years of sustainable
years
of sustainable
income
investing
income investing
reasons to consider
Investec Global
Quality Equity
Income Fund
For professional investors and financial advisors only.
Not for distribution to the public or within a country
where distribution would be contrary to applicable
law or regulations.
10 reasons to consider Investec Global Quality Equity Income
A
reasons to consider Investec Global Quality Equity Income Fund
Investec Global Quality Equity Income
1
Greater certainty in
uncertain markets
2
Tried and tested
track record of
income generation
Page 06
Page 07
reasons
6
Superior dividend growth
leads to far higher longer
term realised yields
7
Innovation and efficient
capital allocation protect
business models against
competitive threats
Page 11
Page 12
reasons to consider Investec Global Quality Equity Income Fund
3
Enduring competitive
advantages create
barriers to entry that
can sustain high levels
of profitability
Page 08
8
Financially strong with
low sensitivity to the
economic cycle
4
Quality companies
have delivered
sustainable long-term
outperformance
Page 09
9
Quality valuations
remain attractive
Page 14
5
Capital light business
models are highly cash
generative, providing
better cash cover
of dividends
Page 10
10
A disciplined
investment framework
to uncover the best
Quality income ideas
Page 13
Page 15
1
reasons to consider Investec Global Quality Equity Income Fund
Introduction
A differentiated approach
to income investing
The philosophy behind our approach
We believe that:
The Investec Global Quality Equity Income Fund
focuses solely on Quality companies.
Quality companies have enduring competitive
advantages, creating barriers to entry that can sustain
high levels of profitability. Naturally resilient and with
an ability to generate high levels of cashflow, they have
excellent records of compounding shareholder wealth
and sustainably growing income over time.
Managed by our Quality investment team, the Fund
aims to deliver investors:
• Above-market dividend yield and strong,
sustainable dividend growth – from companies
generating sustainably high levels of free cashflow.
• Attractive total returns, with smaller drawdowns
and lower volatility – the strength of Quality
companies makes them less economically
sensitive and therefore better equipped to
cope with today’s uncertain markets.
2
• Income generated by quality companies is more
durable and faster growing than other sources of
equity income.
• Quality companies with enduring competitive
advantages, sustainably high returns on capital,
strong free cashflow support and low capital
intensity, are able to deliver persistent growth.
• By constructing an attractively valued portfolio
of these quality businesses, we can create the
conditions for strong long-term total returns
at below market levels of risk.
reasons to consider Investec Global Quality Equity Income Fund
A decade of strong risk-adjusted returns
Launched 10 years ago, the strategy has built up a strong track-record of long-term outperformance with a history of
smaller drawdowns and lower volatility than the MSCI All Country World Index (MSCI ACWI). In May last year it was
made available as an OEIC for UK investors.
Risk
vs.return
return
since
Risk vs.
since
MarchMarch
2007 2007
• Above market dividend yield1:
Fund 3.1%
MSCI ACWI 2.4%
Annualised performance
% change
12
11
10
Investec GSF
Global Quality
Equity Income Fund
9
• Strong sustainable income growth1:
Fund CAGR 8.1%
MSCI ACWI 2.0%
8
7
6
5
4
10
11
12
13
Annualised standard deviation
GIFS Global Large-Cap Blend Equity
GIFS Global Equity-Income
14
15
MSCI ACWI NR
1
Fund and Index dividend yield: sourced from FactSet
using constituent data, 31.03.17. Fund income growth:
calculated from the annual distribution (2008 is the
first full year of payments) of the Fund, since inception
S class net income per share for the Fund.
5 YEARS
P.A.
10 YEARS
(SINCE INCEPTION2)
P.A.
YTD
1 YEAR
3 YEARS
P.A.
SICAV Fund
6.9%
22.6%
17.9%
13.6%
10.9%
Index3
5.6%
32.2%
15.6%
13.8%
8.5%
1
4
1
1
1
Quartile ranking
Past performance should not be taken as a guide to the future, losses may be made. Source: Morningstar, 31.03.17. Performance
is net of fees (NAV based on A Inc share class, including ongoing charges, excluding initial charges) gross income reinvested in GBP.
2
Since inception 30.03.07. Performance is based on the Guernsey B Global Opportunity Equity Fund that was launched on 30.03.07 and
then merged on 03.12.10 into the newly launched GSF Global Opportunity Equity Fund in order to make the strategy more accessible to a
broader range of investors. On 16.07.15 the fund changed its name to Global Quality Equity Income Fund and its investment objective was
clarified to reflect its above average income profile as well as long-term capital focus. 3Comparaitve index changed from MSCI
World NR to MSCI AC World NR on 01.10.11.
3
reasons to consider Investec Global Quality Equity Income Fund
3 managers, 3 continents,
1 unique global perspective
Portfolio managers based in
London, New York and Cape Town
gives us a unique perspective on
global income investing.
