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www.montanaro.co.uk enquiries@montanaro.co.uk Tel: +44 (0)20 7448 8600

UK Smaller Companies Investment Trust Q1 2013. www.montanaro.co.uk enquiries@montanaro.co.uk Tel: +44 (0)20 7448 8600. Performance since launch. Source: Montanaro, FTSE . Who are Montanaro?. Leading specialists in long only UK & European SmallCap Exclusive focus on SmallCap

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www.montanaro.co.uk enquiries@montanaro.co.uk Tel: +44 (0)20 7448 8600

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  1. UK Smaller Companies Investment TrustQ1 2013 www.montanaro.co.uk enquiries@montanaro.co.uk Tel: +44 (0)20 7448 8600

  2. Performance since launch Source: Montanaro, FTSE.

  3. Who are Montanaro? Leading specialists in long only UK & European SmallCap Exclusive focus on SmallCap Established in London in 1991 (20-year track record) We manage £2bn Independent - a family culture Well resourced: 28 people with 8 nationalities Source: Montanaro.

  4. History of Montanaro • Founded by Charles Montanaro in 1991 • Milestones: • 1995: first UK Investment Trust (MUSCIT) • 2000: first Pan-European Fund • 2005: first Segregated Mandate • 2006: first Continental European Investment Trust • 2012: 3 new Funds 1991: Montanaro founded 1993: UK Growth & Income Fund 1995: UK Investment Trust 2000: European Smaller Companies Fund 2005: First Segregated Mandate 2006: European Trust 2007: AuM reach £1bn 2009: Third Segregated Mandate • 2011: • - Charles River implementation • SEC registration • 3 new mandates 2012: 3 New Funds Source: Montanaro.

  5. The largest SmallCap team in Europe • Eight nationalities: • English • Finnish • French (2) • American • Spanish • Swedish (3) • German • Chinese Source: Montanaro.Note: Six of the Analysts are also Fund Managers.

  6. A truly pan-European Team Head of Systems Mark Petar Chief Executive Officer Charles Montanaro Head of Business Development Cedric Durant des Aulnois Head of Research Anders Jegers Head of Risk Management & Admin. Matthew Francis Compliance Officer Nere Asumendi Analyst George Cooke Analyst/Fund Manager Stefan Fischerfeier Analyst/Fund Manager Raj Jilka Analyst/Fund Manager David Lindley Analyst/Fund Manager Anna Lundén Fund Manager/Senior Analyst Andrea Shen Senior Analyst Veikko Valli Fund Manager/Senior Analyst Christian Albuisson Head of Client Relationship Management Jimmy Burns Client Relations Manager Tom Norman-Butler Client Relations Manager Sarah Bridges Fund Administration Supervisor Gareth Bateman Fund Administrator Parm Rao Fund Administrator Richard Cromarty Fund Administrator Bill Richards Client Relations Manager Henrik Schmidt Client Relations Manager Lowri Brown Client Relations Assistant Bill Jiang Risk Analyst John Ensor Client Reporting Executive Rachel Camfield Client Reporting Executive Eleanor Phelan Office Manager/PA Gillian Edwardes-Ker Accountant Source: Montanaro.

  7. Our Team

  8. Our investors are based across Europe By Geography: 11% 14% By Type: 35% 27% 23% Source: Montanaro.

  9. AEGON UK (Kames Capital) AXA Azimut (Italy) British Airways Pension Fund British Steel Pension Fund Church Commissioners for England Church of Finland Delta Lloyd Bank (Belgium) Derbyshire Pension Fund Devon County Council East Riding Pension Fund Fidelity Fonds de Réserve pour les Retraites (FRR) Generali (France) Henderson Asset Management HSBC J.O. Hambro Investment Management JP Morgan Asset Management Jupiter Fund Managers Kåpan Pension Fund (Sweden) KBL European Private Bankers (Luxembourg) Kempen (Netherlands) Lombard Odier (Switzerland) Newton Investment Management OFI Asset Management (France) Pohjola Asset Management (Finland) Reliance Mutual Insurance Society Royal London Asset Management Skandia (Sweden) South Yorkshire Pension Fund Stefnir (Iceland) UBS Global Asset Management University of London West Yorkshire Pension Fund Our clients are leading, global financial institutions Source: Montanaro.

