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TB SARACEN GLOBAL INCOME & GROWTH FUND QUARTERLY REVIEW 30 JUNE 2017 FOR PROFESSIONAL INVESTORS ONLY- Retail investors should consult their financial advisers
Fund Performance & Market Overview
TB SGIG Sector Average Quartile Q2 2017 +0.5% +0.7% 2 Source: Saracen Fund Managers as of 30 June 2017
Background Global stock markets made modest progress over the quarter, with the FTSE All-World
(Sterling) delivering a positive 1.4% total return for Q2 2017. Whilst the Japanese, UK and
US markets were up, Europe lagged.
Economic data was strong in Europe and slightly weaker in the US. European PMIs,
consumer confidence and retails sales all hit new highs; this helped lift the Euro by 2.4%
against Sterling and 6.5% against the Dollar. In the US, we have seen some data points such
as nonfarm payrolls and hourly wages begin to roll over. Sterling rose sharply at the start of
the quarter as a General Election was called, finishing up 4.2% against the Dollar.
Bond yields declined at the start of the quarter in a fairly quiet market. However, during June
there was increased commentary from Central Banks around the world regarding
normalisation of monetary policy and potential rate hikes which led to bond yields
consequently rising in every region. As a result, most bond indices ended the quarter almost
flat. UK yields rose from 1.1% to 1.3% after the General Election. There was also a slight
increase in Eurozone yields from 0.3% to 0.5%.
The Central Bank comments were probably a trigger for flows into equity funds finally starting
to turn positive. As shown below, after years of flows out of equities and into bond funds, we
have seen a positive net inflow into the former over the last quarter.
Graham Campbell David Keir
Cumulative flows into bond and equity funds
Source: ICI, Bloomberg, JPMorgan
The very slight expansion in bond yields also meant that the spread between dividend yields
and bond narrowed. Nevertheless, the premiums on equities yields over bond yields remain
close to all-time highs.
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00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17
Cumulative fund flows into equities ($bn)
Cumulative Equity (Total) Funds Flow ($mn) Cumulative Bond Funds Flow ($mn)
Bonds
Dividend yield spreads in the main regions
Source: Datastream, JPMorgan
Yet again, this appears anomalous with improving economic growth and with most company
balance sheets in good shape. We suspect we will reflect on this in later years as a clear
bond ‘sell’ signal, reflecting the focus of some investors to match duration liabilities while
ignoring the most important feature of any investment; value!
MSCI Europe: Dividend yield – Bond yield
Source: ICI, Bloomberg, Morgan Stanley
Fund Dividend
TB SGIG has declared an interim dividend of 2.98p, payable on 31 August. This represents
a year-on-year increase of 3.0%.
We target strong dividend growth over the long-term. As we look through 2017, we believe
that the underlying growth in our companies and the weakness of Sterling should result in
further dividend progression.
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0
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00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
US Dividend Yield minus Bond Yield Eurozone Japan UK
1933 1943 1953 1963 1973 1983 1993 2003 2013
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DY – BY
Median
Performance Review
During Q2, TB SGIG delivered a return of 0.5%, which was slightly behind the Global Equity
Income Sector Average of 0.7%.
The fund is ranked first decile within the Global Equity income sector over one year to 30 June
2017. On a longer-term basis, the fund is ranked second quartile over five years and since
launch, having delivered a return of +101% since inception versus the sector average of +80%.
