diversify your knowledge with our 2020 global investment ... · davide campari-milano 1.3 health...

Diversify your knowledgewith our 2020 Global Investment Series

Iain FultonFuture Quality companies extend beyond tomorrow

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A word or two on housekeeping

3

Introducing Iain FultonPortfolio Manager, Global Equity

23 years' industry experienceFirst Class M.A. Honours degree in Scottish History from the University of St Andrews

Iain joined Nikko AM in August 2014 as a Portfolio Manager for global equity. Before joining

Nikko AM, Iain was Investment Director and Head of Research at SWIP, responsible for the

management of Global Select, Kokusai Select and Kokusai income mandates for both

institutional and retail clients.

Iain joined SWIP in June 2005 as a member of the global equity team from Kames Capital,

where he was a portfolio manager on the US equities team. Prior to joining Kames in 2004,

Iain worked as a global portfolio manager, analyst and Head of Research with Alliance Trust

from 1996.

4

Agenda

01 Global market update 6

02 Future Quality companies 11

03 Deep dive on stocks 15

04 Spotlight on the portfolio 21

05 Q&A 27

5

01Global market

update

7

“My home town was so dull, the tide

went out and never came back

Fred Allen

01 GLOBAL MARKET UPDATE

How far has the economic tide gone out?

Source: Federal Bank of New York Liberty Street Economics, 30/3/2020,

National Bureau of Economic Research

Source: I/B/E/S, National Bureau of Economic Research,

Empirical Research Partners Analysis. *Equally weighted data

Weekly economic index of real economic activity2008 through late-April 2020

8

Large capitalisation stocksAverage monthly revisions in earnings estimates*

1976 though late-April 2020


Estimates are lagging

Source: Empirical Research Partners Analysis. *Excludes financials and REITsSource: Bureau of Economic Analysis, Empirical Research

Partners Analysis and estimates

The S&P 500*Year-over-year growth rates of revenues

1976 through 2021E

9

Year-over-year growth rates of GDP1930 through to 2021E


Earning revisions and valuations

Source: Empirical Research Partners Analysis

Source: National Bureau of Economic Research, Empirical

Research Partners Analysis. * Prior to 1952, the spread is

measured using the price-to-book data of largest 1,500 stocks

The S&P 500Earnings growth rates by sector 2021

estimates vs 2019

10

US large capitalisation stocks valuation spreads*The top quintile compared to the average

1926 through late-April 2020

02FUTURE QUALITY

COMPANIES

02 FUTURE QUALITY COMPANIES

The path to Future Quality

12

High qualitygrowth

Low qualitygrowth

Growth

Restructuring, etc.

Cyclicals

Defensive Growth

Deep value

Year 2 Year 5Year 1 Year 4Year 3

Future Quality

ImprovingFundamentals

StrongFundamentals

Potentialcandidates

Premium quality

Future Quality

companies generally

have many of the

following traits:

Strong competitive

advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market share gainer.. . . . . . . . . . . . . . . . . . . . . . . . . . .

Healthy and growing

total addressable market.. . . . . . . . . . . . . . . . . . . . . . . . . . .

Strong and stable

management team... . . . . . . . . . . . . . . . . . . . . . . . . .

Innovative and

differentiated strategy


The four pillars of Future Quality

13

Future Quality companies are those that we

believe will attain and sustain high

returns on investment

“

21 43

ManagementFranchise ValuationBalance sheet

Sustainable

competitive

advantage

Sound strategic

and capital

allocation decisions

Disciplined

approach

Growth

appropriately

financed

ESG is firmly embedded in our process


Why ESG matters: Sustaining high return on capital

14

ESG

Research, Engagement, Voting

Future Quality

companies

Attain and sustain

high returns on

capital

Balanced decisions to sustain high returns

Source: Stakeholder Theory Diagram – Firm Centric. Based on R. Edward Freeman. This is for illustrative purposes only. Globe image from Shutterstock