  10. Our Funds Source: Montanaro.

  11. All of our Funds have performed well (Fund & Indices capital returns net of fees*) Source: Montanaro, Bloomberg.* Fund and Index returns are capital returns net of fees and costs with the exception of the Equity Income Fund (which is Total Return net of fees and costs)** For the European Smaller Companies Fund: NAV returns in € prior to class listing on 30/11/06 are based on GBP NAVs converted into € using Bloomberg.

  12. Why invest in UK SmallCap? • Huge choice of ~2,000 quoted companies: • many global market leaders • Under researched: • LargeCap = passive management • SmallCap = active management - opportunity to add value • Better access to management: • more dynamic / more entrepreneurial • Higher returns – Capture the “illiquidity premium”: • UK SmallCap*: +15.3% p.a. (1955 – 2012) • outperformance v LargeCap**: +3.4% p.a. (SmallCap Effect) Source: Montanaro, Numis.* Numis Smaller Companies Index ** FTSE All Share

  13. Smaller companies are different animals SMALL Companies LARGE Companies • Market Cap < €3bn • ~5,500 names in Europe • Market Cap < £2bn * • ~2,000 names in the UK • Market Cap > £2bn * • ~140 names in the UK • Simpler businesses • Faster growth • Focused / specialists • More entrepreneurial • Management makes or breaks the business • More likely to be ACQUIRED • Inefficient Market  Active Management • Often complex businesses • Mature / Lower growth • Diversified (product / geography) • More bureaucratic • Management exercises less control • More likely to be ACQUIRER • BUT: Efficient Market  Index Source: Montanaro.* Montanaro definition

  14. SmallCap is under-researched Source: Montanaro, Factset. Data as of 24/01/13.

  15. Over 58 years UK SmallCap gave five times higher returns £3,723 +15.3% p.a. +3.4% p.a. £635 +11.9% p.a. Source: Montanaro, Numis/HGSC, FTSE

  16. UK SmallCap has outperformed all other Asset Classes since 1954 Annualized Returns by Asset Class (Total Nominal Returns, 1954 - 2012) Source: Montanaro, Numis/HGSC, Barclays Gilt-Equity Study, Nationwide

  17. Avoid market timing – it pays to stay invested in SmallCap Source: Montanaro, Numis/HGSC

  18. SmallCap has delivered the best risk-adjusted returns since 1954 Source: Montanaro, Bloomberg, Numis, Barclays.

  19. Philosophy & Process

  20. We focus on UK companies of £75m - £2bn in size Source: Montanaro, Factset. Data as of 24/01/13.

  21. Our Analysts are Pan-European sector specialists • Identify the best companies within their sector: • 15 – 20 companies each • Set annual price targets and quality ratings: • reviewed weekly • Meet management typically twice a year: • we produce our own questions and are very well-prepared • Quarterly “Top Picks” presented to team: • one investment case discussed each week • Few Fund Managers have the resources needed Source: Montanaro.

  22. Our investment philosophy Invest in businesses: ‘Buy a business, don’t rent stocks.’(W. Buffett) Be mindful of your circle of competence: 'Never invest in a business you cannot understand.’ (W. Buffett) Invest for the long term: ‘Our favorite holding period is forever.’ (W. Buffett) Buy profitable businesses: ‘Buy companies with strong histories of profitability and with a dominant business franchise.’ (W. Buffett) ‘Turnarounds seldom turn.’ (W. Buffett)

  23. … is to keep it simple Never compromise on quality: ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’ (W. Buffett) Avoid the disasters: ‘An investor needs to do very few things right as long as he or she avoids big mistakes’(W. Buffett) Do the work yourself: “I never talk to brokers or analysts. Wall Street is the only place that people who ride to work in a Rolls Royce get advice from those who take the subway.” (W. Buffett) Back strong management teams: “In SmallCap Management makes or breaks a business. The key to successful investment in SmallCap is management, management, management." (Montanaro).

