Issue 4 – 11th April 2018
ValuFolio – March 2018
. At the Q1 juncture, the majority of our strategies have been able to . eROC Global 90, our diversified global strategy, is flat QTD vs a beat the market, partly thanks to a good month of March. Seven quarterly fall of -1.4% for MSCI World LC. This is another example of a strategies were able to beat or match their benchmark (the best being strategy “doing the job”. We note as well that the strategy’s volatility in eROC USA 60, with an excess return of 2.2% for the quarter) and only one, March was 11.9% vs 14.4% for the market. eROC Europe 30, could not. We always look for improvement, but we are . We benefitted this month again from a takeover situation, with satisfied with the overall behaviour of our strategies, which displayed no Takeda revealing its intention to bid for Shire Plc. Incidentally, we note that style drift and broadly did what they were designed to do. four out of the five best contributors in Europe came from the U.K., which . The eROC Global Sector 30 is exemplary in this respect. This iconoclastic is showing continuous signs of being the value market in this region. strategy usually performs well in an uncorrelated manner, as well as . The risk-controlled strategies had more mixed results. The global occasionally providing some unexpected and thought-provoking version (60 “stable” stocks out of the 90-name global strategy) performed investment options. eROC Global Sector 30 went quite defensive at the well, generating 80bp of excess return and a much lower volatility (11.6% end of 2017, rotating out of the global Technology sector for the first time vs 14.4% for the benchmark). The U.S. version did slightly less well, and the since 2010. Some signal… Solidly positioned in the more defensive sectors, European still needs to improve. including Utilities, the strategy posted this month an eye-popping absolute performance of +20bp in a falling market (-2.5%), fully invested.
Pascal Costantini (+44) 203 058 2931 | Joakim Darras (+44) 203 058 2933 | Janet Lear (+44) 203 058 2934 | Diarmid Ogilvy (+44) 203 058 2932
Authorised and regulated by the Financial Conduct Authority, reference 710908 | Company number 9505284
Contents
VALUANALYSIS EQUITY STRATEGIES ...... 3
THE VALUE OF… “VALUE” AND ACTIVE MANAGEMENT ...... 4
GLOBAL TRENDS YEAR TO DATE ...... 4 STOCK PICKS CONTRIBUTION ...... 6 REGIONAL SERIES ...... 7 RISK-CONTROLLED SERIES ...... 7
STRATEGIES FACTSHEETS...... 8
GLOBAL STRATEGIES...... 8
VALUFOCUS ...... 9 EROC GLOBAL 90 ...... 10 EROC GLOBAL SECTOR 30 ...... 11
REGIONAL STRATEGIES ...... 11
EROC USA 60 ...... 13 EROC EUROPE 50 ...... 14
SAFETY NET STRATEGIES ...... 15
EROC GLOBAL S 60 ...... 16 EROC USA S 40...... 17 EROC EUROPE S 30 ...... 18
GLOSSARY...... 20
DISCLAIMER ...... 22
ValuFolio | 2
ValuAnalysis Equity Strategies
ValuAnalysis uses its proprietary “eROC” models (economic Return on Capital) to value and select stocks in order to build strategies and portfolios for institutional investors. All strategies below are based on our approach to Franchise and Intrinsic value, a detailed exposé of which can be found on our website, The Theory and Practice of Franchise and Intrinsic Value Analysis.
Strategy Live Name Since Region Description Page ValuFocus 12-Jun-17 Global The reference portfolio is constructed from 3 lists of stocks: Core Franchises (franchises with little dispute from competitors or from 9 investors and an economic rent of 10%-20%), Emerging Franchises (franchises stemming from an unusual business model, a genuine new sector or an old industry reinventing itself) and Contentious Franchises (franchises under threat with a higher risk / reward proposition). These three sub-portfolios are given a weighting depending on ValuAnalysis' view of their relative potential and these views are outlined in the ValuFocus research reports. eROC Global 90 08-Apr-16 Global The reference portfolio is composed of 90 liquid & large cap global stocks selected and weighted equally on a quarterly basis. Stocks 10 exhibiting a sustainable “economic franchise” with a strong "shareholder pay-out ratio" at a "reasonable price" are selected. eROC Global Sector 30-Dec-16 Global The reference portfolio is composed of 30 liquid & large cap global stocks selected and weighted equally on a quarterly basis. The 11 30 selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal ranks all industry sectors by their median valuation. The 3 industry sectors with the lowest valuations are kept, represented by the 10 most "reasonably priced" stocks within these sectors. In case less than 10 stocks are below the sector median, additional stocks with the lowest valuation outside these sectors are also included. eROC USA 60 22-Sep-17 USA The reference portfolio is composed of 60 liquid & large cap US stocks selected and weighted equally on a quarterly basis. Stocks 13 exhibiting a sustainable “economic franchise” at a "reasonable price" are selected. eROC Europe 50 22-Sep-17 Europe The reference portfolio is composed of 50 liquid & large cap European stocks selected and weighted equally on a quarterly basis. Stocks 14 exhibiting a sustainable “economic franchise” at a "reasonable price" are selected. eROC Global S 60 08-Apr-16 Global The reference portfolio is composed of 60 liquid & large cap global stocks selected and weighted equally on a monthly basis. The 16 selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk analysis. First, 90 stocks exhibiting a sustainable “economic franchise” with a strong "shareholder pay-out ratio" at a "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 30 more volatile and least stable stocks according to advanced risk metrics. eROC USA S 40 22-Sep-17 USA The reference portfolio is composed of 40 liquid & large cap US stocks selected and weighted equally on a monthly basis. The selection 17 is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk analysis. First, 60 stocks exhibiting a sustainable “economic franchise” at a "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 20 more volatile and least stable stocks according to advanced risk metrics. eROC Europe S 30 22-Sep-17 Europe The reference portfolio is composed of 30 liquid & large cap European stocks selected and weighted equally on a monthly basis. The 18 selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk analysis. First, 50 stocks exhibiting a sustainable “economic franchise” at a "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 20 more volatile and least stable stocks according to advanced risk metrics.