Abrie Pretorius
Co-Portfolio Manager
New York
On the following pages we provide 10 compelling reasons to consider
the Investec Global Quality Equity Income Fund.
4
reasons to consider Investec Global Quality Equity Income Fund
Blake Hutchins
Co-Portfolio Manager
London
Clyde Rossouw
Co-Portfolio Manager
Cape Town
5
reasons to consider Investec Global Quality Equity Income Fund
1
Greater certainty in
uncertain markets
Risk for us is first and foremost a permanent loss of capital – our focus is on providing downside
protection and avoiding losses that are never subsequently recovered.
The Investec GSF Global Quality Equity Income Fund has largely kept pace with strongly rising
markets, but it is in more moderate markets, and in particular in falling markets, where we have
historically outperformed.
This has resulted not only in attractive outperformance over a full market cycle, but also
significantly smaller drawdowns in down markets and significantly lower volatility of returns
versus the index and peer group.
Average rolling 12 month performance
25
20
20.6%
16.2%
15
10
7.9%
5
6.9%
5.4%
4.7%
Percentage (%)
0
-5
- 4.5%
-10
-15
-20
46 months
MSCI > 10%
24 months
0% < MSCI < 10%
Investec GSF Global Quality Equity Income A Acc
-14.5%
39 months
MSCI < 0%
109 rolling
12 months total
MSCI ACWI (MSCI World pre Oct 2011)
Past performance should not be taken as a guide to the future, losses may be made. Source: Investec
Asset Management, 31.03.17. Performance is net of annual management fees and excludes any initial charges,
in USD. Returns are calculated on a bid to bid basis of the A class with gross income reinvested in USD. Rolling
12 month periods since inception: 30.03.07.
6
reasons to consider Investec Global Quality Equity Income Fund
The Investec GSF Global Quality Equity Income Fund has grown its annual income distributions
by 8.1% p.a. since inception, more than four times the dividend growth of the MSCI ACWI, whilst
maintaining a consistently higher dividend yield than the MSCI ACWI.
Strong growth in income distributions1
10
Above market dividend yield2
6.0
8.1%
5.0
8
4.0
6
3.0
Percentage (%)
2
Tried and tested track record
of income generation
4
2.0%
2
0
2.0
1.0
Income growth
(since inception CAGR, 2008-2016,%)
Investec GSF Global Quality Equity Income Fund
MSCI ACWI
0.0
Apr 08
Apr 10
Apr 12
Apr 14
Mar 17
Investec GSF Global Quality Equity Income Fund
MSCI ACWI
Source: FactSet, Bloomberg, Investec Asset Management, 31.03.17. The above reflects the portfolio
characteristics of the Investec GSF Global Quality Equity Income Fund. 1Fund income growth calculated from
the annual distribution (2008 is the first full year of payments) of the S class net income per share for the Fund.
Management fees are agreed and invoiced outside of the share class, performance would have been lower had
these fees been included. 2Fund and Index dividend yield: sourced from FactSet using constituent data, 31.03.17.
Dividend yield based on companies held in the Investec GSF Global Quality Equity Income Fund, re-weighted
excluding cash and equivalents, since inception.
7
reasons to consider Investec Global Quality Equity Income Fund
3
Enduring competitive advantages
create barriers to entry that can
sustain high levels of profitability
Quality companies with enduring competitive advantages, in the form of intangible assets such
as brands, copyrights, licenses and distribution networks, have typically not only generated
higher returns on invested capital (ROIC) than the market as a whole, but have also been less
prone to mean reversion or a decay in those returns. These competitive advantages are most
prevalent in the consumer staples, health care and technology sectors where the Investec
Global Quality Equity Income Fund is primarily focused, and it is these consistent businesses
that we label ‘Quality’.
Relative sector ROIC decay profiles (1st quartile)
20
15
Percentage (%)
10
5
0
Year 1
Year 2
Consumer Staples
Information Technology
Consumer Discretionary
Year 3
Energy
Financials
Real Estate
Year 4
Year 5
Health Care
Telecommunication Services
Industrials
Year 6
Materials
Utilities
Source: Our research framework involved gathering relevant data from the MSCI ACWI dating from 31.12.88 to
31.12.11 (this was the furthest point that would provide six full years of data for the analysis, conducted in 2017:
one year to establish the 1st quartile ROIC companies across all sectors and then five subsequent years to
track the decay profile of returns at a sector level.) The figure above shows the calculated decay profile for first
quartile companies.
