Sundaram World Brand Fund October 2014 1 Worlds Top 100 Brands, - - PowerPoint PPT Presentation

Sundaram World Brand Fund

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October 2014

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World’s Top 100 Brands, compiled by The Daily Mail, UK Logos and images used for illustrative purposes only, and are the properties of the respective companies / persons.

Apple vs HTC over the last 10 years – Sales and Profits

Why is BRAND important?

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• 20,000

40,000 60,000 80,000 1,00,000 1,20,000 1,40,000 1,60,000 1,80,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Apple Inc HTC Corp Sales (USD)

• 5,000
• 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Apple Inc HTC Corp Net Profit (USD)

HTC, despite having an early mover advantage and a comparable product range in the smartphone market, lost out to Apple.

Apple Sales increased 21x Profits increased 108x

Source: Bloomberg and in house analysis

Iconic brands are not just about advertising. It’s about obsession with design, quality, service, motivated employees, and ultimately customer delight.

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How are BRANDS built?

Steve Jobs was a perfectionist. There are many stories about his focus on the smallest detail and his attention to execution excellence. A few weeks before the iPhone was to be launched, Jobs told his top team, “I didn’t sleep last night because I realise I just don’t love the design of our iPhone”. He was referring to the fact that the initial design had glass set into an aluminium case, which took a lot away from the display Jobs wanted. “Guys, you’ve killed yourself over this for the last nine months, but we’re going to

change it”, said Jobs. The entire design had to be redone – the circuit boards, the

antenna and the processor. Other companies would have just shipped the product, but Jobs pressed the reset button and started over because he was not happy. The details he went into included designing a case that no one could open. When Apple found that repair shops were opening up the iPhone 4, it replaced the screws with tamper resistant pentalobe screws that were impossible to open with a commercially available screwdriver. How many CEOs would bother themselves with such tiny details and aspire for perfection? Small wonder that Apple is a synonym for design excellence.

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How are BRANDS built?

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How are BRANDS built?

Samsung today is a household name in all parts of the world. Since Chairman Lee Kun Hee took office in 1987, sales have grown 5775% to $141 billion last

• year. That makes Samsung Electronics the world’s largest electronics company by revenue.

Samsung has a manic quality obsession. In 1995, Chairman Lee was disappointed that the cell phones he gave away as New Year’s gifts were found to be inoperable. He asked his people to assemble a pile of 150,000 devices outside the factory. More than 200 staff members gathered around the pile. Then it was set on fire. When the fire died down, bulldozers razed whatever was remaining. The Chairman said, “ If you continue to make poor quality products like this, I’ll come back and do the same thing”. The bit that appeals to me most though is their approach to success and lack of

• complacency. Chairman Lee’s response to a tremendous performance by the Group in 2010

was, “ Our major businesses can disappear in 10 years”. He believes that there is perpetual crisis and companies need to constantly be on the edge and nimble or else they will perish.

After a record-breaking year he said, “ We are in danger. We are in jeopardy”.

Great brands:

• Span borders
• Span categories
• Sustain pricing power across

economic cycles

• Build a competitive moat
• Generate durable cash flows and

high returns on capital

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Why BRANDS outperform?

A strong BRAND = Competitive advantage + Improved earnings

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Strong competitive positioning typically results in build-up of substantial cash balances

20 40 60 80 100 120 140 160 180

Apple Inc General Electric Microsoft Inc Google Inc Coca Cola

10 20 30 40 50 60

Apple Inc General Electric Microsoft Inc Google Inc Coca Cola Cash and Market Investments (US$Bn as of 30 June 2014) Cash and Market Investments as a % of current market-cap

Data as of 24 Oct 2014. Source: YCharts and third-party research; Past performance may or may not indicate future performance.

Why BRANDS outperform?

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Sales (USD Billion) Net Income (USD Billion) RoE 2008 2013 Growth (%) 2008 2013 Growth (%) 2013 Coca-Cola 31.9 46.9 46.7 5.8 8.6 47.8 26.7 Google 21.8 59.8 174.5 4.2 12.3 205.7 15.2 Apple 37.5 170.9 355.9 6.1 37 505.3 30.6 America Express 31.9 34.9 9.4 2.7 5.4 98.6 27.9 United Parcel Services 51.5 55.4 7.7 3 4.4 45.6 77.4 Nike 18.6 25.3 35.9 1.9 2.5 31.3 22.5

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg WBF Model Portfolio Inception – 1 Oct 2002. Past performance may or may not indicate future performance.

BRANDS deliver high Return On Equity (RoE)

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Stock markets appreciate this!!!