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The Value of… “value” and Active Management
MSCI World is now down year to date (-1.4% at March end), and it looks like a looming “trade war” between America and China might be a more effective trigger to disrupt the market than equities’ oft-mentioned overvaluation. In this context, all our strategies but one did better than the market in March, ranging from -10bp to a very creditable +260bp against benchmark. The safety-net strategies are still struggling somewhat, due, we think, to a relatively low level of volatility despite the recent spikes, and a corresponding high level of correlation, which prevents our risk factor from discriminating enough. This is particularly true in Europe, less so in the U.S. market and even less so globally, where the “risk-controlled” version of VA Global 90 did well, generating 80bp of excess return at a substantially lower volatility.
Global Trends Year to Date This forensic approach of stock selection is currently not fashionable, but we think that the existing environment, should it Could Stock-picking Stage a Comeback? continue, might facilitate a comeback. Expensive and rising Even though some of our strategies are “systematic”, we consider markets arguably do not need stock pickers. Investors only need ourselves stock pickers; we do not systematically generate ratios a general exposure to real assets and any tracker will give them and numbers from a data provider like Bloomberg and invest in that. When some volatility comes back and equity markets are not what looks best. Rather, we analyse company-specific business obviously on a double digit annual increase trend line anymore, models, choosing to capitalise some costs over a given life for being able to differentiate between the intrinsic value of, say, some companies and not for others, normalising returns over AbbVie (24.7x normalised net FCF) and that of Alfa-Laval (24x, both different cash flow cycles or taking a margin of safety in some returning the same economic rent) ought to produce some specific cases. With this process, we derive a detailed analytical results, we think. In that respect, March was a good month for our opinion on stocks, with respect to their capital consumption, their strategies, and we are hopeful that these are the early signs of economic rent and their implicit future profile of free cash flow. more to come. The systematic aspect of our approach resides in our looking at all VA Global Series these same things for all the stocks, in not making any explicit forecasts for any stock, and in investing only in the most All three strategies of our global series did better than the market sustainable and cheapest ones, in our opinion. this month. ValuFocus did 70bp better than the market, with an unchanged portfolio. This strategy is up 12.9% since June 12th, 2017, against 9% for its benchmark, or 390bp of excess return.
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This is our only “actively” managed strategy and the lowest In parallel, the strategy positioned itself on a combination of turnover one, by far. These carefully selected stocks still appear to Utilities, Consumer Discretionary and HealthCare (Telcos was have some excess return left in them, and we are in no hurry to briefly there during Q1, too), sending a signal of caution rather turn them over. eROC Global 90, a more diversified and more than enthusiasm. systematic strategy, did equally well, generating an excess return . Uncorrelated performance of 60bp. The strategy is flat in the year to date (-10bp), 130bp better than its global benchmark. Selecting three global sectors only (among a potential list of eleven) on the basis of their aggregated mean value leads to a The Value…of Value portfolio lacking diversification, seeking concentration and prone But the star of the global strategies this month is unquestionably to volatility. In fact, the strategy is almost systematically more eRoC Global Sectors 30, which generated 260bp of excess return volatile than its benchmark, by ca. 200bp annualised. and ended the month up 20bp in a falling market, despite its long- But the strategy’s long-term excess return potential is substantial only nature and its full equity exposure (no cash). (we estimate it to be ca. 500bp annualised) and, as the March performance shows, it can be uncorrelated, too. This should not We have designed sector rotation strategies based on relative surprise anyone. Many research papers2 have shown that the sector value since 2003 and have always found these strategies to single most potent explanatory factor to stock performance is the be rewarding on many fronts: level of value, preferably on normalised profitability, but, in any . Pertinent long-term sector information case, well ahead of interest rate-associated signals such as the “fed model”, consensus-associated signals or macro-associated Regular readers of this document may remember that the signals (e.g. trend GDP). strategy rotated out of the global technology sector in December 2017, a first since 20101. We are staunch supporters Yet, the proportion of variance explained remains low (below 