8
reasons to consider Investec Global Quality Equity Income Fund
Importantly, sustainably high returns have translated into strong performance for shareholders as
well. From the same analysis of MSCI ACWI data over 28 years we found that 72% of companies
that started with above average profitability (as measured by ROIC) were able to maintain this
above average profitability over a rolling 5 year period. These Quality companies delivered
outperformance of 4.5% p.a. on average versus the market. This strong long-term performance,
with high probability, is why we favour a Quality approach – it maximises our chances of
investment success for clients.
Above average profitability vs. below average profitability
(rolling 5 years, 1988–2016)
6
72%
5.8%
72%
60
4.5%
4
40
28%
2
28%
20
0
0
-2
-20
-4
-40
- 4.6%
-6
-8
-10
80
-80
- 7.8%
Above average
to above average
Above average
to below average
Quality approach
Relative return (LHS)
-60
Below average
to above average
Below average
to below average
-100
Percentage (%)
8
Percentage (%)
4
Quality companies have
delivered sustainable long-term
outperformance
Value approach
% of companies (RHS)
Past performance should not be taken as a guide to the future, losses may be made.
Source: Investec Asset Management analysis of FactSet data, MSCI ACWI universe, 1988 to 2016. For the
full research methodology, please refer to our recent white paper entitled ‘Investing in markets the Quality way’
which is available on request. The MSCI All Country World Index is a market capitalisation weighted index
designed to provide a broad measure of equity-market performance throughout the world. Comprised of
stocks from developed and emerging markets. Maintained by Morgan Stanley Capital International.
9
reasons to consider Investec Global Quality Equity Income Fund
5
Capital light business models are
highly cash generative, providing
better cash cover of dividends
Quality businesses are by their very nature capital light, and require minimal capital expenditure to
grow. As a result they are able to generate significant amounts of free cashflow. We firmly believe
that a sustainable growing dividend can only be paid out of the cashflow statement, and not the
balance sheet through debt and disposals. Ultimately it is cash that pays the dividend; capital light
cash generative Quality businesses provide ample cashflow cover for a sustainable growing
dividend. Which, as the bar chart below demonstrates, is less likely to be cut.
Annual dividend paid as a % of free cashflow (2016)
200
150
200
Percentage
Percentage
(%)
(%)
100
150
50
100
0
50
Energy
Utilities
Telecoms
Industrials
Materials
Consumer
Staples
Consumer
discretionary
Health Care
Information
Technology
Financials
Energy change
Utilities
Telecoms
Industrials
Materials
Consumer
% dividend
by
sector
(2014
to 2016)
20%
Consumer
discretionary
Health Care
Information
Technology
Financials
Staples
30%
0
30%
10%
Percentage
Percentage
(%)
(%)
20%
0%
10%
-10%
0%
-20%
-10%
-30%
-20%
-40%
Energy
Utilities
Telecoms
Industrials
Materials
Consumer
Staples
Consumer
discretionary
Health Care
Information
Technology
Financials
Industrials
Materials
Consumer
Staples
Consumer
discretionary
Health Care
Information
Technology
Financials
-30%
-40%
Capital intensive
Capital light
Energy
Telecoms
Utilities
Capital intensive
Capital light
Source: FactSet, Investec Asset Management, as at 31.12.16. Sector: MSCI ACWI.
10
reasons to consider Investec Global Quality Equity Income Fund
Quality companies may, in some cases, have lower starting yields than traditional income stocks
such as defensive high yielding utility companies, or more cyclical mining companies. However,
through the power of compounding, they have translated stronger, more sustainable dividend
growth into far higher longer term realised yields.
Dividend received from US$100 invested in 1984
160
Global consumer
healthcare
140
Inception yield:
120
100
3.3%
Global mining
company
80
Inception yield:
60
40
8.6%
US utility
company
20
Inception yield:
11.6%
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
0
1984
USD
6
Superior dividend growth
leads to far higher longer
term realised yields
Global mining company (inception dividend yield 8.6%)
Source: Investec Asset Management, FactSet, 31.12.16. This is not a recommendation to buy, sell or hold a
US utility company (inception dividend yield 11.6%)
particular security.
The specific companies discussed herein are included to demonstrate the overall effect of
Global
Quality
consumer
healthcare
company
(inception
3.3%)
compounding
at the
stock
level. We
compared
a typical
highdividend
quality yield
health
care company, Johnson & Johnson,
with a fairly typical high growth cyclical mining company, Anglo American and a fairly typical bond proxy utility
company, American Electric Power. The returns from different companies within these sectors will be different,
with some better and some worse performers, but we think that these examples illustrate the point we are trying
to make. No representation is being made that any investment will or is likely to achieve profits or losses similar to
those achieved in the past, or that significant losses will be avoided.
