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Robeco Boston Partners’ Three Circles Applied to Apple

Mark Donovan, CFA, who describes himself as an “unswayed value investor” takes us by the hand through the process of Robeco Boston Partners’ three circles stock selection criteria through a concrete example. Does it make sense that a value investor like himself has Apple in his portfolio? “I will prove that Apple, theoretically a growth company, is a perfect candidate for our investment philosophy,” he says.

In fact, for a while now, Apple has been one of the top ten positions within the strategy managed by Donovan. “Now that, for the first time, the value has exceeded the US$700bn of market capitalization, the company is on everyone’s lips, but keep in mind that its earnings and cash flows have grown more than its market capitalization”.

Therefore, Donovan analyses Apple through the prism of the first circle, that of valuation. Apple is trading at a 2015 calendar PE ratio of 13,7x*, the S&P 500 does so at 17,3x and the strategy’s benchmark, the Russell Value 1000 Index, trades at 15,5x. “As you can see, Apple trades at a significant discount in relation to the market, and even to the value index. If we look at other ratios such as free cash flow yield, Apple has a yield of 8.9%, three times better than the S&P 500, which is below 3%,” he adds.

Exhibit 1 “Three circle selection criteria”:

Enlarge

Regarding sound business fundamentals, Donovan has no doubts about the ability of Apple to improve profitability. “They have proved to be unique in transforming the money invested in R&D into high demand consumer products.” For Donovan, the fact that iphone models 6 and 6+ have broken all sales estimates prove that the company that invented the concept of the tablet and the smartphone is still able to innovate. “Given the strong demand observed in recent quarters, I think the risk that their products become obsolete in the near term is low. Also, it still has a valuable computer franchise with the Mac brand”.

When analyzing the fundamentals of a business, this investment philosophy pays special attention to the allocation of capital. “It is true that Apple devotes an enormous amount of its cash flows to R&D, but in recent quarters we’re also seeing a growing trend to remunerate shareholders.” On the one hand, Apple pays a dividend which, although small, represents a yield of 1.5%. But above all, it highlights the share buyback activity in the firm. “Apple has reduced its number of shares by 7%,” a relevant figure considering that up to three years ago, Apple did not repurchase shares.

The third circle, momentum, is also functioning in Apple’s case. Not only is the general trend of its business positive, but also analysts’ revisions on their estimates support this momentum. “During the last quarter 44 analysts have revised their estimates on Apple, 42 were upward and only two were downward” Donovan specifies.

Therefore, Apple meets Robeco Boston Partners’ three circles or “fundamental truths”. “When will you sell the stock?” We asked. “Should a serious impairment of their fundamentals occur or if the stock reached our target value” replies Donovan.

This is Part 2 of a Three part interview to Robeco Boston Partners US and Global Equity Team, published in Spanish in Funds Society print magazine (April 2015)

*Market ratios are calculated as of February 2015

The “Fundamental Truths” According to Mark Donovan, an Unswayed Value Investor

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Robeco Boston Partners invests in equities based on the process of the “Three Circles”, a philosophy conceived in the eighties, which is known by the managers of the company as the “fundamental truths” of investment.

“The trick is to keep things simple,” said Mark Donovan, portfolio manager of the company’s Large Cap US Equity strategy. “There are too many people wasting time trying to predict the unpredictable, while for me, investing my time in finding companies that meet the three circles: Attractive valuation, sound business fundamentals, and good momentum, is much more interesting “.

While stock selection is the center of Robeco Boston Partners’ philosophy, the management firm is not alienated from events affecting the market. “We don’t try to guess where the dollar or the oil price will stand, but we do carry out constant sensitivity analyses on the effect of these factors on the fundamentals of the companies which we follow, in order to see if the market is misinterpreting the consequences. “

According to Donovan, the evolution of interest rates in recent years has created valuation traps in certain sectors, such as utilities. “Utilities are often equated with bonds, so in times when bonds pay as little as now, investors tend to buy more utilities looking for extra yield.” This has driven the sector to trade at a PE of 19x compared to a historical average of 13x-14x. “The market is assuming that rates will remain low, or even continue to decline, a wrong bet, in our judgment,” says Donovan. “If rates start to rise, the utilities will suffer a lot.”

