Long Term Investing in a Short Term World

Transcription

1 Long Term Investing in a Short Term World June 2013 Mike Clements Portfolio Manager, Franklin European Growth Fund Franklin Templeton Investment Funds

2 1 Franklin European Growth Fund What kind of stocks do we look for? 1. Sustainable competitive advantage Strong brands AB InBev, Diageo Dominant market share Fugro Technological advantage De La Rue Lowest cost producer Carpetright 2. Strong balance sheets Often net cash balance sheets Must generate substantial free cash flow 3. Attractive valuation Target at least 10% annualised return over our five year investment horizon We are often contra-sentiment We ask ourselves the question what happens if we are wrong? Sustainable Competitive Advantage Attractive Valuation Strong Balance Sheet

3 2 Navigating the European Crisis A Stock Picker s Approach Market Characteristics herd mentality and irrational investing driven by fear Macro uncertainty created a herd mentality amongst investors Investors lost confidence in the European project Political turmoil added to unclear outlook Risk premiums attached to various parts of the market became excessive Our Response removing the noise and normalising the chaos Volatility creates opportunity Much uncertainty is priced in Company fundamentals often overlooked in the midst of political turmoil Flight to safety has resulted in historically cheap equity market multiples

4 3 Case 1: Spain A Rare Opportunity? Market Sentiment An economy forced to undergo major adjustments amidst a serious real estate and banking crisis paired with very high unemployment Crucial requirement for growth measures needed to restore competitiveness The Positives Strong reforms and adjustment efforts especially in labour markets Impressive turnaround in net exports Our Philosophy on Spain To find high quality companies exposed to the Spanish domestic outlook Spanish 10 year Government Bond Yield /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/ /02/2013 GSPG10YR Index Our contrarian philosophy allows us to buy at the point of maximum pessimism and when valuations are most attractive Source: Franklin Templeton Investments as of 31/03/13. The above case study shown represents certain examples of the investment managers best performing investments and other investments made by the investment manager which were not as successful or that lost money are not shown. The investments may or may not be currently held by funds managed by the investment manager. Please refer to the Important Information slide for additional information.

5 4 Case Study - Mediaset España Spain s Number 1 Free to Air Broadcaster Long term competitive advantage Duopolistic FTA market structure with Mediaset Espana being the number 1 player. Recent industry consolidation means that the benefits of a cyclical recovery will flow to two commercial broadcasters instead of six pre-crisis. Best cost control in the sector and the most flexible programming costs amongst the major players. Quality Net cash balance sheet supported by very strong FCF generation. Valuation / Risk Our scenario analysis indicated that a recovery in Spanish private consumption, and thus the Spanish ad market, was not priced in. Current multiples suggest that if the advertising market rebounds to its normalised 15 year average, then we are paying very little for a company which generates an 11% FCF yield. (Photo shows the cast of El Hormiguero, a popular Spanish TV show which airs on a channel owned by Mediaset España Source: Wikimedia Commons). Source: Franklin Templeton Investments as of 31/03/13. The above case study shown represents certain examples of the investment managers best performing investments and other investments made by the investment manager which were not as successful or that lost money are not shown. The investments may or may not be currently held by funds managed by the investment manager. Please refer to the Important Information slide for additional information.

6 5 Case 2 - The Oil Sector Short term Concerns Overshadowing the Long Term Potential Market Sentiment The sector underperformed MSCI Europe by 20% in 2012 driven mainly by multiple company-specific negative events. The Positives Attractive valuation vs the market in an industry with strong long term prospects. Our Philosophy on Oil Play the weakness in the sector through investing in niche companies exposed to the strong structural drivers but are protected from the challenges currently facing the IOC s MSCI Europe STOXX Europe 600 Oil & 600 Gas Index Source: Bloomberg, FactSet and MSCI as of 31/03/ FactSet Research Systems Inc. All Rights Reserved. The above case study shown represents certain examples of the investment managers best performing investments and other investments made by the investment manager which were not as successful or that lost money are not shown. The investments may or may not be currently held by funds managed by the investment manager. Please refer to the Important Information slide for additional information.

7 6 Case Study - TGS NOPEC Norwegian Seismic Company Long term competitive advantage Consolidated market - 4 players controlling 80% of the market. Asset light business model allows TGS NOPEC to avoid the risk of oversupply. Barriers to entry for new entrants as sufficient scale is needed. Best track record in identifying new areas for exploration. Quality Generates sales of 2.5x its investment - the highest in the multi client industry. Very stable and best in sector margins and returns (5yr avg EBIT margin of 43% and ROE of 20%). Net cash balance sheet underpinned by strong FCF generation. Valuation / Risk Our scenario analysis indicated that at a price of NOK170 per share, we were assuming that they were only able to achieve 2.0x sales on their investment (the lowest it has been in 10yrs). The graphic shows an example of a geological map. TGS NOPEC focuses on seismological studies. Source: Franklin Templeton Investments as of 31/03/13. The above case study shown represents certain examples of the investment managers best performing investments and other investments made by the investment manager which were not as successful or that lost money are not shown. The investments may or may not be currently held by funds managed by the investment manager. Please refer to the Important Information slide for additional information.

8 7 Case 3 - UK Housing Market A Sector Rising From the Ashes Market Sentiment An environment characterised by a weak consumer reliant on low on low interest rates. Lending has remained stagnant despite efforts from UK Government and Bank of England. Positives New initiatives announced appear to have a clear bias towards new builds as opposed to existing homes. Increasing housing shortage in the UK UK Consumer Confidence Index Bank of England - Mortgage Approvals Our Philosophy on UK Housing Market Many investors are still scarred from the housing crisis and remain sceptical. Our view - a sector now characterised by stronger balance sheets and diminished competition in the land-buying market. Source: Franklin Templeton Investments as of 31/03/13. The above case study shown represents certain examples of the investment managers best performing investments and other investments made by the investment manager which were not as successful or that lost money are not shown. The investments may or may not be currently held by funds managed by the investment manager. Please refer to the Important Information slide for additional information.

9 8 Case Study - Berkeley Group plc London s Number 1 House builder Long term competitive advantage Twice as big as number two player in the market means significant economies of scale can be achieved on their cost base. Counter cyclical investment approach allows Berkeley to buy prime land at discounted prices when there is little competition in the bidding process. Berkeley s key skill lies in developing land that is complex both in its planning and its execution this allows them to generate superior returns and margins vs. peers. Quality Correctly called the cycle twice. Cautious management approach meant they were the only UK house builder to enter the recession with a net cash balance sheet. Valuation / Risk Our scenario analysis indicated that at 1400p, the market was assuming the excess free cash flow (FCF) in the landbank was never released. Over past 10yrs, Berkeley has generated 190m of FCF annually (~9.5% FCF yield). Source: Franklin Templeton Investments as of 31/03/13. The above case study shown represents certain examples of the investment managers best performing investments and other investments made by the investment manager which were not as successful or that lost money are not shown. The investments may or may not be currently held by funds managed by the investment manager. Please refer to the Important Information slide for additional information.

10 9 In Summary We focus on creating value across the market by: 1. Finding the right companies at the right price 2. Focusing on the downside risk

11 10 Franklin European Growth Fund Cumulative Net Fund Performance Over 5 Years in EUR 180 Performance in EUR (rebased to 100) % +10.0% Franklin European Growth Fund MSCI Europe Index 0 04/08 10/08 04/09 10/09 04/10 10/10 04/11 10/11 04/12 10/12 04/13 Source: Franklin Templeton Investments as of 30 April Past performance is not an indicator nor a guarantee of future performance.. All performance data shown is in the Fund currency stated and net of management fees. Performance data may represent blended share class performance, e.g. hybrid created from an A(dis) share class which was converted to A(acc). The Fund offers other share classes subject to different fees and expenses, which will affect their performance. Please see the prospectus for details.