50%) of the argument recognising a connectivity-induced productivity even by the best value factor. We explain this by the use of and its long-term effects on corporate margins. Regardless, it is accounting rather than adjusted fundamental corporate data in the hard, if not foolish, to ignore or dismiss such a rare signal value measures in these tests. The best example would be the use altogether, and investors could have done worse than pruning of a P/E ratio, with “E” being simply net profits, rather than an their technology exposure in Q1 2018, at least among the most Enterprise Value to unleveraged Free Cash Flow ratio. This is hopeful valuations. something that we strive to correct by using cash flows rather than earnings as a measure of profitability, or economic capital
1 ValuFolio issue 1, January 2018 2 See for instance Forecasting stock returns, Vanguard research, 2012
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rather than book value as a measure of capital invested, and targets. The strategies have already benefited from this bias this generally calculating all ratios with “economic” corporate data. year (e.g. Dr Pepper, GKN) and Shire (the best contributor in eROC Europe 50) was the latest target on the list, coming – rather Stock Picks Contribution surprisingly - from Takeda’s public interest. Elsewhere, and rather Contribution to Total Return Analysis strangely, Express Scripts, also wanted by Cigna, did not react well to the announcement and was an unusual drag to the The individual strategy sheets (see page 9 onwards) give the five performance of the eROC Global Sector 30. best and worst contributors to total return (CTR) on a monthly basis. The following table gives the top two best and worst . Positive contribution from newcomers contributors for selected strategies. We added Micron Technology last month and the stock is still performing well this month (March), getting the top spot of eROC MONTHLY CONTRIBUTION TO TOTAL RETURN, BEST AND WORST, SELECTED STRATEGIES USA 60. Burberry, a stock that entered various strategies at the Best two CTR % Worst two CTR % end of February did well for the Global 90, the Europe 50 and the ValuFocus Global Sector 30. Pandora A/S 0.28% McKesson Corporation -0.41% Mylan N.V. 0.15% Apple Inc. -0.40% . Pandora A/S is rewarding the patient investor eROC Global Sector 30 Pandora is on a roll and has gone up 9% in the past month, ENN Energy Holdings Ltd 0.51% Signet Jewelers Ltd -0.77% benefitting ValuFocus. We classify the company as a contentious Burberry Group plc 0.41% ProSiebenSat.1 Media SE -0.42% franchise, meaning that its franchise (which is real, as we calculate eROC Global 90 that the stock has a normalised operating rent of 40%+) is not Burberry Group plc 0.14% Capita plc -0.18% Seagate Technology plc 0.12% ProSiebenSat.1 Media SE -0.14% really deemed sustainable by investors. These are attractive eROC USA 60 investments if we can get the level of franchise right, as investors Micron Technology, Inc. 0.19% Signet Jewelers Ltd -0.36% will play catch-up for every “fade beating” year, or the ability of the Seagate Technology plc 0.18% Discovery -0.20% company to deliver a better outcome than expected. We seem to eROC Europe 50 be in such a phase with Pandora now. Shire plc 0.33% WPP plc -0.37% . ProSieben and Signet are a drag this month Burberry Group plc 0.22% ProSiebenSat.1 Media SE -0.26% (VALUANALYSIS) It is debatable whether Signet Jewellers is actually a sustainable franchise holder. This does not prevent Global Sector, which . More takeover bids focuses exclusively on value, from owning it. We calculate that this As we have pointed out in the past, our proclivity towards value stock trades on less than replacement value, which is a rarity in and sustainable economic franchise should naturally select bid the current market. But investors are unimpressed by the level of
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debt, even though the company is getting rid of its credit business acquire. It looks like the U.K. market might be the one with most to clean up its balance sheet. value in Europe, following its earlier Brexit-related fall.
ProSieben illustrated this month how Media stocks can be Risk-controlled Series volatile. Its shares featured as one of the worst contributors for 3 strategies, having been a top contributor for some in the previous These strategies, which take away the more unstable stocks from month. We suspect that the shares leaving the DAX in March had the Global 90, USA 60 and Europe 50 to produce three an adverse effect on their performance. Technically, media stocks corresponding “safety net” strategies with fewer stocks but are difficult to model, which may explain their erratic stock market paradoxically more stability, have been struggling over the past behaviour as well. But we think that this company has a real rent six to nine months. “Struggling” means that they do not and trades on less than 20x normalised FCF, which is why it is convincingly reduce volatility (their prime objective) and being included in several ValuAnalysis strategies. sometimes do not perform as well as their original strategies.
