Cormac Weldon, Threadneedle’s Head of US Equities, Fund manager, "Threadneedle (Lux)-American AU" (ISIN: LU0061475181) (08.02.2012): "We remain positive on the US equity market. Although we note that de-leveraging is likely to continue to constrain economic growth for the foreseeable future, we note that the US consumer has taken some significant steps over the past 3 years to re-adjust its spending patterns and to lower its indebtedness. The US economy also benefits from a recapitalised and deposit-funded banking sector where we start to see evidence of a trough in credit creation. We also see positive cycles emerging in some areas such as energy infrastructure, commercial aerospace or technology. Finally, productivity growth together with wage inflation in emerging markets, higher transportation costs and the weakness of the US dollar in trade adjusted terms over the past few years has resulted in an industrial renaissance. Against this background, valuations are cheap, even based on our below-consensus earnings forecasts. Valuations are further supported by strong cash flows and balance sheets and by an increased willingness to return capital to shareholders." Eric Mc Laughlin, Investment Specialist US Equity, "BNP Paribas L1 Equity USA Growth C C" (ISIN: LU0377078216) (06.02.2012): "As we look back at 2011, a few important themes defined the behavior of U.S. stocks. First, companies delivered exceptional results in a relatively weak economy and second, multiples contracted substantially, offsetting virtually all of this success. As we look forward to 2012, we believe there are reasons for optimism.
While the global economy will certainly continue to struggle for growth, well-positioned companies with little debt on their balance sheets should benefit from growing pockets of strength. We believe equity returns in 2012 will come back to basics - that is to earnings and valuation. We expect the market´s sensitivity to macro economic events to lessen and while earnings growth may be slower, we aren´t currently being asked to pay very that growth. In this scenario, we like the chances of U.S. equity outperformance relative to other developed markets."
Grant Bughman, Portfolio Manager, "UBS (Lux) Eq S - USA Growth (USD) P-acc" (ISIN: LU0198837287) (01.02.2012): "For the past three years since the beginning of the recovery, investor expectations for the trajectory of US economic growth has ebbed and flowed between euphoria and pessimism. As recently as this past October, pessimism abounded as the consensus was that the US would likely fall into recession by year-end. Fourth quarter GDP which was released last week however showed an advance of 2.8% in Q4, indicating that growth had actually accelerated into the end of the year. The recent improvement of many economic data points notably the continued healing of the labor market are supportive of a more optimistic view, however we are unlikely to see a dramatic reacceleration above the current rate. This gradual healing process is a result of the ongoing deleveraging in the private sector which has not yet reached its conclusion. Falling debt/income ratios has been made easier thanks in part to accommodative monetary policy and fiscal stimulus rather than austerity. Loose monetary policy will continue for some time in order for households to repair their balance sheets. Risk however of overly tight fiscal policy remains, as does the impact from the fragile banking system in Europe. The environment has certainly improved over the past few months, but we believe that it will reward investors who have a process in place to manage the ups and downs of what will likely continue to be a bumpy road."
Mathew Powers, Investment Specialist US Equities, "BNP Paribas L1 Opportunities USA C C" (ISIN: LU0377124267) (02.02.2012): "We believe 2012 will be similar to 2009, a period of aggressive re-inflation. Aggressive expansionary policies by central banks will likely stabilize economies and help push the stock market ahead. The US will likely maintain a long-term low-to-negative real rate environment, and we anticipate this low-rate environment to continue over the next few years.
For these reasons we have started to reduce our hedge against the S&P 500, thereby increasing our net equity position and allowing us to better participate in market rallies driven by monetary easing. However, although we have positioned ourselves to best participate in positive fluctuations of the equity markets; our view of the broader underlying economy has not improved."
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e-fundresearch: "Which company specific fundamental factors are you focusing on currently?"
Cormac Weldon, Threadneedle’s Head of US Equities, Fund manager, "Threadneedle (Lux)-American AU" (ISIN: LU0061475181) (08.02.2012): "We are focused on companies with exposure to secular growth trends; those operating in industries with high barriers to entry or with a product advantage, such as stocks benefiting from the frugality of US consumer (auto maintenance companies for instance) or stocks operating in niche industries protected by high barriers to entry and strong contracts (such as industrial gases stocks). Although these characteristics should deliver sustainable earnings growth for these portfolio companies, the prevalence of macroeconomic concerns over the past several quarters has meant that their valuations fail to reflect the strong fundamentals that underpin these businesses. Another theme that we have been favouring is companies with strong balance sheets where management is managing capital proactively by, for example, buying back shares, raising dividends or undertaking sensible corporate activity.