Cumulative Performance after all ongoing charges to last valuation point in June 2017
1 month 6 months 1 year 3 years 5 years Since launch*
TB SGIG B Acc -0.2% +6.3% +28.9% +40.5% +98.2% +101.0%
Sector Average -0.7% +5.6% +19.2% +36.3% +89.2% +80.3%
Quartile Ranking 1 1 1 3 2 2
Source: Financial Express; *launch date 07 June 2011 Sector: IA Sector (Global Equity Income)
2017 Forecast Dividend Growth
30% of Portfolio
ABB 34% of Portfolio
26% of Portfolio BMW
DBS Apple
Ashmore Diageo AXA
Astrazeneca IBM Cisco
BP Intel Deutsche Post DHL
Chevron General Electric Dow Chemicals
Evonik GKN H&R Block 10% of Portfolio
Hugo Boss Harley Davidson Imperial Brands
HSBC Johnson and Johnson Invesco Allied Irish Bank
Merck Johnson Matthey JP Morgan Amadeus IT
Mizuho Financial Group Pfizer LVMH Anta Sports
Novartis Roche Microsoft Pandora
SES Schneider Novo Nordisk Prosieben
UBS SKF Saint Gobain Rio Tinto
0% - 3% 4% - 7% 8% - 12% > 12%
Positive Contributors
The fund benefitted from a number of our companies reporting strong results and a positive
outlook for 2017.
Novo Nordisk (+19%) was the biggest positive contributor to performance in the quarter after
reporting better than expected Q1 results, especially in the important diabetes division, beating
consensus by 5%. The company narrowed its full year guidance, which offered some relief to
sentiment on the shares.
H&R Block (+28%) reported better than expected Q4 earnings, beating market consensus by
6.5% on the back of strong cost control. The shares were up 8% on the day of the results and
are 30% above our initial purchase price. We have taken some profits towards the end of the
quarter.
Anta Sports (+15%) benefited from two peers recording good numbers. Li Ning of China
reported better than expected Q1 numbers and Nike posted a 7% sales increase for Q4, which
came on the back of a weak order book in Q3. Similarly, the market now expects Anta to post
better sales in Q2 despite posting a weaker order book in Q1.
Amadeus (+15%) was another company that beat Q1 expectations reporting sales and
EBITDA 3% and EPS 6% above consensus. The FY 2017 outlook was also slightly better
than what the market was hoping for. Most importantly for us, the company is looking to keep
its net debt / EBITDA range low at 1-1.5x and keep its dividend pay-out ratio at 50%.
LVMH (+13%) was a strong performer after reporting Q1 organic growth of 13%. The strength
was broad-based, with the higher margin areas of both Wines & Spirits and Fashion & Leather
performing particularly well. Whilst this run rate can’t be extrapolated, it does highlight the
return to growth of the luxury segment.
Financials outperformed this quarter as Central Banks around the world talked about
normalisation of monetary policy and potential rate hikes. The results of the stress tests in the
US benefitted banks globally. Our holdings in Invesco (+9%), HSBC (+9%), DBS (4%), AXA
(4%) and UBS (+3%) all had a good quarter. The fund has now reached its self-imposed limit
in financial exposure of 20% at the end of the quarter.
0
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NovoNordisk
Block H&R AntaSports
Novartis Amadeus HSBC LVMH Invesco DeutschePost
DBS
Negative Contributors
“Old” US tech stocks underperformed during the quarter despite positive earnings
announcements as most investors kept chasing highly priced new technology shares. IBM (-
15%) reported in-line Q1 numbers and reiterated its full year guidance. Management also
increased its quarterly dividend by 7% and the shares now yield 3.9%. Cisco (-11%) beat Q3
estimates with a stronger mix and margin upside. Intel’s (-10%) Q1 EPS were slightly better
than estimates and Q2 EPS outlook was 6% above expectations. The company also raised
its full year guidance. However, in all three cases the market only concentrated on short term
headwinds. We still see strong growth opportunities in our old tech holdings and used the
weakness to increase our positions over the quarter.
General Electric (-13%), Harley Davidson (-15%) and Dow Chemicals (-6%) were caught
up in profit taking in the US after reporting good numbers.
Pandora (-17%) beat Q1 EBITDA expectations as sales growth in Asia and other products
came in better than expected. However, the market is still focused on the slowdown in US
and UK. We see this as a temporary change rather than a structural change. In fact, towards
the end of the quarter Pandora’s CEO said in an interview that new products in US have
gained traction and that the company plans to open more stores. We have topped up our
holding near recent lows.
Portfolio Activity
The fund has 45 investments which are spread across the globe with an average market
capitalisation of £93.4bn. As at 30 June 2017, the breakdown of the portfolio by sales was
35% US, 35% Emerging Markets (incl. Asia ex-Japan), 22% Europe, 3% UK and 4% Japan.
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0
During the course of the quarter we made new investments in Pandora, Evonik and Allied
Irish Banks.
Pandora designs, manufactures and markets a full universe of high-quality, hand-finished, contemporary and affordable jewellery. Its cornerstone product is the collectible charm bracelet, which was launched in 2000 and is complemented by a range of other jewellery. We believe the company has long-term growth potential from launching new products and entering new geographic markets. It also has an extremely strong margin profile (75% gross margins and 35% operating margins). Pandora has a very solid balance sheet (0.3X net debt/EBITDA) and is incredibly cash generative. Due to concerns about a structural change in US and UK and a change in dividend policy (less share buyback and higher dividend pay-out ratio) the shares de-rated significantly this year. Pandora’s yield jumped from 1.3% to over 5% and made an investment for us much more interesting. At 12.7x 2017 PER and 8.7x Year 5 PER we see Pandora as a fantastic long term growth story with a strong yield and dividend growth. Evonik is a large speciality chemicals company with three segments, Nutrition & Care,
Resource Efficiency and Performance Materials. We had looked at Evonik in the past but
were concerned about the outlook of its Nutrition & Care division. A year ago it was 58% of
EBITDA with declining sales and margins. Today, the division makes up 33% of EBITDA and
is showing first signs of stabilisation. Additionally, the company was highly ambitious in its
M&A strategy and we were worried it would stretch its balance sheet too far. Although Evonik
bought Air Products Performance Materials this deal was not as large as feared and net debt/
EBITDA today stands at 1x. Lastly, the company appointed a new CEO in March who set new
margin targets and seems to have a more constraint approach to M&A. We like the change
in Evonik’s business profile and strategy over the last year. At 13.7x 2017 PER and 8.7x Year
5 PER with a 4% historic yield we feel the shares are undervalued and unloved.
We participated in the IPO of Allied Irish Banks, which was placed by the Irish Government
after a severe financial restructuring post 2008 crash. The shrinkage of the balance sheet and
built up of sufficient capital resulted in surplus capital ratios. There was a change in
management, which is more aligned with new shareholders and will have been actively
involved in ensuring that provisions and assumptions have been conservatively recorded. AIB
also has a leading position in the Irish banking sector and will benefit from accelerating
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45%
Europe ex-UK North America UK Asia ex-Japan Japan Emerging Markets
By Domicile By Sales
economic growth in Ireland. The balance sheet is very strong and with minimal scope to
acquire, due to competition issues, investors are likely to enjoy special dividends. The shares
were initially listed at 1x P/BV and had strong debut on the Irish stock market.
To fund these new opportunities we sold Asahi and Covestro.
Asahi rallied strongly after the acquisition of European assets from ABI. We were attracted
to a strong balance sheet, a low and increasing pay-out ratio and strong dividend growth.
However, Asahi took on more debt than we expected and its current net debt / EBITDA ratio
sits at almost 5x. This leaves the balance sheet too leveraged for our liking. Additionally, we
now expect the pay-out ratio to stay in the low 20% and after the run in the share price the
current yield of 1.5% is too low for a suitable investment for TB SGIG.
We bought Covestro after it was spun out of Bayer at the start of 2016. At the IPO the shares
were trading on 12x Year 1 PER and 8x Year 5 PER with a 4% dividend yield. Over the last
18 months the shares rose over 130% and re-rated on significantly better earnings than
expected. The increased valuation and a more severe worse case led us to turn less optimistic
on the shares. Additionally, Bayer continues to sell down sizeable stakes in the business. We
sold our holding in a very timely manner when both CEO and CFO announced their impending
departure from the business.