03DEEP DIVE ON

STOCKS

03 DEEP DIVE ON STOCKS

Progressive

16

Cash return on equity %

0

5

10

15

20

25

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Source: Nikko AM estimates

Progressive Corporation total addressable market (USD bn)

Franchise Management Balance sheet Valuation

▪ Fast growing,

profitable and

innovative

company

▪ Home insurance

acquisition in

2015

▪ Informational &

underwriting

advantage

▪ CEO and CFO in

place for over 30

years

▪ Disrupting the

US markets

▪ Very strong

balance sheet

with modest

debt

▪ Less reliant on

investment

income

▪ Premiums

growth rate in

double digits

▪ Ability to acquire

new profitable

customers

underestimated

A data driven disruptive insurance model

returning high returns and high growth“

Source: William Blair, Nikko AM estimates


Progressive: Responding to COVID-19

17

▪ Returned USD 1bn in premiums to customers due to less frequent driving and to help customer cash flow. This

amounts to 20% rebates for customers in April and May.

▪ Introduced the Apron Relief Program—suspending cancelations and non-renewals for non-payment through

May 15th, providing commercial line customers with credit and full service claims experience for critical workers.

▪ Providing advances on their annual bonus program for employees and covering co-pay health care costs.

▪ Funded an $8m donation to provide support to the disadvantage in communities.

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024


Amazon.com

18

Cash return on investment%

Source: Nikko AM estimates

Incremental cloud revenue

Franchise Management Balance sheet Valuation

▪ Fast growing,

profitable and

innovative

company

▪ >60% share in

the fast

growing cloud

infrastructure

market

▪ Less than half

of Walmart’s

market share

in retail, but

rapidly taking

share

▪ Founding CEO

has built a

remarkable

franchise in

several

industry

verticals

▪ Increasingly

investing to do

the right thing

by customers,

suppliers and

employees

▪ Extremely

strong balance

sheet with very

low debt level

▪ >$20bn free

cash flow

generation per

year and

growing

quickly

▪ Improving

return on

capital driven

by higher AWS

sales

underestimate

d by the

market

▪ Investments to

enhance

customer

service and

stakeholder

experience lay

foundation for

faster long

term growth

The return on capital and long term

growth for both the retail business

and cloud infrastructure services are

underestimated by the market

“


Amazon.com: Responding to COVID-19

19

Employees

▪ Investing c. USD 4 billion from April to June on COVID-related initiatives—getting products to customers and keeping employees safe.

▪ Distributed personal protective gear, such as masks for employees and implemented disinfectant spraying and temperature

checks across operations worldwide.

▪ Employees diagnosed with COVID-19 will receive up to two weeks of paid leave in addition to their other paid and unpaid time off

options.

▪ Spending $500m on building scalable testing for coronavirus.

▪ Offering comprehensive health benefits to employees starting on day one of employment.

▪ Increased pay for hourly employees by $2 per hour in the U.S., C$2 per hour in Canada, and €2 per hour in many EU countries.

▪ Doubled regular hourly base pay for every overtime hour worked.

▪ Established a USD 25m relief fund for partners (e.g. delivery drivers) and seasonal associates facing financial hardship or quarantine.


Amazon.com: Responding to COVID-19

20

Communities

▪ Launched the USD 20 million AWS Diagnostic Initiative to accelerate COVID-19 research.

▪ In Europe, Amazon committed €21 million to support those most affected by the COVID-19 pandemic.

▪ Amazon CEO and Founder Jeff Bezos donated $100 million to Feeding America.

▪ Hired 175,000 additional full- and part-time employees.

▪ Working with foodbanks in 25 cities across the country to deliver six million meals to underserved and vulnerable populations.

▪ Donating USD 5 million in Amazon devices globally to those in need.

▪ Donating 8,200 laptops to Seattle Public Schools students who do not have access to a device at home.