Although we favoured stocks with sustainable growth characteristics in the second half of 2011, we have over the past months been buying more cyclical businesses already discounting tough business conditions. We have been finding such opportunities for instance in the semiconductor equipment industry but also in the parts of the energy and industrial sectors."
Eric Mc Laughlin, Investment Specialist US Equity, "BNP Paribas L1 Equity USA Growth C C" (ISIN: LU0377078216) (06.02.2012): "We are focused on a broad range of factors, but are specifically focused on operational quality, valuation and momentum. To assess operating quality, we try to capture management behaviour by looking at factors such as working capital to sales and margin expansion. Valuation factors assessed include enterprise vale / EBITDA, price to sales, and price to free-cash-flow. Momentum factors assessed include earning revisions, earnings surprises and acceleration of sales."
Grant Bughman, Portfolio Manager, "UBS (Lux) Eq S - USA Growth (USD) P-acc" (ISIN: LU0198837287) (01.02.2012): "When identifying investment opportunities we focus on two questions, "is this a good business model" and "is this a good price". We use this framework to identify companies whose future free cash flow generation is not fully appreciated by the market. From a portfolio construction standpoint, we´ve found that diversifying our sources of growth across classic, elite, and cyclical growth companies has helped to smooth out the volatility of returns as we identify and invest in diverse and complementary types of business models."
Mathew Powers, Investment Specialist US Equities, "BNP Paribas L1 Opportunities USA C C" (ISIN: LU0377124267) (02.02.2012): "Gold mining stocks are an asset driven vehicle, generally priced by the expected value of the mined commodity. The market is treating elevated gold prices as a function of speculation, not as a structural move higher. However we believe the increased price is indeed a structural move higher and, as the price continues to rise, the market will come to agree. Gold miners were not fully rewarded for the increased price of gold in 2011 and we believe this leaves them with significant upside in 2012. We focus on those gold mining companies which have the best management. We feel an experienced management team is of the outmost importance in this industry."
e-fundresearch: "Which over- and underweight positions are currently implemented in your U.S. equity positions?"
Cormac Weldon, Threadneedle’s Head of US Equities, Fund manager, "Threadneedle (Lux)-American AU" (ISIN: LU0061475181) (08.02.2012): "Our stock selection efforts in light of the themes mentioned above are leading to overweight positions in the IT, energy and more recently in the financial sector. We have recently taken some profits on a number of well performing positions in the consumer discretionary and industrial sectors and hence reduced our overweight. We continue to find no or little opportunities in the utilities and telecom sectors, where we maintain underweight positions."
Eric Mc Laughlin, Investment Specialist US Equity, "BNP Paribas L1 Equity USA Growth C C" (ISIN: LU0377078216) (06.02.2012): "Our portfolio is built to be sector and industry group neutral versus the Russell 1000 Growth benchmark, so we implement our views at the stock level, rather than using a top down approach. We manage a concentrated portfolio designed to reflect the team’s conviction. Every stock we own has a target weight within the portfolio to reflect that conviction. We consider every stock we own a “buy” in that it represents our current thinking about which stocks represent the most attractive opportunities.
Oracle Corp. is an example of an overweight security within our portfolio. Oracle has astutely leveraged its dominance of the database software industry to become a major provider of enterprise software solutions. We believe the firm has the scale, resources, and expertise to remain at the forefront of the consolidation of the enterprise software industry."
Grant Bughman, Portfolio Manager, "UBS (Lux) Eq S - USA Growth (USD) P-acc" (ISIN: LU0198837287) (01.02.2012): "We are positioned to participate in the growth of e-commerce, applications in mobile devices, cloud computing, and other business models that will benefit from wealth creation both in Asia and Latin America. In addition we have added to unique business models at attractive valuations that are well positioned domestically in the US. We also believe that oil and gas companies based in North America are attractively valued for major oil companies to acquire, which combined with the benefits of the low tax regime and political certainty, are unique assets. As always, we continue to adhere to our process of managing a barbell of high free cash flow, dividend paying companies in the Classic growth space with market share gaining, sustainable Elite growth business models, and prudently managing risk in Cyclical growth which has helped us navigate volatility over the past ten years."
