

Below 160% 2. 3 51. 6

Source: Department of CommerceDepartment of Labor Federal Reserve Board

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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Total Credit Market Debt's (All Sectors, as a % of GDP) Potential Impact On Growth

Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

7

• Unemployment, especially long-term unemployment, remains a problem

• Nearly 44% of unemployed individuals have been out of work for six months or longer (approximately 32% have been out of work for one year or longer)

Monthly Data 1/31/1948 - 5/31/2011

(E0107A)

Short-Term (< 5 weeks)5/31/2011 = 1.7%

( )

Long-Term (27+ weeks)5/31/2011 = 4.0%

( )

Shaded areas represent NationalBureau of Economic Research recessions

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Short-Term vs Long-Term Unemployment Rates


8• After leveling off from their precipitous decline, home prices have been trending downward

over the past three quarters

Quarterly Data 3/31/1987 - 3/31/2011 (Log Scale)

(E0760E)

3/31/2011 = 128.3

Measures seasonally - adjusted weighted-average change in value of residential housing markets across nine U.S. Census regions.

6672788592

101 110 119 130 141 154 168 183

6672788592

101 110 119 130 141 154 168 183

Quarterly % Change 3/31/2011 = -1.9% Home Prices Rising

Home Prices Falling

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3/31/2011 = -4.9% Home Prices Rising

Home Prices Falling

Year-to-Year Change

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1990 1995 2000 2005 2010

S&P/Case-Shiller U.S. National Home Price Index


9• The correlation between retail gasoline prices and inflation expectations has been

reasonably high over the past 20 years

Monthly Data 10/31/1987 - 5/31/2011

(E0965)

Real Average Retail Gasoline Price 4/30/2011 = 366.3 cents/gallon

(Scale Left)( )

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Conference Board's Inflation Expectations

(Scale Right) ( )

Correlation Coefficient = 0.82Source: The Conference Board 3.8

3.9 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6

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Inflation Expectations vs Real Retail Gasoline Prices (Smoothed)


10• Overall, the broad market (S&P 500 Index) appears overvalued, based on its 5-year normalized

P/E ratio

11• The broad market ranks in the 8th decile (more expensive) in terms of normalized P/E, for both the 1926-to-date period and the 1957-to-date period

12• Chart conveys a sense of “unfinished business” with respect to the possibility of

establishing a secular low (bottom line of channel)

(S7)

Monthly Data 12/31/1925 - 5/31/2011 (Log Scale)

Concept Courtesy: Fisher Capital Mgt.

Upper Trend Line Runs Parallel to Lower Trend Line

Earnings will reflect estimate for latest completed quarter until actual earnings are released.

CURRENT P/B = 2.3

P/D = 57.4

P/E = 16.5

T-Bill = 0.0

T-Bnds = 3.9

Based on monthly closing prices

Date P/B P/D P/E T-Bill T-BondA* 06/1932 . 4* 6. 7* 8. 9* 2. 6 3. 8 B 02/1937 2. 1 25. 1 17. 7 . 8 2. 5 C 04/1942 . 8 11. 1 7. 4 . 6 2. 4 D 05/1949 1. 0 14. 5 6. 0 1. 6 2. 4 E 01/1966 2. 1 34. 1 17. 9 4. 8 4. 4 F 11/1968 2. 2 35. 8 19. 1 5. 9 5. 4 G 12/1972 2. 0 37. 5 18. 4 5. 4 5. 6 H 09/1974 1. 0 17. 7 7. 0 11. 3 7. 3 I 02/1978 1. 1 18. 7 8. 0 6. 8 7. 6 J 07/1982 . 9 15. 7 7. 6 11. 9 13. 0 K 08/1987 2. 3 38. 7 22. 9 6. 2 9. 0 L 03/2000 5. 0 89. 4 29. 4 5. 9 6. 3 M 10/2007 2. 9 57. 4 19. 7 4. 0 4. 8

* = NDR Estimates

P/B P/D P/E T-Bill T-Bond

Average B,E,F,G,K,L,M 2. 7 45. 4 20. 7 4. 7 5. 4 Average A,C,D,H,I,J 0. 9 14. 1 7. 5 5. 8 6. 1

Average Secular LowsA,C,D 0. 7 10. 8 7. 4 1. 6 2. 9 Average Secular LowsH,I,J 1. 0 17. 4 7. 5 10. 0 9. 3