Regional Series Last month, we explained how we expect these strategies to start producing better statistics once volatility returns to normal levels U.S. Market (say between 15 to 20%). We are there, or thereabouts, and the eROC USA 60 was able to mitigate the 2.5% fall of the market with results are, if not wholly satisfactory, at least on the right track. a 40bp excess return in March, making the Q1 numbers eROC Global 60, the “Safety net” version of the Global 90, had a honourable, with an (absolute) improvement of 1.5% against a good month. It generated an excess return of 80bp (60bp for the market fall of -0.8%, with a volatility marginally below that of the 90-name strategy) with a significantly lower volatility than the market. Else, we can’t help noticing that Semiconductors and Data market (11.6% vs 14.4%). This is the blueprint of what these Storage were leading the charge for the strategy in March, despite strategies should produce in any market, except in the sort of the market fall, suggesting that investors in aggregate still have bull market that we saw for instance in 2017. some sympathy for the connectivity theme. The two regional strategies were less convincing. eROC USA 40 European Market was the better one; it managed to generate some excess return For once, Europe did slightly better than the U.S. market, falling by (+20bp) and less volatility than the market (16.8% vs 19.8%) and 2.1% only in March. eROC Europe 50 was able to improve on this its original strategy (16.8% vs 18.8%). eROC Europe 30 was more by 30bp, thanks partly to Shire (see above) and three other UK disappointing, and the risk control did not produce in this market stocks, Burberry, Bunzl and GlaxoSmithKline, the last what it is expected to do. It is unclear why, and there is no reason benefitting from a relief rally following their walking away from why, over the long run, our risk factor should not produce similar Pfizer’s consumer business, which they previously wanted to results across all markets.
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Global Strategies
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ValuFocus March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The portfolio is constructed from 3 lists of stocks: Core Franchises From: 12-Jun-17 to: 30-Mar-18 (daily) From: 12-Jun-17 to: 30-Mar-18 (daily) (franchises with little dispute from competitors or from investors 1300 1200 and an economic rent of 10%-20%), Emerging Franchises (franchises stemming from an unusual business model, a genuine new sector or an old industry reinventing itself) and Contentious 1200 1100 Franchises (franchises under threat with a higher risk / reward proposition). These three sub-portfolios are given a weight 1100 depending on ValuAnalysis' view of their relative potential. These views are outlined in the ValuFocus research reports. 1000 1000 Live since : 12-Jun-17 Strategy inception : 12-Jun-17
Benchmark : MSCI World LC (USD) 900 Selection method : Active 900 Stock weighting : Discretionary
Rebalancing frequency : Discretionary 1000at Rebased
- 800 800 Style : Long Only 06/2017 08/2017 09/2017 11/2017 12/2017 02/2018 06/2017 08/2017 09/2017 11/2017 12/2017 02/2018 Date Available as : Calculated by VA Price Date VA FOCUS Vs MSCI WORLD LC VA FOCUS MSCI WORLD LC RelativePerformance Region : Global Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% 40% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Pandora A/S 0.28 hold Return VA FOCUS -1.8% -1.4% 8.7% -1.4% 12.9% n/a n/a n/a n/a Cons. Staples Mylan N.V. 0.15 hold MSCI World LC -2.5% -1.4% 4.0% -1.4% 9.0% n/a n/a n/a n/a Energy Intel Corporation 0.12 hold Excess Return 0.7% 0.0% 4.7% 0.0% 3.9% n/a n/a n/a n/a Financ/Real… Roche Holding AG 0.07 hold Risk Larg. Drawdown VA FOCUS -5.4% -9.2% -9.2% -9.2% -9.2% n/a n/a n/a n/a Healthcare Gemalto NV 0.05 hold MSCI World LC -5.6% -9.5% -9.5% -9.5% -9.5% n/a n/a n/a n/a Industrials Bottom 5 Contributors CTR (%) Status Volatility VA FOCUS 13.1% 14.7% 11.6% 14.7% 10.4% n/a n/a n/a n/a IT McKesson Corporation -0.41 hold MSCI World LC 14.4% 14.6% 10.9% 14.6% 9.4% n/a n/a n/a n/a Materials Apple Inc. -0.40 hold Cisco Systems, Inc. -0.37 hold Ratio Ret / Vol VA FOCUS -14% -9% 75% -9% 124% n/a n/a n/a n/a Telecom. Kone Oyj -0.28 hold MSCI World LC -17% -10% 37% -10% 96% n/a n/a n/a n/a Utilities Gilead Sciences Inc. -0.27 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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eROC Global 90 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 90 liquid & large cap global From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) stocks selected and weighted equally on a quarterly basis. Stocks 3500 2000 exhibiting a sustainable “economic franchise” with a strong "shareholder payout ratio" at a "reasonable price" are selected. 3000 1750
