citywire montreux presentation final

2011 – The year for developed markets

Cazenove Pan Europe FundSteve Cordell

For professional advisers only

- 1 -

Source: Lipper, from 2 January 2003 to 31 March 2011.

A diversified risk approach to beating the European Equity market

•“Right blend of attributes to suit long term investors.”

• Manager’s record since inception

-8

-6

-4

-2

0

2

4

6

0 2 4 6 8 10 12

• Relative performance (Ann)

Tracking error (Ann)

Median tracking

error of 5.07

Median return

of -2.34

Information

ratio of 0.5x

Lipper Offshore Funds – European

Cazenove Pan European B Dis EUR

Information Ratio

No permanent

style bias

Highly

rated

AAA

Manager’s record

Diversified up to 90 large/mid cap

stocks

Strong risk adjusted

record

Ideal core holding

within portfolio

construction

Pragmatic approach to

sector/stock selection

- 2 -

Absolute 3 year record of European Fund Sector Vs Market Risk

Lipper UK Offshore European Sector 3 Year Performance and Beta

-15

-10

-5

0

5

10

15

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

Beta

Absolute Perform

ance (Ann)

Lipper Offshore - European

Cazenove Pan Europe B Dis EUR

FTSE Europe TR EUR

Source: Lipper. 31st March 2011

- 3 -

Risk assets have rewarded investors

Cazenove Pan Europe Performance relative to FTSE Europe and Fund Beta

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

Apr-0

6

May-06

Jun-06

Jul-0

6

Aug-06

Sep-06

Oct-0

6

Nov-06

Dec-06

Jan-07

Feb-07

Mar-0

7

Apr-0

7

May-07

Jun-07

Jul-0

7

Aug-07

Sep-07

Oct-0

7

Nov-07

Dec-07

Jan-08

Feb-08

Mar-0

8

Apr-0

8

May-08

Jun-08

Jul-0

8

Aug-08

Sep-08

Oct-0

8

Nov-08

Dec-08

Jan-09

Feb-09

Mar-0

9

Apr-0

9

May-09

Jun-09

Jul-0

9

Aug-09

Sep-09

Oct-0

9

Nov-09

Dec-09

Jan-10

Feb-10

Mar-1

0

Apr-1

0

May-10

Jun-10

Jul-1

0

Aug-10

Sep-10

Oct-1

0

Nov-10

Dec-10

Jan-11

Feb-11

Mar-1

1

Rel Perf (%)

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

Beta

Cazenove Pan Europe Beta

Source: Lipper. 31st March 2011

- 4 -

• Analyse sensitivity of companies’ earnings streams to business cycle

• Use leading indicators to assess where we are in the business cycle

• The beta of the portfolio should therefore change through the different phases of the cycle

• Stock selection will usually be the key driver of return except at turning points in the cycle

• Stock returns will be dominated by Beta or Alpha factors throughout the cycle

Business cycle – A pragmatic approach

GDP trend growth

Beta dominates

Beta dominates

Beta dominates

Alpha

dom

inat

es

Alpha dominates

Recovery Expansion Slowdown Recession

- 5 -

Business cycle approach

• Stocks in market sector are not homogenous. They do not necessarily help us determine the behaviour of these stocks within the cycle.

• Assess the correlation and drivers of stocks and allocate them to seven style groupings:

• Pragmatic approach combining top-down macro view with earnings based security selection

• Avoid permanent style / size bias

• Demand for products and services changes throughout the business cycle

• Operational gearing of companies impacts profitability of companies

“Designed to deliver consistent performance”

Commodity Cyclicals Growth Financials Growth Defensives

Consumer Cyclicals Value Defensives

Industrial Cyclicals

HIGH BETA LOW BETA

- 6 -

Riding the business cycle

• Style grouping exposure driven by business cycle strategy

• Avoidance of permanent style bias is key

Industrial

Cyclicals

Growth

Defensives

Value

Defensives

Consumer

Cyclicals

Commodity

Cyclicals

Financials

Growth

Style

Groupings

Recession

αααα ββββRecoveryExpansion

Slowdown

GDP

Growth

- 7 -

11/4/11

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

50

100

150

200

250

300

Nestle relative to FTSE Europe Thyssenkrupp relative to FTSE Europe

Source: Thomson Datastream

Business Cycles Matter

Source: Datastream 11 April 2011

Stock: NestléSector: FoodStyle: Value Defensive

Stock: ThyssenkruppSector: SteelStyle: Industrial Cyclical

- 8 -

60

70

80

90

100

110

120

130

140

2006 2007 2008 2009 2010 2011

Weakening earnings revisions favour compounding growth

Source: Thomson Datastream. 30th April 2011

Novartis – Relative performance Campari – Relative performance

Publicis – Relative performance Bayer – Relative performance

80

90

100

110

120

130

140

150

160

170

180

2006 2007 2008 2009 2010 2011

60

70

80

90

100

110

120

130

140

150

160

2006 2007 2008 2009 2010 2011

80

100

120

140

160

180

200

220

2006 2007 2008 2009 2010 2011

- 9 -

10

20

30

40

50

60

70

2001 2003 2005 2007 2009 2011

Headline Index New Orders

20

25

30

35

40

45

50

55

60

65

70

1996 1999 2002 2005 2008 2011


30

35

40

45

50

55

60

65

70

1992 1995 1998 2001 2004 2007 2010


20

30

40

50

60

70

80

1980 1985 1990 1995 2000 2005 2010

Manufacturing PMI New Orders

How we determine turning points (1)

