PowerPoint Presentation
A (BL-Global) Flexible Approach to InvestingMay 2015#1Structural brakes on growth
Nominal growth of the global economy remains low by historic standards
Excess debt, demographics, technological disruption and gap of aggregate demand relative to aggregate supply are deflationary forces
Massive monetary response to avert deflation + financial repression: interest rates will remain low
No historic precedent for short-term rates remaining unchanged for over 60 months into an economic recovery
Economic and financial environment#US nominal GDP growthLower and lower#Too much debt
World debt much higher than before the financial crisis#Low interest rates
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Low interest rates#What is risk ?
1. Volatility (mark-to-market): Equities are risky
2. Loss of purchasing power (inflation): Cash is risky
3. Permanent (or near permanent) loss of capital
bankruptcy: Bonds can be risky buying at too high a price: Bonds and equities can be risky not handling the emotional pressure of a big decline: Equities are risky
4. Missing opportunities (Risk of not taking enough risk) : Cash is risky
- In a normal environment, using volatility as the way of defining risk is appropriate (equities are more risky than bonds). In the current environment, this is no longer trueAre equity risky ? #General Motors 7,25% 3/7/2013Risk 3: Illustration#8Cisco SystemsRisk 3: Illustration#9More than half of all government bonds in the world yield less than 1%
Search for yield has created an unstable bond market. Spreads are within historic lows and corporate financial health has deteriorated
Priority should still be given to equities. There has however been a substantial rerating of equities over the last 3 years
Focus on quality companies. The merits of profitable, well-managed businesses are more than usually compelling when economic growth is fragile (market share gains) and interest rates are close to all-time lows (higher multiples).
Dividends are important and a big part of equity returns in the years to come.
Where to invest ?#Government bond yields are very lowTen-year government bond yields (mid-May 2015)#Equities attractive when compared to bondsSource : Morgan StanleyMSCI Europe - Dividend Yield - Bond Yield (Latest = 205bp)#
Equities attractive when compared to bonds#
Companies are big buyers of equities#Need for incomeSource: Environnement conomique
Demographic trends favouring income#Quelle: Morgan Stanley
Low interest rates mean that income has to come from dividends#Dividend of Nestle (in CHF)Contrary to stock prices, dividends are not volatile#17Diversified portfolio:
Equities as centre-piece
Partial hedging of equity risk to manage volatility
Long-term government bonds as a hedge against recession / deflation
Gold as a hedge against a loss of control of the central banksBL-Global Flexible: Investment philosophy#18Equities: 77%
Quality at a reasonable price
Dividends
Defensive sector allocation
Partial hedging through futures (26%)BL-Global Flexible: Asset Allocation#19Allocation by regionAllocation by sectors(1): 16% hedged(2): 11% hedgedBL-Global Flexible: Asset Allocation#Health Care2000-2010 : derating (lower multiples)2011- ? : rerating (higher multiples)Stable / rising dividends
Consumer Staples
Earnings visibilityLow cyclicalityCompetitive advantages ( brands, distribution network, )Stable / rising dividends
BL-Global Flexible: Sector Allocation#LuxuryRising incomes in developing countriesLimited supplyStrong brandsInternet: more power to producers
TechnologyStrong balance sheetsReturn of capitalHigher levels of recurring revenueAsia
Huge competitive advantage through long term relationshipsRising middle class in developing countriesSuperior corporate governanceStrong balance sheets
BL-Global Flexible: Sector Allocation#Quality company in a bear market : KAO (Japan)#Bonds: 12 %
Long-Term U.S. Treasuries with hedging of dollar risk
Quality bonds in BRL and MXN with favourable risk / return characteristics (opportunistic purchases)
BL-Global Flexible: Asset Allocation#24Low bond yields reflect low nominal growth
#Gold: 7.5 %
Insurance
Currency (which cannot be arbitrarily created by a central bank)
Demand / supply situation remains favourable in the long run
Investment through gold companies:
Leverage on gold priceChange in strategy by gold producers (from production growth to profitability)Focus on royalties companies
BL-Global Flexible: Asset Allocation#26
Gold#27Gold priceGold#GoldIndex Gold Miners#ROYALTY COMPANIES
Superior business model:
little exposure to operating risk
upside potential from resource growth and mine expansions
high free cash flow generation
=> lower risk exposure to goldGold#Before hedgingAfter hedgingBL-Global Flexible: Currency Allocation#31* min (purchases, sales) / average of net assets** under restricted scheme
Operational data#BLI - Banque de Luxembourg Investments7, boulevard du Prince Henri - L-1724 LuxembourgPhone: (+352) 26 26 99-1Fax: (+352) 26 26 99 33 33E-mail: [email protected] WAGNER
Chief Investment Officer
Phone: (+352) 26 26 99 - 3317E-mail:[email protected]
Contacts Matthieu BOACHON
Sales Manager
Phone: (+352) 26 26 99 - 3700E-mail:[email protected]
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