Sales (USD Billion) Net Income (USD Billion) RoE Market Cap (USD Billion) 2008 2013 Growth (%) 2008 2013 Growth (%) 2013 2008 2013 Growth (%) Coca-Cola 31.9 46.9 46.7 5.8 8.6 47.8 26.7 104.7 182.4 74.2 Google 21.8 59.8 174.5 4.2 12.3 205.7 15.2 96.9 374.4 286.5 Apple 37.5 170.9 355.9 6.1 37 505.3 30.6 75.9 504.8 565.3 America Express 31.9 34.9 9.4 2.7 5.4 98.6 27.9 21.5 97.2 351.7 United Parcel Services 51.5 55.4 7.7 3 4.4 45.6 77.4 54.9 97.6 77.7 Nike 18.6 25.3 35.9 1.9 2.5 31.3 22.5 24.8 69.9 182.7

Strong competitive positioning leads to exceptional returns for shareholders

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg WBF Model Portfolio Inception – 1 Oct 2002. Past performance may or may not indicate future performance.

Sundaram World Brand Fund

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• Extensive back testing of data from 2002 has led to the development of a

proprietary portfolio allocation and re-balancing methodology

• A list of 50 leading brands will be created using publicly available annual

rankings of leading brand rating agencies such as Portfolio Construction overview

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Agencies Financial Analysis Brand Strength Analysis Brand Loyalty Analysis Interbrand    BrandZ    Forbes  At industry level X

Methodologies Adopted

Financial Analysis

• Measure economic profits
• Forecast future values over 5 years and arrive at terminal value
• Capital charge – Reference to Industry weighted average cost of capital

Demand Analysis

• Role of Brand Index (RBI)
• Determined by:
• Primary research
• Review of historical roles of brand for companies in that industry
• Expert panel assessment

Competitive Analysis

• Brand strength Score (measures the ability of the brand to create loyalty )
• Score from 1-100
• Evaluation across 10 key factors
• Performance on these factors is judged relative to other brands in the industry
• Proprietary formula used to connect the Brand Strength Score to a brand-specific

discount rate

• Rate is used to discount brand earnings back to a present value

Brand Rating process

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• Portfolio will consist of listed equities of 30 leading global brands
• Preference for brands with geographically diversified revenues in order to reduce portfolio risk
• The chosen 30 brands split into 3 bands

– Band 1 consists of the top 10 brands – Band 2 consists of the next 10 brands – Band 3 consists of the residual 10 brands

• Individual stock weighting to depend on the band the stock belongs to

– Band 1 stocks will have a weighting allocation of 5% each – Band 2 stocks will have a weighting allocation of 3% each – Band 3 stocks will have a weighting allocation of 2% each

• Portfolio changes triggered by

– Movement of brands within the 3 bands – Exit or entry of a brand from the top 30 list

• Risk control

– Single stock limit of 10% – Single sector limit of 50% – Intervention in instances of significant corporate governance issues

Investment Process

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2009 Model Portfolio

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Model Portfolio

American Express Hewlett-Packard (HP) Nokia Apple Honda Motor Oracle BMW HSBC Pepsi Cisco Systems Intel Philip Morris International (Marlboro) Citigroup IBM Procter & Gamble (P&G) Coca-Cola LVMH (Louis Vuitton) Samsung Electronics Daimler (Benz) McDonald's Sony General Electric Microsoft Toyota Motor Google Nestle United Parcel Service (UPS) Hennes & Mauritz (H&M) NIKE Walt Disney

Annualised Performance (%) in USD WBF Model Portfolio MSCI ACWI (Benchmark) Excess Returns 2014 YTD 3.3 2.0 1.3 1-Year 13.5 9.1 4.4 2-Years 14.9 12.0 2.9 3-Years 18.8 14.0 4.8 4-Years 14.1 8.0 6.1 5-Years 14.1 7.7 6.4 6-Years 11.4 5.9 5.5 7-Years 6.6 0.2 6.4

Actively-run model portfolio has consistently beaten benchmark

Back Testing

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg WBF Model Portfolio Inception – 1 Oct 2002. Past performance may or may not indicate future performance.

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Annualised Performance (%) in INR WBF Model Portfolio NSE CNX NIFTY INDEX Excess Returns 1-Year 12.0 38.6

• 26.6

2-Years 24.1 17.8 6.3 3-Years 28.2 17.0 11.2 4-Years 23.8 7.4 16.4 5-Years 19.9 9.3 10.6 6-Years 16.5 12.5 4.0 7-Years 13.4 6.7 6.7

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg WBF Model Portfolio Inception – 1 Oct 2002. Past performance may or may not indicate future performance.

