S O L A C T IV E E U R O P E A N D E E P V A L U E S E L E C T 5 0 IN D E X Marketing C ommunication For professional clients only This document has been prepared for discussion purposes only and does not constitute an offer or a solicitation to engage in any trading strategy or the purchase or sale of any financial instrument C O R P O R A T E & IN S T IT U T IO N A L B A N K IN G G L O B A L M A R K E T S S E P T E M B E R 2 0 1 7
1 V A L U E IN V E S T IN G September 2017 | 2
T H E C O N C E P T O F V A L U E IN V E S T IN G (1 /2 ) H O W IT S T A R T E D BENJ AMIN GRAHAM (1894 1976): THE FATHER OF VALUE INVESTING L E S S O N S B Y B E N J A M IN G R A H A M Value Investing is a comprehensive investment philosophy that emphasises 1 the need to perform in-depth fundamental analysis , pursue long-term investment results, limit risk, and resist crowd psychology 2 Value Investors regard securities as a fractional ownership in the actual business, with an underlying value that does not depend on its share price Benjamin Graham was an economist and a professional investor. He began teaching the Value investment 3 These investors seek stocks they believe the market has undervalued. When a approach at C olumbia Business School company is available on a discount to its intrinsic value (the one that is justified in 1928, which he refined through the by the facts: assets, earnings, dividends, etc.), it is suitable for investment various editions of his famous books. 4 Since intrinsic value is an elusive concept, one must invest with a margin of safety : a big enough discount to allow some room for error, imprecision, bad luck or the vicissitudes of the economy and the stock market investor's primary interest lies in acquiring and holding suitable securities at suitable prices. (Benjamin Graham) L.Dood, and Preface to the Sixth Edition by Seth A. Klaman. September 2017 | 3
T H E C O N C E P T O F V A L U E IN V E S T IN G (2 /2 ) D O E S IT W O R K ? FOR BENJ AMIN GRAHAM � A long track record and experience � Benjamin Graham started his investment career in 1914 and made it through the 1929-1932 Great C rash � From 1936 until he retired in 1956, his Graham-Newman C orp. 1 gained 20% annually , versus 12.2% for the stock market as a whole: one of the best long-term track records on Wall Street history 1 Modern equivalent of a closed-end mutual fund. FOR HIS STUDENTS students have achieved impressive performances: � Warren Buffett , Walter Schloss Bill R uane , Tom Knapp and Amongst followed Sequoia Fund Ed Anderson , others: at C olumbia Benjamin Manager, met were also C harles Business School , Graham lifelong friend Munger, R ick described him as courses at Warren Buffett disciples (9% Guerin, Stan the second most night at the at a Benjamin annual Perlmeter, influential person New York Graham outperformance etc. All very in his life after his own father Institute of Finance (8% investment seminar (7% over the S&P 500 successful (6.1% annual outperformance annual outperformance annual outperformance from 1968 to investors over the general stock over the S&P 500 Index over the S&P 500 Index 1983) market from 1976 to 2011) from 1956 to 1968) from 1970 to 1984) September 2017 | 4
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T H E IN D E X S T R A T E G Y IN A N U T S H E L L S T H E L E E S C T T R IO U N C T P U R R O E C D E S S THE STRATEGY SELEC TS STOCKS OF EUROPEAN COMPANIES THAT AIM TO PROVIDE: L o w v o la tility S tro n g a n d s ta b le re s u lts o v e r tim e By removing stocks with the By choosing robust companies highest volatilities in order to that demonstrate high standards enhance the risk/return profile in terms of Valuation, Solvency and Stability L o n g te rm re p lica b ility S ta b le s o u rce o f in co m e By selecting highly liquid stocks By selecting stocks that are that have proven their capacity expected to pay dividends in the for endurance and dependability coming month C urrency Type of index Bloomberg code R euters code Launch date EUR Price R eturn SO LEDVSP Index .SO LEDVSP 7th J uly 2015 A R IG O R O U S IN V E S T M E N T M E T H O D O L O G Y T H A T A IM S T O S E L E C T S O U N D C O M P A N IE S , W H A T E V E R T H E M A R K E T C O N D IT IO N S September 2017 | 6