▪ Donating 4,000 laptops to high school students across the U.S. and making new online computer science resources, including exam

prep, free through the Amazon Future Engineer program.

04SPOTLIGHT ON THE PORTFOLIO

BUYS

Gentex

Nintendo Palomar

Woodward Inc.

KerryGroup Bio-Techne

Schneider Electric

Coca Cola

KingspanTJX Cos

04 SPOTLIGHT ON THE PORTFOLIO

What made it in

Any securities shown are for illustrative purposes only and are not stock recommendations

SELLS

Sinopharm

Resmed

Bristol-Myers-Squibb

EOG Resources

AltranTechnologies

Li NingCompany

Estee Lauder

DavideCampari

Red Hat

Envista


What went out

Any securities shown are for illustrative purposes only and are not stock recommendations

McCormick


Strategy positioning & characteristics

24

Portfolio % Index % Active weight %

TO

P 1

0A

CTIV

E W

EIG

HTS

LHC Group Inc. 4.20 0.00 4.20

Nintendo Co. Ltd. 3.66 0.11 3.55

Progressive Corporation 3.56 0.11 3.45

Microsoft Corporation 5.90 2.87 3.03

Sony Corporation 3.19 0.19 3.00

Adobe Inc. 3.33 0.39 2.94

TJX Companies Inc. 3.07 0.15 2.92

Koninklijke Philips 2.89 0.09 2.80Laboratory Corp. of

America 2.80 0.03 2.77

Anthem Inc. 2.85 0.14 2.71

TO

P 1

0 H

OLD

ING

S

Microsoft Corporation 5.90 2.87 3.03

Amazon.com Inc. 4.60 2.07 2.53

LHC Group Inc. 4.20 0.00 4.20

Nintendo Co. Ltd. 3.66 0.11 3.55

Progressive Corporation 3.56 0.11 3.45

Tencent Holdings Ltd. 3.36 0.71 2.65

Adobe Inc. 3.33 0.39 2.94

Sony Corporation 3.19 0.19 3.00

TJX Companies Inc. 3.07 0.15 2.92

Accenture Plc. 2.93 0.26 2.67

Portfolio Characteristics – Stock Portfolio Index Difference

ROE 1 year (%) 18.1 12.7 5.4

P/E (FY1 estimate) 18.9 13.4 5.5

P/B 3.3 1.9 1.4

Dividend Yield (%) 1.3 3.0 -1.7

Period As at 31Mar

2020

Number of stocks 41Weighted average market cap (USD m) 175,232 Beta 0.96Portfolio Risk (%) 29.7Benchmark Risk (%) 30.6Active Risk 5.3Active Share (%) 91.4

Risk Factors As at 31 Mar

2020

Stock Specific Risk 58.0

Risk Indices (Style) 18.9

Industry 11.6

Country 3.7

FX 5.0

Market 2.7

Total 100.0

Source: As at 31 March 2020. Source: FactSet. This has been prepared and presented in compliance with the Global Investment Performance Standards (GIPS®).

The above is a representative account of the Global Equity Strategy composite and the benchmark is the MSCI AC World. This is for illustrative purposes only.

Any securities shown are not stock recommendations. Forecasts are not guaranteed. Currency shown in USD.


Portfolio by sector

25

Source: As at 31 March 2020. Source: FactSet. This has been prepared and presented in compliance with the Global Investment Performance Standards (GIPS®).

The above is a representative account of the Global Equity Strategy composite and the benchmark is the MSCI AC World. This is for illustrative purposes only.

Any securities shown are not stock recommendations. Forecasts are not guaranteed.