2500 1500
2000 1250
Live since : 08-Apr-16 Strategy inception : 10-Jan-06 1500 1000 Benchmark : MSCI World LC (USD)
Selection method : Systematic (Franchise, Value, Dividends) 1000 750 Stock weighting : Equal
Rebalancing frequency : Quarterly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Independently calculated by S&P Price Date EGL 90 Vs MSCI WORLD LC EGL 90 MSCI WORLD LC RelativePerformance Region : Global Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Burberry Group plc 0.14 hold Return EGL 90 -1.8% -0.1% 4.5% -0.1% 15.3% 13.0% 9.1% 13.2% 12.0% Cons. Staples Seagate Technology plc 0.12 hold MSCI World LC -2.5% -1.4% 4.0% -1.4% 14.9% 13.3% 8.0% 9.6% 5.7% Energy Bunzl plc 0.10 hold Excess Return 0.6% 1.3% 0.5% 1.3% 0.5% -0.3% 1.2% 3.6% 6.3% Financ/Real… GlaxoSmithKline plc 0.09 hold Risk Larg. Drawdown EGL 90 -4.7% -9.3% -9.3% -9.3% -9.3% -9.3% -17.5% -17.5% -45.1% Healthcare Samsung Electronics Co. Ltd. 0.07 hold MSCI World LC -5.6% -9.5% -9.5% -9.5% -9.5% -9.5% -17.6% -17.6% -54.6% Industrials Bottom 5 Contributors CTR (%) Status Volatility EGL 90 11.9% 13.8% 10.6% 13.8% 10.3% 8.9% 12.1% 11.5% 16.9% IT Capita plc -0.18 hold MSCI World LC 14.4% 14.6% 10.9% 14.6% 9.5% 8.9% 11.5% 10.9% 17.5% Materials ProSiebenSat.1 Media SE -0.14 hold Discovery Communications, Inc. -0.13 hold Ratio Ret / Vol EGL 90 -15% -1% 42% -1% 149% 146% 76% 115% 71% Telecom. Adecco S.A. -0.13 hold MSCI World LC -17% -10% 37% -10% 156% 149% 69% 88% 33% Utilities General Mills, Inc. -0.11 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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eROC Global Sector 30 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 30 liquid & large cap global From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) stocks selected and weighted equally on a quarterly basis. The 4000 2000 selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal ranks all industry sectors by their 3500 1750 median valuation. The 3 industry sectors with the lowest valuations are kept, 3000 1500 represented by the 10 most "reasonably priced" stocks within these sectors. In case less than 10 stocks are below the sector 2500 median, additional stocks with the lowest valuation outside these 1250 sectors are also included. 2000 Live since : 30-Dec-16 Strategy inception : 10-Jan-06 1000 Benchmark : MSCI World LC (USD) 1500 Selection method : Systematic (Value) 1000 750 Stock weighting : Equal
Rebalancing frequency : Quarterly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Calculated by VA Price Date ESEC 30 Vs MSCI WORLD LC ESEC 30 MSCI WORLD LC RelativePerformance Region : Global Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% 40% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status ENN Energy Holdings Limited 0.51 hold Return ESEC 30 0.2% -1.4% 4.1% -1.4% 21.8% 13.6% 13.1% 17.0% 14.1% Cons. Staples Burberry Group plc 0.41 hold MSCI World LC -2.5% -1.4% 4.0% -1.4% 16.1% 13.3% 8.0% 9.6% 5.7% Energy National Grid plc 0.33 hold Excess Return 2.6% 0.0% 0.2% 0.0% 5.7% 0.3% 5.1% 7.4% 8.4% Financ/Real… H. Lundbeck A/S 0.27 hold Risk Larg. Drawdown ESEC 30 -3.7% -9.6% -9.6% -9.6% -9.6% -9.6% -24.4% -24.4% -50.7% Healthcare ENGIE SA 0.20 hold MSCI World LC -5.6% -9.5% -9.5% -9.5% -9.5% -9.5% -17.6% -17.6% -54.6% Industrials Bottom 5 Contributors CTR (%) Status Volatility ESEC 30 10.8% 13.2% 10.8% 13.2% 9.1% 9.5% 14.9% 13.7% 19.2% IT Signet Jewelers Limited -0.77 hold MSCI World LC 14.4% 14.6% 10.9% 14.6% 8.4% 8.9% 11.5% 10.9% 17.5% Materials ProSiebenSat.1 Media SE -0.42 hold Nikon Corporation -0.41 hold Ratio Ret / Vol ESEC 30 2% -10% 39% -10% 240% 143% 88% 124% 74% Telecom. Express Scripts Holding Company -0.28 hold MSCI World LC -17% -10% 37% -10% 193% 149% 69% 88% 33% Utilities Target Corp. -0.27 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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Regional Strategies
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eROC USA 60 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 60 liquid & large cap US From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) stocks selected and weighted equally on a quarterly basis. Stocks 4000 2000 exhibiting a sustainable “economic franchise” at a "reasonable price" are selected. 3500 1750
3000 1500
2500 1250 2000
Live since : 22-Sep-17 Strategy inception : 10-Jan-06 1000 Benchmark : MSCI USA (USD) 1500 Selection method : Systematic (Franchise, Value) 1000 750 Stock weighting : Equal