O V E R V IE W O F T H E S E L E C T IO N P R O C E S S O V E R A L L S E L E C T IO N P R O C E S S Geographical Universe European stocks 1000 stocks Liquidity 1 500 stocks Liquidity Filter 200+ stocks Valuation, Solvency Deep Value Filter & Stability Q uantitative Dividend and Selection Volatility filtering 50 stocks Final composition Monthly Equally weighted EUR rebalancing Source: BNP Paribas, for illustrative proposes only. 1 Average daily volume observed at or above 10M over a 20 days period. September 2017 | 7
S te p 1 - T H E D E E P V A L U E F IL T E R (1 /2 ) 1 H O W IT W O R K S : T H E 3 F U N D A M E N T A L F IL T E R S 1 2 3 VALUA TIO N SO L VENC Y STABILITY Is the price attractive Is the financial Are the earnings stable? enough compared to its revenues position solid? Select companies able to � and assets? Debt charge must be generate profit in any market � � Avoid overvalued names: a reasonable to avoid putting at condition: profits generated by reasonable price compared to stake the benefits: the company must be positive the benefits of the last 5 years financial expenses over the previous 10 years (Shiller PE 2 ) largely covered by their � Target companies that are able revenues � Select efficient business to reward investors in all models: regularly posting solid Select companies able to market conditions: filter on the � profits compared to accounting decrease and reimburse their dividends paid by the company value and having an earnings debts: target companies with in each of the previous 10 years yield high enough to justify a limited debt compared to their long term investment revenues 1 Please turn to slides 20 to 22 for more details. 2 Shiller Price Earnings, also called C APE «C yclically Adjusted Price Earnings», developed by R obert Shiller. A F U N D A M E N T A L S -B A S E D IN V E S T M E N T M E T H O D O L O G Y September 2017 | 8
S te p 1 - T H E D E E P V A L U E F IL T E R (2 /2 ) H O W IT W O R K S : T H E D E E P V A L U E S C O R E A balanced but selective approach based on analyzing fundamentals according to three groups of criteria: � � Valuation, Solvency and Stability � To move to the next step of the selection process, a company must comply with the following 3 constraints: (note that only companies with an average daily volume observed at or above 10M over a 20 days period appear on the Index calculator screens) � Deep Value Score 4 � Valuation score 1 � Solvency score 1 No Non-Fi Financial Fi Financial Deep Shiller C APE x Earning Past Past Valuation Financial Interest EBITDA Solvency Earnings Stability Value 3 PE P/B Yield Dividends 1 R O E 2 Score leverage C over Growth R exam PLC 1 1 0 2 1 1 - - 2 1 0 1 5 Munich R e AG 1 1 1 3 - - 1 0 1 1 1 2 6 BAE Systems PLC 0 0 1 1 1 1 - - 2 1 0 1 4 C ompass Group PLC 1 1 0 2 1 1 - - 2 1 0 1 5 TeliaSonena AB 1 1 1 3 1 1 - - 2 1 1 2 7 Unilever PLC 0 0 1 1 1 1 - - 2 1 1 2 5 R oche Holding AG 0 0 1 1 1 1 - - 2 1 1 2 5 IMI PLC 1 1 0 2 1 1 - - 2 1 1 2 6 Standard Life PLC 1 1 0 2 - - 1 0 1 0 1 1 4 Wolters Kluwer 0 0 1 1 1 1 - - 2 1 1 2 5 AR M Holdings PLC 0 0 0 0 1 0 - - 1 1 0 1 2 SSE PLC 1 0 1 2 0 0 - - 0 1 1 2 4 the company had a positive mark on that criterion, if there is a ng scale is from 0 to 7 and is made up of the sum of the grey columns. 1 Price-to-Book. 2 R eturn on Equity. 3 Earnings Before Interest, Taxes, Depreciation and Amortization. September 2017 | 9
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