Mathew Powers, Investment Specialist US Equities, "BNP Paribas L1 Opportunities USA C C" (ISIN: LU0377124267) (02.02.2012): "We are currently overweight gold mining, for reasons previously discussed and oil services. Oil production continues to expand into more technically complicated methods of extraction, requiring increasingly specialized service. In addition, oil service companies benefit from a clearer vision of global activity and suffer less from political uncertainty, relative to E&P companies. The fund has been zero weight in Financials since 2006."
e-fundresearch: "Where do you see potential risks for US equities?"
Cormac Weldon, Threadneedle’s Head of US Equities, Fund manager, "Threadneedle (Lux)-American AU" (ISIN: LU0061475181) (08.02.2012): "The biggest risks to outlook are in the form of slowing global growth, the European financial system and the shadow banking system globally. All pose a long-term thread to equity prices. Our investment process, which driven by fundamental, bottom-up stock decisions but also incorporates thematic and macroeconomic inputs is particularly well suited to deal with these challenges."
Eric Mc Laughlin, Investment Specialist US Equity, "BNP Paribas L1 Equity USA Growth C C" (ISIN: LU0377078216) (06.02.2012): "There are several significant risks facing the US market, starting with the sovereign debt situation in Europe. This news event dominated global markets last year and led to increased volatility throughout the year. A viable solution is vital to global equity markets, including the US. Other risks to the market include a slow down to the US economic recovery, the geo-politic situation and global de-leveraging, but the European debt situation is the most important."
Grant Bughman, Portfolio Manager, "UBS (Lux) Eq S - USA Growth (USD) P-acc" (ISIN: LU0198837287) (01.02.2012): "The risk of overly tight fiscal policy remains, as does the impact from the fragile banking system in Europe. While equity prices have found their footing of late, it is our belief that the downside risk of equities has remains due to the fragile European banking system and its impact on global growth and investor confidence. Our concern is that the European banking system remains in a fragile position and could pose a significant risk to global economic growth and investor confidence if the issues are not addressed comprehensively in a timely manner."
Mathew Powers, Investment Specialist US Equities, "BNP Paribas L1 Opportunities USA C C" (ISIN: LU0377124267) (02.02.2012): "Debt levels in the US and throughout Europe are alarmingly high and the road to recovery will be a long one. The total debt / nominal GDP levels in the US surpassed 200% in 2005 and are currently over 240%. In fact, this level has been rising sharply since 1981, a period of 30 years! In our view, the enormous debt levels currently existing in most developed nations will impede any potential for the financial sector to succeed again any time soon. Additionally, with limited growth potential due to increased regulation and the small likelihood of increased lending rates, there is little opportunity for earnings growth in the Financial sector."
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the past year as well as over the past 3 and 5 years."
Cormac Weldon, Threadneedle’s Head of US Equities, Fund manager, "Threadneedle (Lux)-American AU" (ISIN: LU0061475181) (08.02.2012): "Although we are stock-pickers, our investment approach considers a broad range of inputs. Practically, this means that we leverage the insights from our colleagues across the investment floor covering various asset classes to gain a better perspective and understanding of the key macroeconomic developments and themes that are likely to play out and their likely impact on US equities. This way, our stock picking is not conducted in isolation. Over the past few years and especially since the financial crisis of 2007/2008, this ability to access expert opinion in-house across a number of asset classes has become more valuable and has helped us as US investors to avoid some of the pitfalls and to navigate a tumultuous market environment characterised by sell-offs and sharp rallies.