The banks are at the other extreme. It is a sector that has behaved lackluster for the last two years, due to the low rates, the bank’s net interest margin is lower and profitability suffers. “The sector is trading at a PE of 10x, a ratio which reflects that investors believe that banks are dead money, but if rates start to rise, even a little, the potential for improvement is important,” said Donovan.

The earnings season remains positive, beating expectations as regards the fourth quarter “but not so in the revision of targets for 2015, which is generally downward”. As a large caps investor, Donovan closely monitors the US dollar effect on the earnings of US companies. “The vast majority generates a significant portion of its revenue overseas, so that a strong dollar means lower dollar value of foreign income in addition to the problem of loss of competitiveness“. Donovan points out that even without considering the currency effect, revenue growth is slowing compared to the second half of 2014. “Growth has moderated in the US, and neither China nor Europe is helping.”

Corporate Activism, an interesting trend

According to Donovan, an interesting factor in the current North American business scene is the proliferation of activist investors. “In Robeco Boston Partners we are not ‘activist’ investors, but it strikes my attention that within my portfolio there are several names that have either been touched by, or are likely to arouse the interest of activist investors whose ultimate goal is to influence company management to unlock its value,” he explains. “If I was currently the CEO of a listed company in USA, what would deprive me of some sleep would be to think of waking up one day to find that Bill Ackman, Carl Icahn, or someone similar has taken an interest in my business, “adds Donovan.

Activist investors acquire a stake in companies in which they see they would be able to obtain value with some major changes in senior management. A recent example is McDonalds, which has had two bad years, causing its former CEO, who had barely held the position for two years, to decide to “retire” pushed by the board of the company. His replacement has the mandate to turn the company around by taking a different path than his predecessor. The board of McDonalds, influenced by shareholders who have decided to take an active approach in their investment, has zero tolerance for management with mediocre results. Although Donovan insists on clarifying that they are not activists in their positions, he also claims that this trend is benefiting the type of companies that are often part of their portfolio. “One example is United Technologies, which has been part of our strategy for some months. It is a company that has inherited a good business, even though it has recently experienced some problems. The appointment of a new management team is usually a good catalyst for change. “

This is Part 1 of a Three part interview to Robeco Boston Partners US and Global Equity Team, published in Spanish in Funds Society print magazine (April 2015)

*Market ratios are calculated as of February 2015

BNY Mellon Introduces ESG Advisory Services for its Depositary Receipts Clients

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BNY Mellon announced that it is teaming with Sustainalytics, a leading provider of environmental, social and governance (ESG) research and analysis, to make available a wide range of ESG data and insight to its depositary receipts clients. BNY Mellon is the first depositary bank to offer such services to securities issuers.

Momentum is growing both from investors and companies to more carefully consider the implications of ESG factors. The number of institutional signatories participating in the United Nations-backed Principles for Responsible Investment (PRI) Initiative – an international network of investors dedicated to advancing responsible investment practices – grew by 19% last year and now includes more than 1,300 signatories representing over $45 trillion in assets under management.

To support growing interest in ESG investing, BNY Mellon’s Depositary Receipts business will offer its clients access to Sustainalytics’ ESG research and ratings, as well as custom benchmark reports that provide a lens through which issuers are viewed by investors. Sustainalytics will also offer clients access to in-house industry analysts who can provide deeper insight on ESG issues.

“More investors are evaluating corporate ESG practices and performance as part of their decision-making process. Through Sustainalytics, we can create an important link to help global firms gain insight into the approaches of investors and asset owners,” said Christopher M. Kearns, CEO of BNY Mellon’s Depositary Receipts business. “Sustainalytics’ coverage of international issuers is excellent and widely utilized by institutional shareholders.

