2. o Introduction
o Global Emerging Markets
o Old Mutual Global Emerging Markets
o Team
o Philosophy
o Process
o Investment Research Process
o Portfolio Construction
o Performance
o Conclusion
AGENDA
2|
3. WHY GLOBAL EMERGING MARKETS
Source: Economist Intelligence Unit; Consensus Economics, as of September 30, 215
World Land Mass
74%
World Population
81%
World GDP
37%
World Market Capitalization
31%
Emerging Markets
Rest of the World
EMERGING MARKETS VS REST OF THE WORLD
4. 4
Young
Active
Retired
Population pyramids- Developed regions-2015 Population pyramids- Emerging regions-2015
CONTRACTING POPULATION RAPIDLY EXPANDING POPULATION
Emerging markets structurally superior population dynamics
POPULATION DYNAMICS- DEVELOPED MARKETS VS EMERGING
MARKETS
Developed markets face shrinking
workforce & consumer population
Emerging markets face expanding
workforce & consumer population
5. 5
CONSUMPTION SHIFTS TO EMERGING MARKETS
Source: Angus Maddison, founder of Groningen Growth & Development Centre, University of Groningen; Homi Kharas, senior fellow at Wolfensohn Center for Development at Brookings Institution; McKinsey Global Institute analysis
WORLD CONSUMPTION, $ TRILLION
26
34
12
30
0
20
40
60
80
100
2010 2025
Emerging Markets
Developed Markets
38
64
250% Growth
30% Growth
6. • Trading on depressed earnings
• With low valuation multiples
• And historically undervalued currencies
WHY GLOBAL
EMERGING
MARKETS
10. SA NOW TRADING ON A 25% PREMIUM TO EMERGING
MARKETS
5
7
9
11
13
15
17
19
21
96 98 00 02 04 06 08 10 12 14 16
South Africa
Emerging Markets
SOUTH AFRICA VS EM 12M FWD PE
Source: Citi Research, MSCI, Datastream10|
11. EMERGING MARKETS VS. DEVELOPED MARKETS
VALUATIONS
Source: Citi Research, MSCI, Datastream
EM VS DM PRICE TO BOOK RELATIVE
0.50
0.75
1.00
1.25
02 03 04 06 07 08 10 11 12 14 15 16
Average
EM VS DM 12M FORWARD P/E RELATIVE
0.50
0.75
1.00
1.25
02 03 04 06 07 08 10 11 12 14 15 16
Average
8|
12. WHY THE OLD
MUTUAL
GEM FUND
A consistent philosophy
and a disciplined
research process
has delivered
top quartile performance
over all periods.
13. o Emerging Markets team based in an Emerging Market
o Experienced in investing in transforming economies, politically volatile countries & currencies.
o Experienced in seeing companies evolve from start-ups to highly profitable entities.
o Disciplined
o Performance consistent with philosophy
o Bottom up valuation focused manager
o Focus
o Concentrated portfolio with multiple risk management overlays
o Performance driven culture and people
o Performance aligned incentives
o Extreme focus on idea generation
WHY OLD MUTUAL GLOBAL EMERGING MARKETS FUND
13|
14. OLD MUTUAL GLOBAL EMERGING MARKETS TEAM
Tinyiko Ngwenya
Rian le Roux
Johann Els
Siboniso Nxumalo (B.Com (Hons), MBA 9 yrs)
Feroz Basa (B.Com (Hons) 13 yrs)
Wium Malan (B.Acc (Hons), CA(SA), CFA 8 yrs)
Sharief Pansarey (B.Com 8 yrs)
Izak Swanepoel (B.Com CA(SA), CFA 15 yrs)
Lynn Klaase (BBusSc, PGDA 1 year)
Equity Trading
Compliance
Legal
Advanced IT
Risk Management
Investment Administration
TEAM CREDENTIALS
OMIG’S ECONOMIC
RESEARCH TEAM
OMIG’S
INFRASTRUCTURAL PLATFORM
IZAK
SWANEPOE
L
WIUM
MALAN
SIBONISO
NXUMALO
SHARIEF
PANSARE
Y
FEROZ
BASA
LYNN
KLAASE
14|
17. INVESTMENT PHILOSOPHY
17|
Stock Selection Criteria
Valuation
We invest in companies whose
fundamental valuation indicates a
discount to the market price
• Normalised PE/DCF
• Long term earnings
• FCF yield
18. INVESTMENT PHILOSOPHY
18|
Stock Selection Criteria
Corporate Governance
We invest in companies with
sound Corporate Governance
• Value creation
• Shareholder alignment
• Global best practise standard
19. INVESTMENT PROCESS
DEFINE THE INVESTMENT UNIVERSE
= > 6000 SHARES
INITIAL FILTER FOR DATA
QUALITY/AVAILABILITY
= 2000 SHARES
MULTI FACTOR QUANT SCREEN
(60% QUALITY & 40% VALUATION)
= 200 SHARES
FUNDAMENTAL
ANALYSIS
**MSCI DM: Fund invests in stocks listed in DM who >50% of its revenue, profits or equity is generated in Emerging Markets
1
2
3
4
5
Analysts assigned to companies.