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Back Testing

Actively-run model portfolio has beaten Nifty over medium term

Maximizing wealth creation

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• Investment strategy with a medium term perspective can be effectively

implemented

• Existing investors are insulated from the impact of fresh investors entering

and old investors exiting

• The low churn helps wealth creation over the medium term
• Extensive backtesting reveals that a closed-end strategy delivers consistent

results independent of the timing of fund launch (see next slide)

• As seen in the chart overleaf, closed-end strategies have over a 10 year

period have beaten their benchmarks over 75% of the time Benefits of closed-end nature

5 Year Model ACWI # No of observations 84 84 Average Returns 10.4 5.1 Maximum Returns 27.9 21.4 Minimum Returns

• 2.0
• 4.0

Positive Returns (times) 98% 85% times > 10% 39% 26% times > 15% 19% 11% times < -5% 0% 0% Positive excess returns 88%

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg: WBF Model Portfolio Inception – 1 Oct 2002. Past performance may

• r may not indicate future performance.

Back Testing: Monthly Rolling returns since 2002

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Maximizing wealth creation Benefits of closed-end nature

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg WBF Model Portfolio Inception – 1 Oct 2002. Past performance may or may not indicate future performance. Rs 10,000 invested on 30 Sep 2009

20 0.00 5,000.00 10,000.00 15,000.00 20,000.00 25,000.00 30,000.00 01-Sep-09 01-Nov-09 01-Jan-10 01-Mar-10 01-May-10 01-Jul-10 01-Sep-10 01-Nov-10 01-Jan-11 01-Mar-11 01-May-11 01-Jul-11 01-Sep-11 01-Nov-11 01-Jan-12 01-Mar-12 01-May-12 01-Jul-12 01-Sep-12 01-Nov-12 01-Jan-13 01-Mar-13 01-May-13 01-Jul-13 01-Sep-13 01-Nov-13 01-Jan-14 01-Mar-14 01-May-14 01-Jul-14 01-Sep-14

WBF MSCI ACWI NSE CNX NIFTY INDEX

25,016 18,629 15,625 Wealth creation

Rs 10,000 investment in Sep 2009 would have multiplied 2.5x over 5 years

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Additional reasons to invest

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. Past performance may or may not indicate future performance.

Diversification Benefits

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A good addition to your India exposure

Duration Benchmark (MSCI ACWI) CNX Nifty Index 5 Years 0.94 0.63

Model Portfolio Correlation with Benchmark & Nifty

Risk (Annualised Standard Deviation) Risk Adjusted Returns WBF Model Benchmark (MSCI ACWI) CNX Nifty Index WBF Model Benchmark (MSCI ACWI) CNX Nifty Index 5 Years 13.82 14.70 26.19 1.04 0.58 0.28

Data in USD Terms Data in USD Terms

Returns of WBF Model Portfolio is 1026 basis points higher Volatility of WBF Model Portfolio is 1237 basis points lower

Standard Deviation 5 Year Annualised Returns (USD)

All data as of 30 Sep 2014. Source: Bloomberg and in house analysis. INR/USD conversion rates: Bloomberg WBF Model Portfolio Inception – 1 Oct 2002. Past performance may or may not indicate future performance.

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13.82 26.19 14.27 4.01

Diversification Benefits A good addition to your India exposure

Rising urbanisation will lead to rise in demand for aspirational brands

Source : IIFL

Urbanisation in the past 3 decades Urban population and GDP per capita

Source : UN, Sundaram Asset Management

Brazil India Russia Indonesia China 20 30 40 50 60 70 80 90

• 5,000

10,000 15,000

Urbanisation rate % GDP percapita US$

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Fully benefiting from India growth

Several of the leading brands are already in India, and growing strongly – Google revenue from India crossed ₹3,000 crore for the year ending March 2014, up 47% from the year before. Targeting ₹6,000 crore for March 2015. – McDonald’s entered India in 1996, and now has over 310 outlets. – iPhone sales in India up 55% last year, and iPad sales up by 45% year on year. – Honda India sold 1,34,339 cars last year, representing a staggering 82% growth. – Amazon, after launching operations in India in June 2013, has announced plans to invest an additional USD2billion, and sees India on track to become the fastest country ever to reach $1 billion in gross sales.