“This new offering signals the next phase of BNY Mellon’s unmatched DR advisory service, enabling us to help clients better understand the needs of investors and develop strategies around enhanced corporate disclosure. We want to keep firms at the forefront of these trends,” Kearns added.

“Companies working with BNY Mellon will benefit from a deeper understanding of how investors view their sustainability practices and how they can improve upon them to attract new investments,” said Sustainalytics’ CEO, Michael Jantzi. “We look forward to working closely with BNY Mellon as they break new ground in being the first depositary bank to offer ESG data to its clients.”

Net Assets under Management in Luxembourg Funds Continue to Grow with Record Net Sales in March

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El patrimonio gestionado en fondos de Luxemburgo continúa creciendo y alcanza niveles récord de ventas en marzo — CC-BY-SA-2.0, FlickrPhoto: Nicolas. Net Assets under Management in Luxembourg Funds Continue to Grow with Record Net Sales in March

The Association of the Luxembourg Fund Industry (ALFI) has published its statistics as at 31 March 2015:

Luxembourg retains its position as the leading European domicile with EUR 3,524.79bn of net assets under management, growing 3.55% in the month ending 31 March 2015 and 13.89% so far in 2015
At EUR 49.92bn, net sales in March were the highest of all time
Net assets managed by investment funds under Luxembourg law grew by 30.10% in the past 12 months
The number of investment funds (legal entities) is 3,888 as at 31 March 2015
Germany remains the main initiator of funds domiciled in Luxembourg (2,812 in total), with Switzerland coming second (2,585 in total). However, funds initiated in the US and the UK have the most net assets under management (EUR 790,580m from the US, EUR 579,799m from the UK)

Marc Saluzzi, Chairman of ALFI, comments: “The low interest rate environment is obviously a decisive factor in the sustained growth of assets under management by the investment fund industry”.

He adds: “The exceptionally high net sales that we are registering in Luxembourg are the best proof of the continuous confidence of the international investor in the Luxembourg investment fund product. Equally, the diversified geographical origin of fund promoters in Luxembourg demonstrates that our fund centre remains the domicile of choice for the international asset management community.”

Chairman of BBVA Analyzes Effects of Technological Revolution on Banking Industry at Harvard University

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El presidente de BBVA analiza los efectos de la revolución tecnológica sobre la banca en Harvard — Francisco González, Chairman and CEO of BBVA, has presented the book Reinventing the Company in the Digital Age at Harvard University - Courtesy photo. Chairman of BBVA Analyzes Effects of Technological Revolution on Banking Industry at Harvard University

Francisco González has presented the book “Reinventing the Company in the Digital Age” at Harvard University. This is the seventh volume in BBVA’s annual series dedicated to analyzing the major issues of our time in which authors from around the world are participating with the goal of “helping people understand the changes that are continually reshaping our world”.

The Bank´s Chairman focused on how this technological and digital transformation has already reached the financial world. ”A new digital ecosystem is being built. One in which launching new products and services is much easier, cheaper and faster that it was a few years ago. Startups, developers, designers, large digital companies, all interact in this ecosystem, simultaneously competing and collaborating”.

In the opinion of Mr. González , “Many conventional banks are going to fall by the wayside. Those that make it will no longer be ‘banks’, but software companies, competing with the digital players and with a completely different value proposition”.

Francisco González expressed his conviction that BBVA “is now in a position to lead the process of transformation of the banking industry”, while bearing in mind that “we are leaders but we are running a race which as no discernible finish line, not even a pre-fixed route. Our strategy is to encourage change and to keep working to remove the practices and structures that stand in the way of change. This is the only way to maintain our leadership and extract value from it in the exciting new times to come”.