11
reasons to consider Investec Global Quality Equity Income Fund
7
Innovation and efficient capital
allocation protect business models
against competitive threats
Cash generation and balance sheet strength provide the management teams of Quality
companies with significant optionality. They allow them to invest heavily in Research &
Development (R&D) and Advertising & Promotion (A&P), driving product innovation and
strengthening brand loyalty. This not only contributes to future dividend growth, but strengthens
barriers to entry and protects them from competitive threats. The sales of companies in the
Investec Global Quality Equity Income portfolio make up 3% of the total aggregate sales of
companies in the MSCI ACWI, yet these companies in aggregate spend 10.5% of total R&D.
In other words, they spend almost four times as much on R&D as a percentage of sales than
the wider market, and still generate sustainably higher ROIC.
Contribution to R&D spend
100
90
80
70
60
50
40
Percentage (%)
30
20
10
0
1.5%
3.0%
10.5%
No. of companies
Sales
R&D
Investec Global Quality Equity Income Fund
Source: FactSet, as at 31.03.17.
12
MSCI ACWI
reasons to consider Investec Global Quality Equity Income Fund
8
Financially strong with low
sensitivity to the economic cycle
Quality companies are typically found in stable industries, generating sustainable recurring
revenues driven by diversified, defensive and repeat business. These companies are not reliant
on leverage to drive dividend growth; in aggregate, the Net Debt/EBITDA of companies in the
Investec Global Quality Equity Income portfolio is 0.8x, nearly three times lower than that of the
MSCI ACWI. Combined, these characteristics have resulted in a defensive return profile, and low
sensitivity to the economic and market cycle.
Low leverage (net debt to EBITDA)
6x
5x
4x
3x
Axis name
2x
1x
0x
-1x
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Investec GSF Global Quality Equity Income Fund
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
MSCI ACWI
Past performance should not be taken as a guide to the future, losses may be made. Source: Investec
Asset Management, FactSet, 31.03.17. Investec GSF Global Quality Equity Income Fund re-weighted excluding
cash and equivalents.
13
reasons to consider Investec Global Quality Equity Income Fund
9
Quality valuations
remain attractive
In the context of longer-term history, valuations of the wider equity market and other asset
classes, and the quality attributes one is paying for, we do not believe current valuations are
stretched. We prefer free cashflow and enterprise value based metrics, as a P/E ratio tells you
nothing about the cash generating power of the business or the strength of the balance sheet,
and uses an earnings figure that can be easily manipulated. When compared on FCF yield and
EV/EBIT metrics, the Fund’s valuation is in line with the market yet with a significant premium in
terms of quality, as measured by ROIC.
22
20
18
17.0x
17.2x
15.4%
16
14
12
9.1%
Axis name
10
8
6
4.7%
4.9%
4
2
0
EV/EBIT
Investec Global Quality Equity Income Fund
FCF Yield
ROIC
MSCI ACWI
The portfolio may change significantly over a short period of time. Source: FactSet, Investec Asset Management,
31.03.17. The above reflects the portfolio characteristics of the Investec OEIC Global Quality Equity Income Fund
reweighted excluding cash and cash equivalents. Excludes companies in the ‘Banks’ Industry Group according
to GICS from free cashflow yield calculation.
14
reasons to consider Investec Global Quality Equity Income Fund
10
A disciplined investment
framework to uncover the
best Quality income ideas
We conduct in-depth proprietary fundamental analysis of the companies we invest in, seeking
to ensure that a company’s business model, financial model and capital allocation are aligned
with the long-term interests of shareholders and other key stakeholders. Both qualitative and
quantitative analysis are essential to fully assess the sustainability of a company’s competitive
advantage, and the ability to pay a growing dividend. A valuation focus helps to ensure we do
not overpay for companies with the quality income characteristics we seek.
Financial model
● Balance sheet strength
● Quality of earnings/accounting
● Cashflow conversion & dividend cover
Business
model
● Competitive advantage
● Sustainability
● Profit & dividend growth
Capital
allocation
Valuation
Primarily free
cashflow yield
● Management track record
● Governance
● Shareholder alignment &
appropriate dividend policy
Challenge and debate
15
reasons to consider Investec Global Quality Equity Income Fund
Our UK Sales team
is here to help support
and grow your business
DAVID AIRD
MANAGING DIRECTOR, UK CLIENT GROUP
JON ROBINSON
SALES MANAGER, NORTH
Tel: 020 7597 2018 | [email protected]
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SALES DIRECTOR, SOUTH
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SALES MANAGER, SCOTLAND, IRELAND & ISLE OF MAN
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Tel: 07738 604 867 | [email protected]
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www.investecassetmanagement.com
16
10 reasons to consider Investec Global Quality Equity Income Fund
17
Important information
All information is as at 31.03.17 unless otherwise stated.
This communication is for institutional investors and financial advisors only. It is not to be distributed to private customers who are
resident in countries where the Fund is not registered for sale or in any other circumstances where its distribution is not authorised or is
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