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Fully benefiting from India growth Global brands poised to capitalize on this demand

Current Model Portfolio

70% 8% 12% 10%

Geographic Allocation

US Japan Germany Others

43% 12% 36% 9%

Sector Allocation

Information Technology Consumer Staples Consumer Discretionary Others

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Well diversified & reasonable valuations

Portfolio Characteristics 2015 weighted estimated PER 15.9x 2016 weighted estimated PER 13.5x Average RoE 24.80% 2014 estimated Dividend Yield 2.30%

$ 307,500 ₹ 1.90 Crores

Cost of buying 100 shares of each company in the World Brand Fund Model Portfolio as

• f end September 2014

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Fund Facts

• Theme: Invest in equity securities of world’s strong brands & those with the potential to become

globally recognized brands

• Asset Allocation

 Equity related securities listed on recognized overseas stock exchanges across the world: 65-100%  Domestic Fixed Income Securities & Money Market Instruments : 0-35%

• Tenure - Series I: 1100 Days; Series II: 1800 Days
• The fund proposes to adopt an investor-friendly dividend policy (surpluses permitting) to ensure that

liquidity is not restricted

• Dividends maybe declared between NAV band of Rs 12 to Rs 16
• Benchmark : MSCI ACWI Index
• Fund Manager: S Bharath
• For investment in international securities, Sundaram AMC has entered into an agreement with

Sundaram AMC Singapore to act as Investment Advisors

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Our Singapore Team

Anish has over 20 years of experience in Indian and Asian capital markets. Prior experience: Societe Generale Asset Management, Singapore as the Deputy Chief Investment Officer, where he was responsible for Asia Pacific ex-Japan investments. Formerly Director

• Investments
• f

Deutsche Asset Management, Singapore, where he was responsible for Asian equity investments with a focus on Asian Emerging Markets. Qualifications: Bachelor's degree in Commerce (Honours) from Delhi University, and a Post Graduate Diploma in Management (MBA) from the Xavier Institute of Management

Anish Mathew

Chief Investment Officer Sundaram Asset Management, Singapore

R Vijayendiran

Chief Executive Officer Sundaram Asset Management, Singapore

Vijayendiran has over 25 years of work experience in the Indian financial services industry. Prior experience: Working with Sundaram Asset Management Company since September 1996. Has been an integral part of the investment team from commencement of business in 1996 till

• 2008. He was also the head of Sundaram Mutual Portfolio

Managers till July 2012. Prior experience: Prabhudas Liladhar, The Stock Holding Corporation of India, Citicorp Software and Kotak Securities in various capacities. Qualifications: Bachelor's degree in Commerce from Madras Christian College, and a Master's degree in Commerce from the University of Madras.

Disclaimer

General Disclaimer: This document is issued by Sundaram Asset Management for your exclusive and confidential reference. This document is produced for information purposes only. It does not constitute a prospectus or offer document or an offer or solicitation to buy any securities

• r other investment. Information and opinion contained in this document are published for the assistance of the recipient only; they are not

to be relied upon as authoritative or taken as a substitution for exercise of judgment by any recipient. They are subject to change without any notice and not intended to provide the sole basis of any evaluation of the instrument discussed or offer to buy. It is neither a solicitation to sell nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or be taken as investment

• advice. The information and opinions contained in this communication have been obtained from sources that Sundaram Asset Management

believes to be reliable; no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. Sundaram Asset Management neither guarantees its accuracy and/or completeness nor does it guarantee to update the information from time to time. This communication is for private circulation only and for the exclusive and confidential use of the intended recipient(s). Any other distribution, use or reproduction of this communication in its entirety or any part thereof is unauthorized and strictly prohibited. By accepting this document you agree to be bound by the foregoing limitations. This communication is for general information only without regard to specific objectives, financial situations and needs of any particular person who may receive it and Sundaram Asset Management is not soliciting any action based on this document. In the discharge of its functions, Sundaram Asset Management may use any of the data presented in this document for its decision-making purpose and is not bound to disclose the same. For details about fund management services and performance, please refer to the Disclosure Documents available at the offices of the AMC. Images used are for illustration only. All logos and trademarks are properties of their respective companies and are hereby acknowledged. Securities investments are subject to market risks and there is no assurance or guarantee that the objectives of portfolios will be achieved. As with any securities investment, the value of a portfolio can go up or down depending on the factors and forces affecting the capital

• markets. Past performance of the Fund Manager or AMC may not be indicative of the performance in the future. Sundaram Asset

Management is not responsible or liable for losses resulting form the operations of any portfolio. The value of any portfolio illustrated in this document may be affected by changes in the general market conditions, factors and forces affecting capital markets in particular, level of interest rates, various market related factors and trading volumes, settlement periods and transfer procedures. The liquidity of investments are inherently restricted by trading volumes in the securities in which it invests. Investors in portfolios are not offered any guaranteed returns. 29