The transformation of banks must start with the foundation, the technological platform, said Francisco González, and this “is a long and complex process. We at BBVA know this, because we started our digital journey eight years ago” and the group’s first move was to significantly increase our IT investments to build a brand new, real-time client-centric, modular and scalable platform “not only to better satisfy our customer demands, but also to improve radically cyber security and data protection”.

At the same time, “at BBVA we have comprehensively reengineered our processes and promoted a change of culture in step with our technological overhaul”, added Francisco González, stressing that the bank has achieved very significant results over the last few years: “From December 2011 we have more than doubled our active digital customers. At the end of March 2015 we counted 12.5 million, of which 50% (more than 6 million) used mobile technologies”.

The Chairman of BBVA has also pointed out that in 2014 the Group created a Digital Banking division in order to accelerate the bank’s digital transformation across the board.

Along with Francisco González, the authors of the book, Peter Thompson, Professor at Henley Business School, and Esteban García-Canal, Professor at the Universidad de Oviedo, also participated in the presentation.

Peter Thompson remarked that in just one decade the digital revolution underway brought about more changes in the way we live than the industrial revolution did in a century.

In his opinion, societies are increasingly demanding higher–quality jobs that are smarter, more collaborative and flexible, more satisfactory and ensure a better balance between professional and personal lives. This need has spurred a revolution in work practices and management, including the use of technology to develop new physical and virtual work environments adapted to new requirements.

Esteban García-Canal has focused on the rise of emerging economies –which in just 20 years have gone from representing 15% of economic activity to 50% at present– and the companies with corporate offices in these economies. Many of these companies were small players until recently and today they are challenging the most consolidated multinationals.

In the opinion of García-Canal, these companies, created in countries with fragile institutional environments, have taken advantage of the experience acquired in their home countries to compete in complex environments. Furthermore, and although it seems paradoxical, their scant international presence has allowed them to adopt a strategy and an organizational structure that has been ideal in the current context in which emerging economies are growing very quickly.

Broker Dealers, Custodians, and Asset Managers Need to Adapt as Advisor Teaming Gains Speed

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According to new research from global analytics firm Cerulli Associates, broker/dealers, custodians, and asset managers need to adapt as advisor teaming grows.

“The appeal of advisor teaming has grown among both established and new advisors,” comments Kenton Shirk, associate director at Cerulli. “For advisors, a successful merger can generate substantial growth and productivity enhancements.”

With the growing complexity of planning needs, investment products, technology, and regulations, small advisor practices may struggle to tread water, opening the door to consolidation opportunities for larger practices with a robust infrastructure.

“The growth of multi-advisor practices is most pronounced in independent channels. The average number of total professional staff per practice is 3.3 in the wirehouse channel. That compares to an average of 5.2 for dually registered practices and 4.5 for registered investment advisors,” Shirk explains.

“The advisory industry is increasingly shifting away from an individual producer mindset to that of a multi-advisor team,” Shirk continues. “The industry’s largest practices and mega teams also typically serve affluent investors, which reinforces their propensity for teaming. The desired result is providing broader and deeper services to meet the more sophisticated needs of their high-net-worth clientele.”

“Mega teams cite the ability to provide more services as the primary reason for teaming. By pooling resources, they are better equipped to specialize advisor and staff roles,” Shirk adds. “Teaming offers an opportunity to develop specialized roles for both advisors and staff, which greatly enhances advisor growth opportunities and productivity levels.”

Pioneer Investments and Santander Asset Management to Join Forces Creating a Leading Global Asset Manager

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Nace la nueva Pioneer Investments tras confirmarse la fusión entre Santader AM y Pioneer — Juan Alcaraz will be Global CEO Global at the new Pioneer Investments, and Giordano Lombardo, Global CIO. Pioneer Investments and Santander Asset Management to Join Forces Creating a Leading Global Asset Manager

UniCredit, Santander, and affiliates of Warburg Pincus and General Atlantic have signed a preliminary and exclusivity agreement to combine Pioneer Investments and Santander Asset Management to create a leading global asset manager.