4 5 6 7 8 9

1113151821242934404755657791

107 126 148 175 206 243 286 337 397 468 551 649 765 901

1062125114741737

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1113151821242934404755657791

107 126 148 175 206 243 286 337 397 468 551 649 765 901

1062125114741737

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Standard & Poor's 500 Stock Index -- Trend Channel


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• Leuthold’s quality assessment based on profitability, leverage, and earnings consistency

• Lower quality stocks have outperformed since the market low of March 2009, but have trailed since the market peak in 2007

• The longer-term trend over the past 20 years has favored higher quality stocks

Quality Ranking High versus Low Performance Relative Strength

S&P 500 Constituents

111009080706050403020100999897969594939291901.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

2.35

2.40

High QR Outperform

Low QR Outperform

High QR

High QR

High QR

Low QR

Low QR

The Leuthold GroupCopyright © 2011

Low QR

14• Within the S&P 500 Index, high quality stocks are more attractively valued than low quality stocks,

based on normalized P/E ratio

Ratio of Normalized PE Ratio (High Quality/Low Quality)

S&P 500 Constituents

1009080706050403020100999897969594939291900.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

The Leuthold GroupCopyright © 2011

Median: 1.04

High Quality Stock More Expensive

Low Quality Stock More Expensive

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15• Earnings growth rates tend to be cyclical; earnings growth peaks have generally been

associated with more challenging equity markets during the past 30 years


(AA380)

S&P 500 Index

S&P 500 Gain/Annum When:

Expected EPS Gain/ % Growth Is: Annum of Time

* Above 14.2% 0. 3 15. 6

Between 4.2% and 14.2% 6. 9 65. 6

4.2% and Below 17. 2 18. 9

Buy/Hold 8. 4 100. 0

Calculation is median 12-month percent change in rolling one-year forecasted EPS.Rolling one-year forecasted EPS is a time-weighted average of current fiscal

year's earnings estimates and following fiscal year's earnings estimates. Forecasted EPS based on median estimates from Zacks Investment Research.

111 127 145 166 190 218 250 286 327 374 428 490 561 643 736 842 964

110312631446

111 127 145 166 190 218 250 286 327 374 428 490 561 643 736 842 964

110312631446

Median Estimated One-Year Earnings Growth Rate for S&P 500 Index Components (%)

5/31/2011 = 16.4%

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S&P 500 vs Median Expected Earnings Growth


16• The broad market also looks overvalued based on dividend yield

(S629)


Dividends Are NDR Estimates Prior to 1936 12-Month Dividends 3/31/2011 = $23.43

Dividends x 1/Norm (3.65) x 100 85.5-Year Median*

( )

S&P 500 ( )

5 7

1013182534466284

114 155 211 287 389 529 718 976

1326

5 7

1013182534466284

114 155 211 287 389 529 718 976

1326

Expensive (<2.87%)

Bargains (>5.56%)

Norm (3.65%)* (---)

25-Year Average = 2.25

50-Year Average = 3.065/31/2011 = 1.74

1.1 1.3 1.6 1.9 2.2 2.6 3.1 3.7 4.4 5.2 6.1 7.3 8.6

10.212.114.316.9

1.1 1.3 1.6 1.9 2.2 2.6 3.1 3.7 4.4 5.2 6.1 7.3 8.6

10.212.114.316.9

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Standard & Poor's 500 Stock Index

S&P 500 Dividend Yield (%) Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

17

• Typical of secular bear markets, the DJIA ended the 1965 - 1981 period near its starting level but experienced considerable volatility in between

• While the price low was reached in 1974, the valuation low didn’t occur until 1981

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• After a strong rebound from the1974 secular low, stock prices leveled off and became more range-bound

• We think the current environment for stocks could be similar, given the magnitude of the market’s rise and its full valuation

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Staying with “Quality” (data as of 5/31/11)

- Investment-grade balance sheets (S&P senior debt ratings)

• BBB- or better for 32 of 33 companies

- Higher dividend yield

• 2.72% vs. 2.21% for Russell 1000 Value vs. 1.89% for S&P 500

- Higher average ROE: 15.5 vs. 13.3 for Value Index

Insisting on “Cheapness” (data as of 5/31/11)