Commodity sectors -5.8

Energy -3.7

Materials -2.1

Johnson Matthey Plc. 1.2

Ecolab Inc. 1.0

Cash 1.9

Defensive sectors -1.2

Consumer Staples -0.2

Kerry Group Plc. 2.5

Unilever Plc. 2.2

Coca-Cola Company 2.0

Davide Campari-Milano 1.3

Health Care 6.0

LHC Group Inc. 4.2

Koninklijke Philips 2.8

Laboratory Corp. of America 2.8

Anthem Inc. 2.7

Bio-Techne Corporation 2.7

Danaher Corporation 1.9

LivaNova Plc. 1.8

Real Estate -1.1

America Tower Corporation 1.8

Communication Services -2.3

Nintendo Co. Ltd. 3.6

Tencent Holdings Ltd. 2.7

Utilities -3.6

Consumer Discretionary 4.0

Sony Corporation 3.0

TJX Companies Inc. 2.9

Amazon.com Inc. 2.5

Compass Group Plc. 2.4

Gentex Corporation 1.6

Financials 0.6

Progressive Corporation 3.4

AIA Group Ltd. 2.3

Prudential Plc. 2.1

SVB Financial Group 2.1

Housing Dev Finance Corp. Ltd 2.0

Palomar Holdings Inc. 1.9

Burford Capital Ltd. 0.6

Industrials 0.9

TransUnion 2.5

Schneider Electric 1.8

Woodward Inc. 1.7

Verisk Analytics Inc. 1.6

Rentokil Initial Plc. 1.6

Weir Group Plc. 0.8

Kingspan Group Plc. 0.4

Information Technology -0.5

Microsoft Corporation 3.0

Adobe Inc. 2.9

Accenture Plc. 2.7

Dolby Laboratories Inc. 2.5

Hexagon 1.9

Keyence Corporation 1.6

Cyclical sectors 5.0


Key take outs

26

▪ The tide has gone out very far and very fast, it might come back in more slowly than many expect.

▪ Policy response has been swift and significant.

▪ Future Quality means strong balance sheets and profitable growth businesses.

▪ We are mindful of valuations given the current market conditions.

Nikko AM Global Share FundRatings and platforms

AMP North

Asgard

Infinity

eWrap

BT Panorama BT Wrap FirstWrap Hub 24Mason

Stevens

MLC Wrap Navigator Netwealth OneVue Portfolio CareSuncorp

Wealthsmart

* These are strategies replicating the Fund. Nikko AM Limited (ABN 99 003 376 252, AFSL 237563) is the Advisor for the SMAs that are issued by external parties.

This material was prepared by Nikko Asset Management Australia Limited ABN 34 002 542 038, AFSL 229664 (Nikko AM Australia) who is the responsible entity and issuer of units

in the Nikko AM Global Share Fund ARSN 092 026 269 (Fund). Nikko AM Australia is part of the Nikko AM Group. Parts of this material have been prepared by Nikko Asset

Management Europe Limited (Nikko AM Europe). Nikko AM Europe does not hold an AFS Licence. The information contained in this material is of a general nature only and does

not constitute personal advice. It is for the use of wholesale clients, researchers, licensed financial advisers and their authorised representatives only. It does not take into account

the objectives, financial situation or needs of any individual. Investors should consult a financial adviser as well as the information contained in the Fund’s current Product

Disclosure Statement (PDS) and the ‘Additional Information to the PDS’ which are available at www.nikkoam.com.au/pds or by calling Nikko AM Investor Services on 1800 251 589

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the return of capital are not guaranteed. Past performance is not an indicator of future performance. Whilst we believe the information contained in this material to be correct as

at the date of presentation, no warranty of accuracy or reliability is given and no responsibility is accepted for errors or omissions. Any references to particular securities or sectors

are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty

or guarantee is provided that the positions will remain within the portfolio of the Fund. The Nikko AM Global Equity Fund is managed by Nikko Asset Management Europe

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Regulations 2014. New Zealand investors should read the section titled ‘Additional Information for New Zealand investors” under Other Information of the Additional Information

Booklet of the Fund before making a decision to invest in the Fund.

Important information

29

Important informationRating agency disclaimer

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