Juan Alcaraz, current CEO of Santander Asset Management, will be the Global Chief Executive Officer, and Giordano Lombardo, current CEO and Group Chief Investment Officer (CIO) of Pioneer Investments, will be the Global CIO of the new company.

The combined firm, with approximately €400 billion in assets under management, will be one of the preeminent asset managers in Europe, as well as a comprehensively global firm with capabilities and client relationships around the world. The partnership between the two firms will provide for substantially enhanced economies of scale, a key advantage in the asset management industry, while also expanding the business’s diversification with respect to investment strategies, distribution channels and region. The combined firm will have robust market share based on deep client relationships in a wide range of markets including both growing and established regions, covering institutional, wholesale third party, and proprietary channels.

Building on a strong growth trajectory with total combined net inflows of over €25 billion in 2014, the combined company will have improved growth potential owing to an increasingly independent profile and a broader set of investment solutions to meet client needs across all channels worldwide.

Pioneer and SAM bring largely complementary platforms, investment capabilities, and client relationships, resulting in a more complete range of solutions and services to the benefit of all clients. Through this strategic transaction, the combined firm will be committed to maintaining the continuity and repeatability of its investment processes that have served clients well over multiple market cycles.

Furthermore, it will offer an expansive global distribution footprint, with a presence in over 30 countries and exposure to both growing and well-established regions such as Latin America, North America, Asia, as well as a leading position in Europe. In addition to Pioneer and SAM’s longstanding institutional and wholesale third-party relationships, long-term distribution agreements with UniCredit and Santander will result in unparalleled retail distribution capabilities in Europe and Latin America.

The preliminary agreement will lead to the establishment of a holding company, with the name Pioneer Investments, which will control Pioneer’s US operations along with the combination of Pioneer and SAM’s operations outside the US. UniCredit and the Private Equity Firms will each own 50% of the holding company, which will in turn own 100% of Pioneer US, and 66.7% of the combination of Pioneer and SAM’s operations outside the US, while Santander will directly own the remaining 33.3% stake. The combined firm will continue to operate as one global entity, led by a single global management team, focusing on meeting the needs of its clients worldwide.

The agreement is based on an Enterprise Value of €2.75 billion for Pioneer Investments and €2.60 billion for Santander Asset Management (including its 49.5% stake in AllFunds Bank). Furthermore, the transaction is estimated to enhance UniCredit’s capital position by approximately 25 basis points.

Following the signing of the preliminary agreement, the parties will work towards signing a definitive agreement subject to the customary regulatory and corporate approvals.

Has Royal Dutch Shell Overpaid?

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¿Ha pagado demasiado Shell por BG Group? — Photo: Hakon Thingstad. Has Royal Dutch Shell Overpaid?

The Royal Dutch Shell bid for BG Group (£47bn) represents the largest ever deal between two UK corporates, and the largest deal in the oil and gas sector since Exxon’s takeover of Mobil in 1998. Now that the dust is settling, the Commodities & Resources team in Investec AM shares some perspective on the deal.

“We were not surprised to see the UK’s third largest energy company, BG Group, being acquired, or to see Royal Dutch Shell making an opportunistic move”, says Tom Nelson, Head of Commodities & Resources at Investec AM.

BG Group has struggled since 2011 in its evolution from a highly successful exploration company to a senior developer and producer. Management changes, operational setbacks, and unrealistic targets had reduced investor confidence in the long-term story. The oil price crash of 2014 compounded the pain for shareholders and brought the stock price down to £8, almost 50% below the levels attained in 2011 and 2012. Despite these recent struggles, Investec felt its assets were of a materiality and quality that would be extremely attractive to a supermajor.

It was clear to the team from meetings with management that Royal Dutch Shell had a more progressive view on the oil price than some of its peers, notably Exxon Mobil and BP. They recognised that oilfield decline rates and the lack of exploration success had made reserve replacement increasingly unattainable for the Majors – and that was at prices of US$100 per barrel, with rising capex budgets.