Rebalancing frequency : At least Quarterly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Calculated by VA Price Date EUS 60 Vs MSCI USA Index EUS 60 MSCI USA Index RelativePerformance Region : USA Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% 40% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Micron Technology, Inc. 0.19 hold Return EUS 60 -2.0% 1.5% 10.3% 1.5% 11.6% 12.4% 9.8% 15.1% 14.2% Cons. Staples Seagate Technology plc 0.18 hold MSCI USA -2.5% -0.8% 5.6% -0.8% 6.3% 13.4% 9.9% 12.5% 8.8% Energy Western Digital Corporation 0.13 hold Excess Return 0.4% 2.2% 4.7% 2.2% 5.3% -1.0% -0.1% 2.6% 5.4% Financ/Real… Ralph Lauren Corporation 0.10 hold Risk Larg. Drawdown EUS 60 -7.7% -9.5% -9.5% -9.5% -9.5% -9.5% -19.9% -19.9% -47.9% Healthcare Hormel Foods Corporation 0.08 added MSCI USA -7.0% -10.0% -10.0% -10.0% -10.0% -10.0% -14.2% -14.2% -51.7% Industrials Bottom 5 Contributors CTR (%) Status Volatility EUS 60 18.6% 19.0% 14.6% 19.0% 14.4% 12.2% 14.4% 13.5% 20.4% IT Signet Jewelers Limited -0.36 sold MSCI USA 19.8% 19.4% 14.3% 19.4% 14.0% 11.3% 13.0% 12.5% 20.3% Materials Discovery Communications, Inc. -0.20 sold Oracle Corporation -0.17 hold Ratio Ret / Vol EUS 60 -11% 8% 70% 8% 80% 101% 68% 112% 70% Telecom. General Mills, Inc. -0.16 hold MSCI USA -13% -4% 39% -4% 45% 118% 76% 100% 43% Utilities Cardinal Health, Inc. -0.15 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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eROC Europe 50 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 50 liquid & large cap From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) European stocks selected and weighted equally on a quarterly 3500 2000 basis. Stocks exhibiting a sustainable “economic franchise” at a "reasonable price" are selected. 3000 1750
2500 1500
2000 1250
Live since : 22-Sep-17 Strategy inception : 10-Jan-06 1500 1000 Benchmark : MSCI Europe (EUR)
Selection method : Systematic (Franchise, Value) 1000 750 Stock weighting : Equal
Rebalancing frequency : At least Quarterly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Calculated by VA Price Date EEU 50 Vs MSCI Europe (EUR) EEU 50 MSCI Europe (EUR) RelativePerformance Region : Europe Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% 40% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Shire plc 0.33 hold Return EEU 50 -1.8% -4.1% -2.4% -4.1% -1.4% -2.1% 2.3% 11.0% 10.7% Cons. Staples Burberry Group plc 0.22 hold MSCI Europe -2.1% -4.4% -3.6% -4.4% -2.4% -0.8% 0.2% 7.3% 4.7% Energy Bunzl plc 0.15 hold Excess Return 0.3% 0.3% 1.2% 0.3% 0.9% -1.3% 2.1% 3.7% 6.1% Financ/Real… Thales SA 0.15 hold Risk Larg. Drawdown EEU 50 -4.8% -8.8% -8.8% -8.8% -8.8% -9.0% -17.6% -17.6% -42.2% Healthcare GlaxoSmithKline plc 0.15 hold MSCI Europe -4.9% -9.4% -9.4% -9.4% -9.4% -9.4% -25.9% -25.9% -51.5% Industrials Bottom 5 Contributors CTR (%) Status Volatility EEU 50 15.3% 14.3% 12.0% 14.3% 11.8% 11.2% 16.3% 15.2% 19.6% IT WPP plc -0.37 hold MSCI Europe 14.3% 14.3% 11.5% 14.3% 11.3% 10.6% 17.2% 16.1% 21.1% Materials ProSiebenSat.1 Media SE -0.26 hold Adecco S.A. -0.26 hold Ratio Ret / Vol EEU 50 -12% -29% -20% -29% -12% -19% 14% 72% 55% Telecom. Publicis Groupe SA -0.18 hold MSCI Europe -15% -31% -31% -31% -21% -8% 1% 45% 22% Utilities Fresenius SE & Co KGaA -0.17 sold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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“Safety Net” Strategies
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eROC Global S 60 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 60 liquid & large cap global From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) stocks selected and weighted equally on a monthly basis. The 3500 2000 selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk 3000 1750 analysis. First, 90 stocks exhibiting a sustainable “economic franchise” with 2500 1500 a strong "shareholder payout ratio" at a "reasonable price" are pre- selected. Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 30 more volatile and least stable stocks 2000 1250 according to advanced risk metrics Live since : 08-Apr-16 Strategy inception : 10-Jan-06 1500 1000 Benchmark : MSCI World LC (USD)
Selection method : Systematic (Franchise, Value, Dividends, Risk) 1000 750 Stock weighting : Equal