Portfolio Strategy & Themes
Our objective is to deliver growth in capital and dividends over the long-term from a diversified
portfolio of global leading companies. We take a long-term investment horizon with holdings
in companies such as Deutsche Post, Diageo, Johnson & Johnson, HSBC, Microsoft and
Novartis all held since the launch of the fund in 2011.
We remain optimistic that global growth will persist. Indeed, lead indicators and economic
activity across all geographies have continued to be robust and in expansionary territory.
Global economic indicators
Source: Datastream
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115.00
07/07 07/08 07/09 07/10 07/11 07/12 07/13 07/14 07/15 07/16
IFO Future Expectations (left) ISM Manufacturing (right)
In the Eurozone especially, the leading indicators of capex and utilisation rates are positive.
Eurozone capacity utilisation vs capex growth
Source: Eurostat, JPMorgan
Despite the elevated market levels, we still believe there are plenty of opportunities for
investors who are prepared to take a contrarian and value-orientated approach. Our research
continues to identify some outstanding opportunities in more economically-cyclical
businesses. Although these cyclicals have done well in the short-term, the chart below
highlights their significant long-term underperformance. We, therefore, expect this
outperformance to continue.
European Cyclicals vs Defensives Price Performance
Source: Datastream, Morgan Stanley
15%
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92 94 96 98 00 02 04 06 08 10 12 14 16
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Eurozone Non-Residential Fixed Investment, % y/y EU industry survey – level of capacity utilisation (rhs)
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70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
At the core of our research process is valuation. We like companies with strong balance
sheets and attractive starting dividend yields. We aim to take advantage of the extreme
movements in share prices to continually enhance returns for the long-term. But most of all
we like to buy shares cheaply. We are not concerned about market noise and often have a
very differentiated portfolio. As can be seen in the chart below, we only own two of the top 30
overweight holdings in Global dividend funds. On the other hand, 25% of our portfolio is in
the top 30 underweight stocks. We have very high conviction in our portfolio of 45 holdings,
which is at the bottom end of our 40-60 range.
Source: HSBC
The chart below highlights the broad sector spread within the portfolio.
Top 30 overweights of global dividend funds: Top 30 underweight of global dividend funds:
Imperial Brands Tobacco Exxon Mobile Energy
Sampo Insurance P&G Household Products
Las Vegas Sands Consumer Services AT&T Telecoms
BCE Telecom Nestle Food & Beverage
SSE Utilities HSBC Banks
SingTel Telecom Intel Semiconductors
BAE Systems Industrials IBM Software
EDP Portugal Utilities Merck Healthcare
National Grid Utilities Pfizer Healthcare
Philip Morris Tobacco Coca-Cola Food & Beverage
Amcor Materials Royal Bank of Canada Financials
KT&G Consumer Services Roche Healthcare
Enbridge Energy Anheuser-Busch Food & Beverage
Reynolds American Tobacco BASF Materials
British American Tobacco Tobacco McDonald's Consumer Services
TELUS Telecom Total Energy
Zurich Insurance Group Financials Sanofi Healthcare
Gjensidige Forsikring Financials Siemens Industrials
Hannover Rueck Financials Qualcomm Semiconductors
CMS Energy Utilities China Construction Bank Financials
Japan Tobacco Tobacco Bank of Nova Scotia Financials
Vanguard Semiconductors Cisco Systems Tech Hardware
Mattel Retailing Daimler Autos
Imperial Holdings Retailing Hon Hai Precision Tech Hardware
NWS Industrials Taiwan Semiconductor Mfg Tech Hardware
SES Consumer Discretionary ICBC Ltd Financials
Aberdeen Assset Mgmt Financials AstraZeneca Healthcare
Arther J Gallagher Financials ABB Capital Goods
HKT Trust & HKT Telecom Syngenta Materials
CA IT Dow Chemicals Materials
Healthcare is cheap on an absolute level and, as the chart below highlights, is significantly
cheaper than consumer staples. We continue to be attracted to the sector given the long-term
growth drivers of ageing populations in the west and increasing wealth in emerging markets.