  24. We invest in the best - “Blue Chip” SmallCap • Simple businesses we can understand: • focused, good order visibility, in control of own destiny, in our “circle of competence” • Niche businesses in growth markets: • non-cyclical, organic growth, long-term franchises • Market leaders: • strong market position, pricing power, high intellectual property, USPs • Companies with high operating margins: • high barriers to entry, sustainable competitive advantage • Profitable companies • Good management we trust: • experienced, high insider ownership, sound corporate governance & Board structure Source: Montanaro.

  25. We have a two stage investment process Stage 1: QUALITATIVE (Identify good businesses) New Ideas Screens Best-in-Class Reviews Client/company meetings • Mini-checklist Fundamentals Assessment of the company, ESG/SRI and its industry:  Full Checklists Valuation Discipline  Maximum P/E  Consensus Review Added to Approved List (c.200 Companies)  Stage 2: QUANTITATIVE (Value the business) Meetings Regular/on-site Well prepared Valuation (in-house) 1. DCF 2. DDM 3. EVA 4. Peer Group Valuation 1. DCF 2. DDM 3. EVA 4. Peer Group Price Target & Rating Investment Only from Approved List “Best in Class”   Source: Montanaro.

  26. One source of ideas comes from in-house screening c. 2,000 quoted companies in the UK c. 1,100 are profitable c.600 of these are £75m - £2bn We rank the universe based on the following 12 criteria: QUALITY Rank: Growth: • 5Y Sales Growth • 5Y EBIT Growth • Profitability: • EBIT Margin • Return on assets (RoA) • Return on Equity (RoE) • 5Y Average RoE Leverage: • Net Debt / Equity • Interest Cover • Cash: • Cash Ratio • Cash Conversion Ratio • Volatility: • 5Y Sales Growth Vol. • 5Y EBIT Growth Vol. Highest A1 Candidates for Approved List A2 B C Lowest D Source: Montanaro

  27. The Checklist is the cornerstone of company analysis Source: Montanaro

  28. We set a price target for every company Source: Montanaro

  29. … and a Quality and Performance rating 1 2 3 4 Quality Rating 12-month Upside Long-term Upside SRI / ESG A Checklist ≥ 66 1 O/P v. Market > +15% 1 O/P v. Market > +15% p.a. A/B/C/D/E “E&S” Rating B Checklist ≥ 60 2 O/P v. Market > +5% 2 O/P v. Market > +5% p.a. “G” Rating A/B/C/D/E C Checklist ≥ 55 3 +/- 5 % v. Market 3 +/- 5 % v. Market p.a. D Checklist < 55 4 U/P v. Market < - 5% 4 U/P v. Market < - 5% p.a. 5 U/P v. Market < - 15% 5 U/P v. Market < - 15% p.a. Source: Montanaro.

  30. … and we engage with companies and travel to see them in situ Germany Fuchs , Rational, Pfeiffer Vacuum, Aixtron, Wasag, Wincor Nixdorf, Mobotix, Sartorius, GfK, Delticom, Carl Zeiss, KWS, Stratec Netherlands Vopak Belgium Van de Velde Finland Vacon 29 Site Visits in 2012 Sweden Hufvudstaden, Avanza, Axis Communications, Elekta, Hoganas, AF Group, Hexpol UK Genus, Domino Printing, Shaftesbury, Dignity, Chemring, Booker, Albemarle & Bond, Domino’s Pizza, Ultra Elec., Oxford Instr., Cineworld, Hampson, Helical Bar, Brooks MacDonald, James Halstead, Fenner, Victrex, Rotork, Renishaw, NCC, Brammer, Rightmove, Carclo, A.G.Barr, Telecity, Fenner, Spirax Russia Nokian Renkaat Denmark Chr. Hansen Czech Republic Devro Brazil Ocean Wilsons Spain Viscofan, Prosegur France Virbac, Stallergenes, Euler-Hermes, SILIC Greece Frigoglass Italy Diasorin Austria Kapsch Trafficom Switzerland LEM, Temenos, Newave, Belimo China Fenner, Elringklinger, Konecranes, Outotec, Vacon Source: Montanaro / Note: The site visits shown above have taken place in recent years; Montanaro does not have investments in all the companies listed