Rebalancing frequency : Monthly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Calculated by VA Price Date EGL S60 Vs MSCI WORLD LC EGL S60 MSCI WORLD LC RelativePerformance Region : Global Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Bunzl plc 0.14 hold Return EGL S60 -1.6% -0.9% 4.3% -0.9% 11.8% 10.0% 8.0% 13.4% 11.6% Cons. Staples GlaxoSmithKline plc 0.14 hold MSCI World LC -2.5% -1.4% 4.0% -1.4% 14.9% 13.3% 8.0% 9.6% 5.7% Energy Samsung Electronics Co. Ltd. 0.12 hold Excess Return 0.8% 0.5% 0.3% 0.5% -3.0% -3.3% 0.1% 3.8% 5.9% Financ/Real… Swedish Match AB 0.09 hold Risk Larg. Drawdown EGL S60 -4.8% -9.4% -9.4% -9.4% -9.4% -9.4% -14.1% -14.1% -40.9% Healthcare KDDI Corporation 0.08 hold MSCI World LC -5.6% -9.5% -9.5% -9.5% -9.5% -9.5% -17.6% -17.6% -54.6% Industrials Bottom 5 Contributors CTR (%) Status Volatility EGL S60 11.6% 13.2% 10.1% 13.2% 9.4% 8.4% 11.0% 10.6% 14.7% IT Adecco S.A. -0.20 hold MSCI World LC 14.4% 14.6% 10.9% 14.6% 9.5% 8.9% 11.5% 10.9% 17.5% Materials Oracle Corporation -0.17 hold General Mills, Inc. -0.16 hold Ratio Ret / Vol EGL S60 -14% -7% 43% -7% 126% 119% 73% 126% 79% Telecom. Express Scripts Holding Company -0.14 hold MSCI World LC -17% -10% 37% -10% 156% 149% 69% 88% 33% Utilities Amgen Inc. -0.12 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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eROC USA S 40 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 40 liquid & large cap US From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) stocks selected and weighted equally on a monthly basis. The 4000 2000 selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk 3500 1750 analysis. First, 60 stocks exhibiting a sustainable “economic franchise” at a 3000 1500 "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 20 more 2500 volatile and least stable stocks according to advanced risk metrics 1250 2000
Invested since : 22-Sep-17 Strategy inception : 10-Jan-06 1000 Benchmark : MSCI USA (USD) 1500 Selection method : Systematic (Franchise, Value, Risk) 1000 750 Stock weighting : Equal
Rebalancing frequency : Monthly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Tracker Price Date EUS S40 Vs MSCI USA Index EUS S40 MSCI USA Index RelativePerformance Region : USA Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% 40% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Ralph Lauren Corporation 0.15 hold Return EUS S40 -2.2% 0.8% 6.3% 0.8% 7.5% 10.5% 9.4% 14.8% 13.9% Cons. Staples Hormel Foods Corporation 0.12 added MSCI USA -2.5% -0.8% 5.6% -0.8% 6.3% 13.4% 9.9% 12.5% 8.8% Energy Crown Holdings Inc. 0.11 added Excess Return 0.2% 1.6% 0.7% 1.6% 1.2% -2.9% -0.5% 2.3% 5.1% Financ/Real… Universal Health Services Inc. 0.10 hold Risk Larg. Drawdown EUS S40 -7.0% -9.7% -9.7% -9.7% -9.7% -9.7% -13.7% -14.0% -40.5% Healthcare Booking Holdings Inc. 0.07 hold MSCI USA -7.0% -10.0% -10.0% -10.0% -10.0% -10.0% -14.2% -14.2% -51.7% Industrials Bottom 5 Contributors CTR (%) Status Volatility EUS S40 16.8% 18.0% 13.7% 18.0% 13.5% 11.4% 13.0% 12.4% 17.7% IT Oracle Corporation -0.25 hold MSCI USA 19.8% 19.4% 14.3% 19.4% 14.0% 11.3% 13.0% 12.5% 20.3% Materials General Mills, Inc. -0.24 hold Express Scripts Holding Company -0.22 hold Ratio Ret / Vol EUS S40 -13% 5% 46% 5% 56% 92% 73% 120% 78% Telecom. DaVita HealthCare Partners Inc. -0.21 hold MSCI USA -13% -4% 39% -4% 45% 118% 76% 100% 43% Utilities Target Corp. -0.20 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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eROC Europe S 30 March 2018 Strategy Description Cumulative Performance (daily) Relative Performance (daily) The reference portfolio is composed of 30 liquid & large cap From: 30-Mar-10 to: 30-Mar-18 (daily) From: 30-Mar-10 to: 30-Mar-18 (daily) European stocks selected and weighted equally on a monthly basis. 3500 2000 The selection is the result of a two-pronged analysis: an initial fundamental valuation appraisal followed by a financial risk 3000 1750 analysis. First, 50 stocks exhibiting a sustainable “economic franchise” at a 2500 1500 "reasonable price" are pre-selected. Thereafter, a “safety net approach” (hence the letter S in the name) excludes the 20 more volatile and least stable stocks according to advanced risk metrics 2000 1250
Invested since : 22-Sep-17 Strategy inception : 10-Jan-06 1500 1000 Benchmark : MSCI Europe (EUR)
Selection method : Systematic (Franchise, Value, Risk) 1000 750 Stock weighting : Equal
Rebalancing frequency : Monthly 1000at Rebased
- 500 500 Style : Long Only 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 03/2010 08/2011 12/2012 05/2014 09/2015 02/2017 Date Available as : Tracker Price Date EEU S30 Vs MSCI Europe (EUR) EEU S30 MSCI Europe (EUR) RelativePerformance Region : Europe Strategy live date Strategy live date