For instance, we considered developments regarding the Euro-zone sovereign debt crisis and recognised the potential contagion risks for US equities early. This has also helped us when looking at individual stocks in being perhaps more diligent in our assessment of our downside risks. Over the past year, this has meant that we have maintained an underweight position in banks that has been beneficial to performance for instance. Researching business fundamentals, understanding how portfolio candidates are positioned, what drives their profitability and questioning their management teams’ track-record at allocating capital on behalf of shareholders are the key determinants of the analysis that we conduct at the stock level. This, and our rigorous valuation framework which prompts us not only to highlight return opportunities but also to quantify downside risks, means that we derive our conviction from the nitty-gritty work of analysing companies. Last year, our stock choices in the IT, financial and industrial sectors where particularly insightful and resulted in strong, positive contributions to performance. In particular, holdings in IT services firm IBM, IT hardware firm Apple, waste management firm Waste Connections and industrial and electrical equipment distributor W.W. Grainger had a positive impact on performance. Likewise, our decision not to own shares in firms such as banks Citigroup and Bank of America and to avoid shares in computing, printing systems and IT services firm Hewlett Packard also benefited relative returns.
The constant interaction between the opportunities highlighted by our work at the stock level and the perspective gained by talking to our colleagues on the investment floor regarding macroeconomic developments has resulted in the consistent outperformance for our strategy over time –this is evidenced by the strength of the performance over short but also longer time horizons."
Eric Mc Laughlin, Investment Specialist US Equity, "BNP Paribas L1 Equity USA Growth C C" (ISIN: LU0377078216) (06.02.2012): "We have been managing this strategy for over five years through very diverse market conditions. We do not ever attempt to time the market, but stay fully invested at all times. Through up and down markets, our experience has shown that when investors are focused on the fundamentals that drive earnings growth, our strategy performs well. We are focused on investing in high quality companies that are reasonably priced and that can sustainably grow earnings. However, there are time periods when stocks with these characteristics are out of favour. There are periods when valuation is less important to investors or when macro factors are driving markets. The 2008 is a good recent example of this. There are also times when the markets are driven by macro-economic factors where company fundamentals are less important and this can prove difficult for our strategy. 2010 and 2011 were examples of event driven markets. We control risk in the portfolio in a number of ways, including our sector neutrality relative to the benchmark. Stock specific risk remains an important risk factor although we monitor ex-ante risk, marginal contribution to risk of each holding, and the product’s overall risk profile (i.e., fundamental factors, style, size, etc.) relative to the benchmark. Risk indicators are controlled on an ongoing basis as part of the daily management of the flagship fund."
Grant Bughman, Portfolio Manager, "UBS (Lux) Eq S - USA Growth (USD) P-acc" (ISIN: LU0198837287) (01.02.2012): "We have successfully navigated the volatile markets over the past 3 and 5 years thanks to our disciplined process of bottom up security selection while managing our risk across three diverse sources of growth. This has lead to excess returns that are in the top decile of our peer group while not taking more risk than most managers. As a result our Information Ratio has consistently ranked well ahead of our peers, further demonstrating our ability to outperform in various market environments."
Mathew Powers, Investment Specialist US Equities, "BNP Paribas L1 Opportunities USA C C" (ISIN: LU0377124267) (02.02.2012): "Since its inception in 2004, on a cumulative basis, the funds returns are well ahead of the S&P 500. As of 30/12/11, the fund has outperformed by almost 6% over a 5 year period and underperformed by 4% over the past three years. This 3 year period of underperformance was driven almost entirely by the underperformance of 2011, the first calendar year the fund has ever underperformed. We entered 2011 believing that the US equity market would be challenged, that gold prices would climb strongly, that high oil prices could be sustained over the long-term and that financials would remain weak. When the year was over, we were able to see that most of our predictions had indeed come true. The S&P 500 was unchanged for the year. Gold appreciated strongly. Oil prices remained high. Financials were the weakest sector. The paradox was that even though our long-term views proved to be correct, BNP Paribas L1 Opportunities USA underperformed. The underperformance can be most briefly described by the following three points; 1) Although gold appreciated strongly, gold mining stocks posted negative returns and ended the year at record low price-to-book valuations 2) Oil service companies did not trade in line with oil prices and 3) Although our view on the equity markets direction was correct, our equity hedge did not help us to outperform, though it did not hurt either.
While 2011 was indeed a challenging year, we stand by the funds long term track record. We continue to have high conviction in the funds positioning and believe that we are well positioned to outperform in 2012."
All performance data per 30.01.2012: