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TIAA-CREF International Equity Fund: Distinct company insights driving high-conviction investments
Christopher Semenuk, Portfolio Manager Dan Morris, CFA, Global Investment Strategist May 22, 2014
2
International Equity
Agenda
§ Investment capabilities § Market overview: Europe, Emerging Asia, Japan § Stock stories: Accor, HDFC, Mazda § Risk management § Closing remarks
3
Centralized equity research team with a global perspective § Over 40 research analysts with an
average of 17 years’ experience – Supported by 11 research associates
§ Career analysts run sector neutral portfolios – Demonstrate conviction through
their investments
Regional specialists
Utilities analysts
Telecom services analysts
Technology analysts
Materials analysts
Industrials analysts
Healthcare analysts
Financial services analysts
Energy analysts
Consumer analysts
TIAA-CREF portfolio managers
Portfolio Management § Chris Semenuk − Lead manager with 26 years of
investment experience − 14 years managing International
Equity Fund
International Equity Fund capabilities
4
Long-tenured management team with extensive industry/company relationships § Supported by research staff of experienced global sector
specialists using proprietary models and bringing deep knowledge in their areas of expertise
Systematic and consistent approach to stock selection § Fundamental bottom-up analysis § Consistent focus on cash flow generation § Nearly fully invested providing pure exposure to the asset class
Focused portfolio of 70-100 stocks with high-quality bias § Concentrated in highest-conviction holdings § Smaller market-cap bias helps us develop unique insight
Long-term view on companies and markets § 2- to 5-year investment horizon on all holdings
Distinguishing characteristics
5
Economic recovery accelerating in Europe
Composite Purchasing Managers’ Indices (PMIs) Index level; value greater than 50 indicates expansion
Last data April 2014. Source: National Bureau of Statistics of China, HSBC, Markit, TIAA-CREF Asset Management.
30
35
40
45
50
55
60
30
35
40
45
50
55
60
2006 2007 2008 2009 2010 2011 2012 2013 2014
Europe
Emerging markets
Japan
Tohoku earthquake/tsunami
6
Japan is hoping QE provides the same boost it did in the U.S. and the U.K.
Monetary base (M0)* Indexed
Latest data April-May 2014. Source: US Federal Reserve, Bank of England, European Central Bank, Bank of Japan, TIAA-CREF Asset Management. *Monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the central bank).
0.7
1.4
2.8
2001 2003 2005 2007 2009 2011 2013
UK: $490
USA: $3,058
Japan: $1,251
Eurozone: $440
Increase since Dec 2007 ($bn)x
1.7x1
2 -‐
3 -‐
4 -‐
µ2.0x
7
Emerging markets and Japan are trading well below historical valuation levels
Region and country relative valuations
Last data: May 19, 2014. Note: Valuation based on current price to next twelve-month earnings relative to long-run average. Japan value calculated on median PE only since 2000, otherwise median is from 1987. Source: IBES, TIAA-CREF Asset Management.
Japan*
Emerging Asia
Emerging Markets
EMEA
DM ex-Japan
Asia ex-Japan
United States
Europe
Latin America
-30 -20 -10 0 10%
8
Earnings momentum recovering for emerging markets
Forward earnings estimates
94
97
100
103
106
78
89
100
111
122
May 13 Aug 13 Nov 13 Feb 14 May 14
Japan (left axis)
Europe ex-UK(right axis)
Emerging markets (right axis)
Last data: May 19, 2014. Indices in local currency terms except emerging markets, which is in USD. Source: Bloomberg, TIAA-CREF Asset Management.
9
Attractive sector valuation § Price-to-cash flow vs. market and sector § 5- and 10-year discounted cash flow
analysis § Sector analysts’ proprietary models
Consistent cash generation § History of using cash to generate
accretive results § Industry competitive Return On
Capital Employed (ROCE)
Performance-oriented management § Management benchmarked
against sector best-in-class § Leadership focused on innovation
and shareholder value § Top-tier management drives
leading market share
TIAA-CREF must have an “edge” § Not well followed by the Street § Unique insight into company
Stock Selection Process
International Equity Fund stock selection process: Four pillars
10
Attractive valuation relative to sector § Trades at less than 10x 2014 EV/EBITDA § 2% to 3% discount to global peers
Consistent cash generation § 300M Euro cash flow annually after
capital expenditures (capex) § Cash flow used to keep debt low, balance
sheet strong § Cash also used to build a state-of-the-art
booking system to compete with online travel agents
Performance-oriented management § Management divided the
company into two separate businesses – Property and Services – measuring each against best-in-class industry peers
TIAA-CREF must have an “edge” § High confidence in CEO
based on our past investment experience with him.
Accor facts § French § Hotel chain in
92 countries § $11.0 billion
market cap § Consumer cyclical
sector
International Equity Fund stock selection process: Accor S.A.
Please note the purpose of this material is to provide an example of how the portfolio management team evaluates securities. All information shown is historical, is provided for informational purposes only and should not be deemed as a recommendation to buy or sell the security shown above.
11
International Equity Fund stock selection process: HDFC Bank Ltd.