Historical Sector Split Top & Bottom 5 Contributors in the month 0% 10% 20% 30% 40% <1 y Annualised 1 m 3 m 6 m YTD Live 1 Y 3 Y 5 Y 10 Y Cons. Disc. Top 5 Contributors CTR (%) Status Bunzl plc 0.25 hold Return EEU S30 -2.2% -6.5% -5.7% -6.5% -4.7% -4.7% 1.4% 9.8% 11.3% Cons. Staples GlaxoSmithKline plc 0.25 hold MSCI Europe -2.1% -4.4% -3.6% -4.4% -2.4% -0.8% 0.2% 7.3% 4.7% Energy Wolters Kluwer NV 0.11 hold Excess Return -0.1% -2.1% -2.1% -2.1% -2.3% -3.9% 1.2% 2.5% 6.6% Financ/Real… Burberry Group plc 0.05 added Risk Larg. Drawdown EEU S30 -5.7% -11.3% -11.3% -11.3% -11.3% -12.7% -14.8% -14.8% -30.8% Healthcare Danone 0.03 added MSCI Europe -4.9% -9.4% -9.4% -9.4% -9.4% -9.4% -25.9% -25.9% -51.5% Industrials Bottom 5 Contributors CTR (%) Status Volatility EEU S30 16.5% 15.3% 12.4% 15.3% 12.2% 11.4% 16.0% 14.7% 16.8% IT Adecco S.A. -0.43 hold MSCI Europe 14.3% 14.3% 11.5% 14.3% 11.3% 10.6% 17.2% 16.1% 21.1% Materials Publicis Groupe SA -0.31 hold Fresenius SE & Co KGaA -0.28 sold Ratio Ret / Vol EEU S30 -14% -43% -46% -43% -38% -42% 8% 67% 67% Telecom. Imperial Brands PLC -0.22 hold MSCI Europe -15% -31% -31% -31% -21% -8% 1% 45% 22% Utilities Kone Oyj -0.17 hold
Source: ValuAnalysis. Assumes reinvestment of dividends net of withholding taxes. Gross of fees or transaction costs. Proforma back testing up to the LIVE date. Live thereafter.
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GLOSSARY
Competitive Advantage Period (CAP) The period during which a firm can generate a return (see Rent) above the cost of capital. Economic Profits Cash profits or Free Cash Flow minus the notional cost of capital. Excess Return The level of return above the cost of capital. Fade The rate of normalisation of the competitive position of the firm, defined as its level of Rent and growth rate. By construction, an excess return cannot be assumed to be perpetual, and the market always assumes an eventual normalisation towards the cost of capital. Franchise Value One of the three sources of value, defined as the net present value of a firm’s sustainable level of Economic Profits over its Competitive Advantage Period. Gross economic Capital (GeC) The sum of all operating capital used by the firm pre-depreciation, including all tangible assets, capitalised intangible assets and operating leases, Other Long Term Assets (OLTA) and concession assets. Growth Value One of the three sources of value, defined as the residual of: Market Value minus Replacement Value and Franchise Value. Intrinsic Value The sustainable value of a firm, defined as Replacement Value plus Franchise Value. Net economic Capital (NeC) The depreciated value of GeC, according to the principles of economic depreciation. Net Free Cash-Flow Gross cash flow minus all capital spending. Operating Free Cash-Flow Gross cash flow minus maintenance capital spending. Rent or Rent Yield The ratio of FCF over Net economic Capital. We refer to it as “asset yield” or “cash return” as well. Replacement Value One of the three sources of value, equal to Net economic Capital. Residual Income Model A valuation framework defining the price of an asset as the net (depreciated) value of this asset plus the net present value of its sustainable level of economic profits.
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DISCLAIMER
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ValuAnalysis has no agreements with issuers with respect to dissemination of recommendations. Analysts do not, nor will they, receive direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in this report. Analysts are paid in part based on the overall profitability of ValuAnalysis.
In line with the European Union’s Market Abuse Regulation, ValuAnalysis provides quarterly statistics on the overall ratio of "Buy”, “Hold” and “Sell” in ValuAnalysis recommendations in financial instruments and the proportion of issuers corresponding to each of those categories to which such person has supplied material services of investment firms over the previous 12 months. These are as follows:
“Buy”, “Hold” and “Sell” recommendations Investment services provided to these issuers in previous 12 months Recommendation Number % of total Number % of total Buy 27 82 0 0 Hold 0 0 0 0 Sell 6 18 0 0
The above table covers the period 26th October to 7th February 2018. This disclosure is reviewed and updated on a quarterly basis. Last updated 7th February 2018.
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For more information:
Pascal Costantini Joakim Darras Janet Lear Diarmid Ogilvy Founding Partner Founding Partner Partner Founding Partner The Clubhouse, 8 St. James's Square The Clubhouse, 8 St. James's Square The Clubhouse, 8 St. James's Square The Clubhouse, 8 St. James's Square London SW1Y 4JU London SW1Y 4JU London SW1Y 4JU London SW1Y 4JU (+44) 203 058 2931 (+44) 20 3058 2933 (+44) 203 058 2934 (+44) 203 058 2932 [email protected] [email protected] [email protected] [email protected]
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