Forward price-earnings ratio - Healthcare vs Staples
Source: Datastream
There is still significant value in financials where, despite the recent rally in share prices,
valuations remain low.
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20.0%
30.0%
40.0%
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S&P 500 Pharma PE / S&P 500 Staples PE Average
Healthcare is more expensive
Healthcare is cheaper
Eurozone Banks 12 months forward price-earnings ratio
Source: IBES, JPMorgan
The chart below outlines the performance of banks vs staples in relation to bond yields. We
expect banks to continue to outperform the defensive sector as bond yields keep rising. Over
the last twelve months we have been able to invest in global-leading franchises which have
strong Tier 1 Capital ratios, cheap valuations and high dividend yields. In fact, we reached
our self-imposed limit of 20% holdings in financials towards the end of the quarter. The only
area we still avoid are some Eurozone banks, particularly in France and Italy due to our
concerns about their balance sheets.
Banks relative to Staples and US 10Y bond yields
Source: Datastream, JPMorgan
1.05
0.95
0.85
0.75
0.65
0.55
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
MSCI Eurozone Banks 12 FWD PE relative Median + 1stdev - 1stdev
105
100
95
90
85
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70
65
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17
2.5%
2.3%
2.1%
1.9%
1.7%
1.5%
1.3%
European Banks relative to Staples US 10Y bond yields (rhs)
Clearly a pick-up in economic growth, rising bond yields and a reduction in regulation (as
promised by President Trump) will be very helpful for a sector which has underperformed the
wider market for many years.
Our exposure to the technology sector over the last 18 months has significantly increased,
introducing names such as Apple, Cisco, IBM and Intel to the portfolio. This is in addition to
our long-standing positions in both Amadeus IT and Microsoft. Our new additions all have
very low valuations and attractive dividend yields.
We believe these companies have been overlooked by investors because they have legacy
businesses which still make up significant proportions of the group profits and which are either
not growing, or are in long-term decline. On closer inspection, however, it becomes apparent
that these “old tech” businesses are slowly transforming themselves and, in time, will benefit
from the growth in connected devices, connections, data analytics and e-commerce. In
addition, they all have incredibly strong balance sheets with significant amounts of gross cash
(most of it held offshore). If President Trump allows the repatriation of this cash, we would
expect to see enhanced shareholder returns either through incremental investment in the
businesses or returns of capital.
We only have Diageo and Imperial Brands in consumer staples as this is an area of the market
which we still find to be extremely expensive.
Europe Food & Beverage relative vs US 10y bond yields
Source: Datastream, JPMorgan
We hope to be able to buy a selection of these high-quality companies back at some point in
the future. Nevertheless, we think that the de-rating of this over-owned and expensive sector
has a long-way to run.
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395
345
295
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195
145
95
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6%
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00 02 04 06 08 10 12 14 16
MSCI Europe Food, Beverages relative US 10Y bond yield (rhs, rs)
Staples Price/Book relative
Source: Datastream, JPMorgan
Investment Approach
TB Saracen Global Income & Growth Fund aims to provide a long-term return from investing
in a portfolio of low risk, highly liquid global equity securities. There is an explicit recognition
that income is an important factor for many investors and a significant contributor to long-term
investment returns.
We have a focussed and highly differentiated portfolio of 40-60 quoted global companies, a
high conviction fund with a significant active share, which is currently above 90%. There is no
formal benchmark for the fund, although we do report performance against the FTSE All-World
(Sterling) and the Global Equity Income Sector.