- Weighted average FY2 P/E ratio of 12.0x vs. 14.5x for Value Index

- 13 stocks with forward P/E ratios of 10x or below

- 19 stocks with price-to-book ratios below 2.0x

Focusing on Downside Risk- Seeking stocks with less potential downside exposure

- Stressing our bear case analysis during fundamental research

- Weighing the trade-off between upside target price and downside risk price

Seeing the Big Picture

* Credit Restraint * Higher Interest Rates

* Commodities * Monetary Debasement

Key Themes for Delaware U.S. Value

Debt Rating and Valuation(S&P 500 companies as of 5/31/2011)

14.216.3

0

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Investment Grade Non-Investment Grade

S&P Senior Debt Rating

FY

2 P

E R

atio

ROE and Valuation(S&P 500 companies as of 5/31/2011)

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Above Index Median Below Index Median

Return on Equity

FY

2 P

E R

atio

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Most Recent Sale

National Oilwell Varco (NOV) – April 2011

10/09 1/10 4/10 7/10 10/10 1/11 4/118

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©FactSet Research SystemsData Source: Compustat North America

National Oilwell Varco Inc. (NOV)30-Sep-2009 to 31-Mar-2011 (Daily)

Average: 13.1 High: 21.0 Low: 9.4 Latest: 19.9

Price to Earnings

• Initial purchase in October 2009 amid negative sentiment toward energy stocks; earnings expectations for NOV had fallen due to large reduction in active rigs

• Stock performed well over our relatively short holding period

outperformed sector and benchmark—total return of approximately 90%

reached upside price target of $80

trailing P/E ratio effectively doubled, from 10x to 20x

• Sentiment had improved significantly

percentage of analysts with buy ratings rose from 60% to 83%

analysts’ average target price moved from $47 to $92

• NOV’s risk/reward trade-off no longer looked attractive to us

• Sale reduced portfolio’s target weight in energy to 12%

The example above is for illustration purposes. The information should not be considered a recommendation to buy, hold, or sell and should not be relied upon as research or investment advice.

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Raytheon Co. (RTN) – April 2011

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Raytheon Co. (RTN)30-Mar-2001 to 31-Mar-2011 (Monthly)


Price to Earnings - FY2 Average

'01 '02 '03 '04 '05 '06 '07 '08 '09 '104

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©FactSet Research SystemsData Source: I/B/E/S Consensus, Compustat North America


Enterprise Value to EBITDA Average

• 5th largest and most broadly diversified U.S. defense contractor

no program comprises >5% of sales; 20% of 2010 sales were non-U.S.

• RTN under pressure due to concerns about potential cuts in military spending

• Believe current market valuation overly discounts effect of cuts and doesn’t reflect ongoing international growth potential; RTN trading near 10-year lows

• Attractive quality attributes include A- senior debt rating, $3.6 billion in cash, modest net debt position, interest coverage ratio of 23x, 3%+ dividend yield

• Less than 3% exposure to supplemental budget (which funds current wars)

• Tenuous geopolitical climate supportive of ongoing investment in military technology and equipment

The example above is for illustration purposes. The information should not be considered a recommendation to buy, hold, or sell and should not be relied upon as research or investment advice.

Most Recent Purchase

22Performance results presented before the reduction of Delaware Investments advisory fees. Management fees, and any other expenses incurred in the management of the account will reduce your return. After inclusion of management fees, annualized performance for the 1 year, 5 year and since inception periods was 32.36%, 3.21%, and 5.79%, respectively. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

Performance

23

Performance

Performance results presented before the reduction of Delaware Investments advisory fees. Management fees, and any other expenses incurred in the management of the account will reduce your return. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

24

Performance

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.Source: PSN. Reproduced pursuant to a licensing arrangement with PSN, which permits redistribution of this material. Presented as supplemental performance information consistent with GIPS standards, which can be found at www.cfainstitute.org. Although presented in a manner consistent with applicable requirements, by providing this performance information Delaware Investments is not claiming ownership of the entire performance record. The performance from April 1, 2004 through May 31, 2011 represents the Delaware Investments Large-Cap Value – Focus composite track record. The performance from January 1, 1994 through March 31, 2004 represents the track record generated by certain members of the existing portfolio team while employed by Merrill Lynch Investment Managers.

Citywire june 2011

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Transcript of Citywire june 2011