12 11 Franklin European Growth Fund Annualised Performance - Volatility Over 5 Years in EUR Performance p.a in % Volatility Franklin European Growth Fund MSCI Europe Index Morningstar Sector (Europe Flex-Cap Equity) Source: Franklin Templeton Investments. As of 30 April All performance data shown is in the Fund currency stated and include reinvested dividends and are net of management fees. Sales charges and other commissions, taxes and other relevant costs paid by the investor are not included in the calculations. Inception Date of the Franklin European Growth Fund A(acc) EUR is 29 December Past performance is not an indicator or a guarantee of future performance.

13 Appendix

14 13 Franklin European Growth Fund Sector and Geographic Allocations as of 30 April 2013 Sector Allocation Geographic Allocation Consumer Discretionary Financials Industrials Consumer Staples Energy Healthcare Information Technology Utilities Telecommunication Services Materials 0% 8% 16% 24% 32% 40% United Kingdom France Netherlands Switzerland Italy Germany Sweden Spain Ireland Belgium Austria Norway Denmark Finland 0% 10% 20% 30% 40% 50% Franklin European Growth Fund MSCI Europe Index Source: Franklin Templeton Investments as at 30/04/13. Weightings as percent of equity. Percentage may not equal 100% due to rounding. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change.

15 14 Important Information Source: Franklin Templeton Investments, unless stated otherwise. Fund specific information - performance details provided are in the Fund currency, include reinvested dividends and are net of management fees. Sales charges and other commissions, taxes and other relevant costs to be paid by an investor are not included in the calculations. Past performance is not an indicator nor a guarantee of future performance. References to indices are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. An index is unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the Franklin Templeton Investment Funds SICAV ( the Fund ). Nothing in this document should be construed as investment advice. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus and where available, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. No shares of the Fund may be directly or indirectly offered or sold to nationals or residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local Franklin Templeton Investments representative before making any plans to invest. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund s holding at any one time. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. All or most of the protections provided by the UK Regulatory System will not apply to Franklin Templeton Investment Funds (SICAV) Investors. An investment in the Fund entails risks which are described in the Fund s prospectus and where available, in the relevant Key Investor Information Document. In emerging markets, the risks can be greater than in developed markets. The Fund invests in a specific sector or geographical area and the returns may be more volatile than a more diversified fund. For a free copy of the latest prospectus, the relevant Key Investor Information Document, the annual report and semi-annual report, if published thereafter or for more information about any Franklin Templeton Investments fund, please contact: Franklin Templeton Investments, Telephone: , [email protected] or write to us at the address below. Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. FTIML is authorised and regulated by the Financial Conduct Authority Franklin Templeton Investments. All rights reserved.

16 15 Important Information (continued) The case studies are not representative of the overall performance of the funds managed by the investment manager as is demonstrated by those funds past performance numbers. Past performance does not guarantee future results and results may differ over future time periods. These case studies are being shown only as examples of what the investment manager is seeking to achieve in managing the fund, but are not necessarily indicative of what has actually been achieved with all of the investments or will be achieved going forward. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment recommendation. The actions taken with respect to these investments, and their performance, may not be representative of other advice or investments. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the fund s manager or its affiliates. These opinions may not be relied upon as investment advice or an offer for a particular security or as an indication of trading intent for any fund FactSet Research Systems Inc. All Rights Reserved. The information contained herein: (1) is proprietary to FactSet Research Systems Inc. and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither FactSet Research Systems Inc. nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. All MSCI data is provided as is. The Fund described herein is not sponsored or endorsed by MSCI. In no event shall MSCI, its affiliates or any MSCI data provider have any liability of any kind in connection with the MSCI data or the Fund described herein. Copying or redistributing the MSCI data is strictly prohibited. Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.