UK Markit Manufacturing PMI

Source: Markit & Thomson Datastream. 30th April 2011

US ISM Manufacturing PMI

Japan Markit Manufacturing PMIGermany Markit Manufacturing PMI

- 10 -

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1973 1978 1983 1988 1993 1998 2003 2008

Trend annual growth rate (real): 3.4%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1973 1978 1983 1988 1993 1998 2003 2008

Trend earnings growth rate (real): 3.3%

How we determine turning points (2)

Source: Thomson Datastream. 4th May 2011

UK Non-financial Trend Earnings (real) Eurozone Non-financial Trend Earnings (real)

US Non-financial Trend Earnings (real) Japan Non-financial Trend Earnings (real)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


0.00

0.05

0.10

0.15

0.20

0.25

1973 1978 1983 1988 1993 1998 2003 2008


- 11 -

Why the ISM matters to the market

European sector correlation with ISMCyclicals have moved in line with the ISM new orders index…

Source: Thomson Reuters Credit Suisse research

- 12 -

Q1 2011 – Two Business Cycles

• Manufacturing surveys have peaked in Q1, following a post Jackson Hole reacceleration.

• The contrast between the booming global manufacturing cycle and the limping, credit constrained Western consumer is astonishing.

• The global manufacturing cycle has classic late cycle characteristics while Western domestic demand is badly lagging.

Booming global manufacturing Constrained domestic consumption

Source: Morgan Stanley

- 13 -

Q1 2011 – Two Profit Cycles

• Those sectors operationally levered to global growth have seen a super-fast recovery back to pre-crisis profitability. Valuations have

expanded but not as quickly as profits.

• Meanwhile sectors geared to domestic growth have seen little recovery in profitability, which in turn has hindered valuation

recovery from depressed levels.

• Looking forward we expect the profit momentum of the former to slow sharply over the coming 6 months as the growth-inflation

trade-off continues to worsen.

Profit cycle and long-term trend P/E of Global Growth

Sectors in Europe Profit cycle and long-term trend P/E of Domestic value

sectors in Europe

Source: Cheuvreux

- 14 -

Q1 2011 – Margin cycles

Source: Cheuvreux, Morgan Stanley

All-time high margins Productivity peaked

World consumer price inflation

• There has been a massive transfer of earnings from labour to commodities and capital. 100% of the national income improvement

in the US in the first year of recovery accrued to companies.

• The loss of earnings momentum in the winners of 2009-10 is simple economics. The large output gap created in 2008 meant

inflation in 2009/10 was “good”.

• All the evidence now indicates that this inflation is now leading to a deteriorating terms of trade for corporates, not just

households. 2011 inflation is “bad”.

Margin pressure – The difference in net revisions for

sales and earnings growth in Europe & US.

- 15 -

Outlook the end of QE2?

• An important rule in economics is to be wary of spurious correlations. Did QE cause the rally in the S&P? Did it even cause the

recovery in payrolls? It is not clear since all of the Fed’s bigger balance sheet is sitting in bank excess reserves.

• If QE2 was a $600bn placebo, should we fear a withdrawal?

• The market will fret about the withdrawal of extreme policy in Q2.

• End of momentum trade for risk assets?

So QE did it…… ….or did it?

Source: Morgan Stanley

- 16 -

A final word or two on the Euro crisis

• Global reflation and caja reform in Spain has drawn a line in the sand and ensured the PIG moniker is singular, not plural.

• A key test for the market’s new found confidence on Spain will come if private capital can be persuaded to recapitalise the caja

sector instead of the full burden falling on the FROB.

• Given the extremely low valuations in the periphery, the secular bear market is over for this cycle.

10 year spreads Banks relative to Stoxx 600

Source: Thomson Datastream. 4th May 2011

0

2

4

6

8

10

12

14

Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11

%

Greece Ireland Portugal Spain

70

75

80

85

90

95

100

105

Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11

- 17 -

This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitute

an offer to enter into any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein.

This document is solely for the use of professional intermediaries and is not for general public distribution.

The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable

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Capital or connected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or any

recommendations expressed herein which, moreover, are subject to change without notice.

This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view. Unless

otherwise stated all views are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission of

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information given here. Unless otherwise indicated, the source for all data is Cazenove Capital.

Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as

well as up and an investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates.

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