Attractive valuation relative to sector § Valuation considered somewhat high by
Indian bank standards, but not relative to Asian or global peers
§ Under appreciated/overlooked by global investors, creating opportunities for further growth
Consistent cash generation § History of generating excess cash § Cash used to improve balance sheet § Growing in under-banked markets in
rural India
Performance-oriented management § Highly focused on cost discipline
and high standards of risk and credit analysis
§ A gold-standard benchmark in Asian banking sector
§ Innovator in Indian banking market, offering Internet services and targeting “friends and family” to find good credit customers
TIAA-CREF must have an “edge” § History with current management
team: Strong relationship with former CFO who became CEO
§ High confidence in management’s ability to execute and meet financial goals
HDFC Bank facts: § Indian § Diversified
financial services § $34.9 billion
market cap § Financial Services
sector
Please note the purpose of this material is to provide an example of how the portfolio management team evaluates securities. All information shown is historical, is provided for informational purposes only and should not be deemed as a recommendation to buy or sell the security shown above.
12
International Equity Fund stock selection process: Mazda Motor Corp
Attractive valuation relative to sector § Valuation became cheap relative to
history as growth slowed due to aging product portfolio
§ Believe valuation will improve given future prospects for planned product innovation
Consistent cash generation § Unlike many car manufacturers, Mazda has
generated free cash after capex across market cycles
§ Balance sheet is almost in a net cash position
Performance-oriented management § Management is focused on
innovation § Producing cars for younger
buyers who appreciate performance and forward-thinking design
TIAA-CREF must have an “edge” § Our research analyst identified
an upcoming refresh in Mazda’s product portfolio before the Street recognized it
Mazda facts § Japanese § Global auto
company § $12.9 billion
market cap § Consumer
Cyclical sector
Please note the purpose of this material is to provide an example of how the portfolio management team evaluates securities. All information shown is historical, is provided for informational purposes only and should not be deemed as a recommendation to buy or sell the security shown above.
13
International Equity Fund Country allocations vs. MSCI EAFE Index as of March 31, 2014*
* Allocations at the time of investment may be different. All information is provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities shown above. The portfolio is actively managed and holdings may not be current.
** Country of Issue used in determining weights.
Country** Percent of portfolio Percent of benchmark Variance
France 21.92% 9.96% 11.96% United Kingdom 20.61% 21.15% (0.54%) Japan 13.51% 19.73% (6.22%) Switzerland 9.09% 9.30% (0.21%) Sweden 8.44% 3.25% 5.19% India 7.76% 0.00% 7.76% Greece 6.07% 0.00% 6.07% Germany 6.00% 9.47% (3.47%) Netherlands 1.58% 3.06% (1.48%) United States 1.58% 0.00% 1.58% Total 96.56% 75.93% 20.63%
Country allocations
14
Sector allocations
International Equity Fund Sector allocations as of March 31, 2014*
Percent of portfolio vs. MSCI EAFE Index
*The data shown is provided for informational purposes only. Allocations at the time of investment may be different.
6.90%
3.76%
4.53%
4.96%
10.99%
8.14%
10.44%
25.56%
11.76%
12.95%
1.30%
0.05%
0.99%
2.54%
3.69%
6.15%
6.99%
7.72%
16.14%
24.83%
29.60%
0% 5% 10% 15% 20% 25% 30% 35%
Short-Term Investments, Other
Energy
Utilities
Information Technology
Telecommunication Services
Consumer Staples
Materials
Health Care
Financials
Consumer Discretionary
Industrials International Equity Fund
MSCI EAFE Index
15
Risk management
Active risk management strategy seeks to closely monitor:
§ Deviations of sector and regional weightings relative to the benchmark – Targeted tracking error range from 500-800 bps – Typical position size of up to 600 bps
§ Systematic risk and beta
Risk control guidelines
§ Top 10 holdings consistently represent 40% to 45% of assets
§ Name count ranges from 70 to 100
§ Proactive trading around core positions as opportunities warrant
§ Individual security positions remain in 50-600 bps range
16
Closing remarks
§ Portfolio management team with long-term track record and deep relationships with company management, supported by global sector research specialists
§ Consistent and systematic management approach focusing on free cash flow
§ Concentrated portfolio of 70-100 stocks with a quality bias and high-conviction positions
§ 2- to 5-year investment horizon on holdings
17
International Equity Fund – Institutional class Net of fees as of March 31, 2014*
Average annual returns vs. MSCI EAFE Index
* The Fund’s inception date is July 01, 1999. Returns do not reflect the taxes that a shareholder would pay on fund distributions or on redemptions of fund shares. Investment return and principal value will fluctuate so that, when redeemed, shares may be worth more or less than the original cost. The performance presented represents past performance and is not an indicator or guarantee of future results. Performance data for the Fund is presented net of management fees and expenses and includes the reinvestment of dividends through March 31, 2014. The net expense ratio for this portfolio is 0.51%. Current performance may be lower or higher than the performance presented herein. For performance current to the most recent month-end, please visit www.tiaa-cref.org/charts/imf-performance.html. Please see the Appendix for important notes to this presentation.
2.91
%
2.91
%
25.1
6%
8.62
%
19.1
4%
7.33
%
5.86
%
0.66
%
0.66
%
17.5
6%
7.21
%
16.0
2%
6.53
%
4.40
%
0%
5%
10%
15%
20%
25%
30%
QTD YTD 1-Year 3-Year 5-Year 10-Year Since Inception
International Equity Fund (Institutional Class)
MSCI EAFE Index
Performance
18
Two options for asking questions:
§ Send questions from webinar console
§ To ask questions by phone, signal the operator
Q&A
19
Important information
This material is prepared by TIAA-CREF Asset Management and represents the views of Christopher Semenuk and Dan Morris as of May 2014. These views may change in response to changing economic and market conditions. The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
Please note the Fund is subject to special risks, including currency fluctuation and political and economic instability.
You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877-518-9161or log on to www.tiaa-cref.org for product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details.
© 2014 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, (TIAA-CREF), 730 Third Ave., New York, NY 10017
C16998