Start with Corporate Governance
assessments then fundamental
research (company/competitor
visits),valuation work.
Analyst presents their research to the
team. Rigorous debate, sensitivities,
scenarios & investment decision
PORTFOLIO
40-60
BEST IDEAS
19|
21. Extract of our proprietary governance questionnaire
INVESTMENT PROCESS
VALUE CREATION AND CAPITAL MANAGEMENT
Importance Max score Min score Score
30 30 0 0
Are you satisfied with the management compensation structure?
- Does the company disclose key performance indicators (No disclosure should = 0)? (1)
- Does performance measurement (KPI's) include ROIC/ROCE? (1)
- Is >30% of total compensation linked to the share price performance or TSR? (1)
- Do long term incentives vest over > 3years? (1)
- Is share price linked incentive through shares already owned (1) or options/shadow structures (0)
There should be some form of downside risk as well
0 - 5 5 0
Do you trust management? (Subjective score between 0 and 4) 0 - 4 4 0
Has management created value in the past 3 years? (EVA, ROIC vs. WACC, ROE vs. COE, CFROI, etc.) (Consistent value creation in past 3 years = 4; No
value creation in some years but overall value creation during the period = 2; Overall value destruction in past 3 years = 0)
0/2/4 4 0
Are you satisfied with the company’s treatment of free cash flow (for example, distribution of excess cash and share buybacks)? (Satisfied = 3; No opinion = 1;
Not satisfied = 0)
0/1/3 3 0
Is the company clearly articulating a business direction that you agree with? (Yes = 2; No = 0) 0/1/2 2 0
Is the quality of guidance comprehensive enough to predict visibility? Please adjust your score for the relative standards of the relevant industry. For example,
fairly comprehensive guidance on revenues, capex and pricing environment in an industry with limited visibility is regarded as higher than average and should
be awarded score of 2. (Higher quality of guidance = 2; Moderate = 1; Low quality = 0)
0/1/2 2 0
Is management credible in its promises or guidance? (Credible = 2; Not proven = 1; Not credible = 0) 0/1/2 2 0
Is there a risk of medium-term management change? (Positive change = 2; No change/Don't know = 1; Negative change = 0) 0/1/2 2 0
Does the company have a well-articulated target regarding dividend policy and financial structure? (Both Yes = 2; One Yes=1, None=0) 0/1/2 2 0
Are the CFO's estimates of the company's cost of equity and cost of capital in line with our view? (In line or more conservative = 1; Too low or no idea = 0) 0/1 1 0
Does the CFO take steps to minimize risk using instruments for hedging fluctuations in operational risks such as duration mismatch, exchange rate or interest
rate risk? (Minimizes risk = 1; Don't know or no = 0)
0/1 1 0
Does the company issue equity for acquisitions or projects only when financing via internal resources or debt is not appropriate? (Yes = 1; No = 0) 0/1 1 0
Has the company ever defaulted on a bond or other financial obligation, or is the company exposed to a financial distress situation? (No = 1; Yes =0) 0/1 1 0
17|
22. INVESTMENT PROCESS
**MSCI DM: Fund invests in stocks listed in DM who >50% of its revenue, profits or equity is generated in Emerging Markets
4
FUNDAMENTAL
ANALYSIS
The GEM team is constantly traveling abroad to find
compelling investment ideas.
Since 2015 the team has done 34 overseas trips and
632 company meetings
22|
24. INVESTMENT PROCESS
DEFINE THE INVESTMENT UNIVERSE
= > 6000 SHARES
INITIAL FILTER FOR DATA
QUALITY/AVAILABILITY
= 2000 SHARES
MULTI FACTOR QUANT SCREEN
(60% QUALITY & 40% VALUATION)
= 200 SHARES
FUNDAMENTAL
ANALYSIS
**MSCI DM: Fund invests in stocks listed in DM who >50% of its revenue, profits or equity is generated in Emerging Markets
1
2
3
4
5
Analysts assigned to companies.