We aim to invest in global-leading businesses which are able to sustainably grow their
revenues, their profits and ultimately, their dividends. We are attracted to businesses which
have high and sustainable margin profiles, create value by generating a return on investment
above the weighted average cost of capital, are cheap, have a strong balance sheet and an
attractive starting dividend yield. We also like to see directors owning shares in the business
and being remunerated on total shareholder returns as opposed to an earnings-per-share
measure, which can be easily manipulated.
Our Wish List for Companies
Global Leading Businesses
Long-term revenue growth potential
Positive return on equity spread
Sustainable margins
Strong balance sheet
Attractive valuation and starting dividend yield in excess of 2%
Alignment of interest with directors
2.7
2.5
2.3
2.1
1.9
1.7
1.5
1.3
1.1
0.9
95 97 99 01 03 05 07 09 11 13 15 17
European Staples Price/Book relative to Market Median + 1stdev - 1stdev
We have a long-term approach and the turnover in the fund has, on average, been less than
20% per annum since the fund was launched.
Outlook
At times of stress, a robust investment process provides a vital support to a Fund Manager.
A year ago, when markets were in turmoil, we used the opportunity to buy positions in
businesses that we have watched for years (Apple, Harley Davidson, LVMH, JP Morgan), but
until then could not find a suitable entry point. We have also been steadily investing in more
cyclical businesses for the past eighteen months as our confidence increased that global
economic growth would persist and slowly strengthen. Estimating operational gearing at
economic turning points is notoriously difficult. We look at previous points in history for
guidance, as well as near-term actions on operational factors. However, our process ensures
that we are not deflected by thematics over valuation. Some of these investments in more
cyclical businesses have performed very strongly and on our forecasts, are already
discounting a robust recovery in fortunes. As a result, we have sold positions in Caterpillar,
Emerson, Wartsila and Covestro this year.
We continue to find value in more economically sensitive businesses which are often domiciled
in Europe.
Our portfolio contains 45 high conviction holdings across a variety of sectors, which we believe
offer attractive returns both in capital and income. The fund has delivered strong returns since
launch and, as ever, investors’ interests remain aligned with our own, given our significant
investment in the fund.
Graham Campbell David Keir Bettina Edmondston
For further information on TB Saracen Global Income and Growth Fund please
contact either Graham ([email protected]) or David
([email protected]) via email or by telephoning 0131 202 9100
Important information: This information should not be construed as an invitation, offer or recommendation to buy or sell investments, shares or securities or to form the basis of a contract to be relied on in any way and is by way of information only. The historic yield reflects distribution payments declared by the fund over the previous year as a percentage of its share price. Taxation levels, benefits and reliefs may all vary depending on individual circumstances and are subject to change. Subscriptions will only be received and shares issued on the basis of the current Prospectus, Key Investor Information Document (KIID) and Supplementary Information Document (SID). These are available, in English, together with information on how to buy and sell shares, on-line at www.saracenfundmanagers.com. Issued by Saracen Fund Managers Ltd, 19 Rutland Square, Edinburgh, EH1 2BB, authorised and regulated by the Financial Conduct Authority. Registered in Scotland No. 180545. Risk factors you should consider before investing: Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and you may get back less than the amount invested. A full list of the risks applicable to this Fund can be found in the Prospectus. All fund performance figures calculated on a single price basis. This Factsheet is for professional Investors only. Investment Manager - Saracen Fund Managers Ltd, 19 Rutland Square, Edinburgh, EH1 2BB Tel: 0131 202 9100/ Fax: 0131 221 1895 ACD & Fund Administrator – T Bailey Fund Services Limited (TBFS), 64 St James’s Street, Nottingham, NG1 6FJ Tel: 0115 988 8274 Custodian – The Northern Trust Company, 50 Bank Street, Canary Wharf, London, E14 5NT Depositary – NatWest Bank PLC, 135 Bishopsgate, London, EC2M 3UR Regulatory Status: FCA Recognised: Yes Scheme Type: OEIC Issue date – 30 June 2017