  31. The Trust

  32. The Montanaro UK Smaller Companies Investment Trust Source: Montanaro, Morningstar.

  33. Strong Board • David Gamble (Chairman) • Chief Executive of British Airways Pension Investment Management (et al) • Roger Cuming • Head of Investments at Reliance Mutual • Michael Moule • Investment Manager of Bankers Trust for 26 years • Kathryn Matthews • Barings, Fidelity, Rathbones; Hermes • The Board decides (in consultation with the Manager): • level of gearing • Treasury Shares / buy-back policy and implementation

  34. Structuring the portfolio Well-diversified: 40 – 60 holdings max. 15% in any one company top-slice at 4% Liquidity closely monitored: smaller investments in less liquid companies initial holding 1% - 2.5% of portfolio Sector weightings: max 15% + / - relative to the index

  35. Sell Discipline • We were right: • fair value is reached, stock outperformance, becomes too big, company taken over • top-slicing extreme outperformance or if stocks reaches 4% weighting • We were wrong: • company disappoints, business case less compelling than originally thought • We see warning signs: • balance sheet weakens, earnings quality slips, competitive situation worsens • overly aggressive acquisitions • management change

  36. Valuation Discipline We look at cash-adjusted P/Es For new holdings: target = cash-adjusted P/E < 15; cash-adjusted P/E must be < 15 if we have not met with management; target of PEG < 1 where P/E > 20. For the portfolio: close monitoring of the cash-adjusted P/E premium/discount

  37. Breakdown by sector Source: Montanaro, FTSE, Bloomberg.

  38. Breakdown by size Source: Montanaro. *FTSE 250 represents those holdings that are above the threshold for the Numis Smaller Companies Index.

  39. Our companies sell all around the world Source: Montanaro

  40. Top 20 holdings Source: Montanaro.

  41. A high quality portfolio * * Cash-adjusted P/E for Portfolio = 13.8x Source: Montanaro, Factset, Bloomberg. Note: PE & EPS growth figures are calculated excluding loss-makers.Note: All risk statistics over three years, monthly data.

  42. But consensus EPS growth figures are misleading Source: Montanaro, Factset.Note: EPS growth figures are calculated excluding loss-makers.

  43. … as our Trust actually delivers (a premium for “certainty”) Source: Montanaro, Factset.Note: EPS growth figures are calculated excluding loss-makers.

  44. Holding Sold Relative performance attribution – Q1 2013 Source: Montanaro, Factset

  45. Holding Sold Relative performance attribution – 12 Months Source: Montanaro, Factset.

  46. How are our companies doing? Source: Montanaro, Bloomberg. Note: Based on numbers reported during the quarter

  47. Since launch, a net return of 9.7% p.a. (TR 10.8% p.a.) Source: Montanaro, FTSE.

  48. Fiscal year returns Source: Montanaro.*Years 1-3 undiluted NAV, years 4-5 diluted NAV and years 6 onwards basic NAV as no longer any warrants in issue**Restated for changes to UK GAAP (all other years have not been restated)

  49. We have outperformed in 14 out of 18 fiscal years & by 6.2% p.a. Source: Montanaro, FTSE.*Years 1-3 undiluted NAV, years 4-5 diluted NAV and years 6 onwards basic NAV as no longer any warrants in issue**Restated for changes to UK GAAP (all other years have not been restated)

  50. The Trust typically has a low beta Source: Montanaro, Bloomberg. 3 year trailing monthly returns.

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