Start with Corporate Governance
assessments then fundamental
research (company/competitor
visits),valuation work.
Analyst presents their research to the
team. Rigorous debate, sensitivities,
scenarios & investment decision
PORTFOLIO
40-80
BEST IDEAS
24|
25. INVESTMENT PROCESS-PORTFOLIO CONSTRUCTION
**MSCI DM: Fund invests in stocks listed in DM who >50% of its revenue, profits or equity is generated in Emerging Markets
5 Analyst presents their research to the
team. Rigorous debate, sensitivities,
scenarios & investment decision
PORTFOLIO
40-80
BEST IDEAS
PORTFOLIO
40-80
BEST IDEAS
Risk Controls
≤ 5% Single Position at cost
≤ 6% Active bet
± 8% Country tilt
± 6%-9% Tracking error
25|
26. o X Axis: Countries ranked by historical volatility
o Y Axis: Earnings ranked by cyclicality/beta
o Country correlation considered
o Position size considered within risk metrics
Matrix approach to diversification & risk management
PORTFOLIO CONSTRUCTION
Source: Old Mutual Investment Group & MSCI * Over/underweight % relative to MSCI GEM index
Countries ranked by volatility/stability
Earningsrankedby
volatility/stability
Country A
(most stable)
Country B Country C
(most volatile)
Earnings A
(most stable) “Safe area”
Earnings B
Earnings C
(most volatile) “Risky area”
28|
27. o Fund targets holding 40 – 80 shares
o Average share weight thus ± 2%
o Share weights adjusted for various risk and return
factors (see example to right)
o Maximum weight ± 5% - 6%
o Risk parameters
≤ 5% Single Position at cost
≤ 6% Active bet
± 8% Country tilt
Individual stock weighting criteria
PORTFOLIO CONSTRUCTION PROCESS
Lenovo
(China)
BB
Seguridade
(Brazil)
Average Weight - meets OMIG investment philosophy (high
Quality, attractive Valuation and good Governance)
2% 2%
EXAMPLE OF CRITERIA THAT REDUCE POTENTIAL WEIGHTING
Government owned, highly regulated or potentially regulated
industry
-1%
Average governance/alignment with minority shareholders
Single product, small cap, limited history
High exposure to operational risk (labour unrest, disease,
volatile commodity prices)
Financial risk (excessive gearing, complicated derivatives)
EXAMPLE OF CRITERIA THAT INCREASE POTENTIAL WEIGHTING
High conviction and large margin of safety in fundamental
valuation
+1%
Diversified via multi-region/country revenue streams +1%
Diversified via multi-product revenue streams +1%
Large competitive advantage – pricing power, barriers to entry,
strong brand positioning
+1%
Global/regional leader +1% +0.5%
Very high growth potential (not priced into stock) +0.5%
Maximum Weight (capped at ± 5% - 6%) 6% 3%29|
28. Gross USD Returns to 30 September 2016
INVESTMENT PERFORMANCE UPDATE
28| Source of Data: Morningstar USD Gross Returns
Periods
Old Mutual
Global Emerging
Markets Portfolio
MSCI EM NR
Index
Excess
Return
Peer Group
Relative Ranking
6 Months 15.8% 9.8% 6.0% 7 / 173
Ytd 28.7% 16.0% 12.7% 4 / 173
1 Year 37.4% 16.8% 20.6% 1 / 169
3 Years 4.4% -0.6% 5.0% 11 / 152
5 Years 5.4% 3.0% 2.4% 43 / 124
29. Latest Top 10 holdings
OLD MUTUAL GLOBAL EMERGING MARKETS
HOLDING COMPANY WEIGHTING
1 Taiwan Semiconductor Manufacturing 4.2
2 Samsung Electronics 3.9
3 Sino Biopharmaceutical 3.2
4 Tata Motors Limited Sponsored 3.1
5 Hyundai Motor Co 3.0
6 Magnit 2.9
7 Kroton Educacional S.A. 2.8
8 JD.Com 2.7
9 X5 Retail Group 2.6
10 Lenovo Group Limited 2.4
29|
30. CONCLUSION
o Why GEM now?
• Depressed earnings
• Low valuation multiples
• Historically undervalued currencies
o GEM is attractively valued relative to Developed Markets
o Old Mutual Global Emerging Markets Fund provides investors access
• To world class companies
• In the fastest growing economies
• At attractive valuations
30|
31. REGULATORY INFORMATION
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Telephone number: +27 21 509 5022
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