The clearest – and cheapest – path to growth lay through acquisition. The BG deal gives Royal Dutch Shell a clear leadership in the global liquefied natural gas market (45m tonnes per year by 2018), the largest position in Brazilian deepwater oil fields apart from Petrobras, and significant growth assets in Australia and Tanzania. The combined company could outstrip Exxon Mobil by 2018 as the largest public oil and gas producer at 4.2m barrels of oil equivalent per day (boe/day) with an expected free cashflow yield of 7%. “Our analysis of costs and returns shows the Brazilian pre-salt to be the most attractive and prospective hydrocarbon basin in the Non-OPEC world”, points out Nelson.

Sceptics think that Royal Dutch Shell has overpaid. The deal valuation of BG Group’s 2P (proven and probable) barrels was US$10-US$12. The average finding and development cost for the European Majors over three years has been over US$30. “Royal Dutch Shell has increased its reserves by 28% by spending US$70bn, which equates to two years of capital expenditure at the current rate. Neither of these measures looks expensive to us. The 50% premium is not out of line with historic deals in the sector. Of course, the ultimate judge of the fair price will be the oil price over the next three years. Shell used US$67 for 2016, US$75 for 2017, and US$90 long term. We note that most of the sceptics are generalist investors who expect oil prices to stay lower for longer”.

Investec makes two final points: “we, alongside Royal Dutch Shell, believe that the oil price will recover meaningfully from current levels over the next three years and we are positioning our portfolios for that environment. We expect that this will not be the last M&A deal of this oil price depression: the three notable deals so far have been Repsol/Talisman (US$8bn), Halliburton/Baker Hughes (US$38bn) and Royal Dutch Shell/BG (US$70bn). We expect Exxon Mobil to make an acquisition(s) and would not be surprised if it was of equivalent size or larger. The Majors have tried and failed to grow organically; the market has now offered a gilt-edged chance for inorganic growth“.

H.I.G. Capital Appoints Henri Penchas to its Latin America Advisory Board

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H.I.G. Capital has appointed Mr. Henri Penchas to its Latin America Advisory Board. H.I.G. established a local presence in Brazil in 2012 and is one of the most active private investors in the country. Its 31-member team, operating out of four offices across Brazil, has completed nine transactions to date.

Henri Penchas is a senior executive at Itaúsa, one of the largest conglomerates in Brazil, with whom he has been associated since 1985. He is currently a member of several Boards of Directors, including those of Itaúsa, Itaú Unibanco, the largest bank in Brazil, Duratex and Elekeiroz.

Fernando Marques Oliveira, Managing Director and Head of H.I.G. Brazil & H.I.G. Latin America, added: “The creation of a regional Advisory Board, which already includes Gustavo Loyola, a former Chairman of the Brazilian Central Bank, is another strong statement of our long-term commitment to Brazil and Latin America. It is with great pleasure that I welcome Mr. Penchas, with whom I have already worked in the past, to our Advisory Board. He is one of the most influential business leaders in Brazil and I am confident he will make a significant contribution to our team and to our success.”

H.I.G. is a leading global private equity and alternative assets investment firm with more than $17 billion of equity capital under management. Based in Miami, and with offices in New York, Boston, Chicago, Dallas, San Francisco and Atlanta in the U.S., as well as international affiliate offices in London, Hamburg, Madrid, Milan, Paris and Rio de Janeiro, H.I.G. specializes in providing both debt and equity capital to small and mid-sized companies, utilizing a flexible and operationally focused/ value-added approach.

Capital Group Boosts Madrid Team

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Following the opening of its Spanish office in Madrid last October, Capital Group has announced the hiring of Alberto Belinchón Azpeitia as a Business Development associate.

Based in Madrid, Belinchón Azpeitia will be responsible for supporting Capital Group´s business development efforts in Iberia.

This hire follows that of other two Business Development Directors, Álvaro Fernández Arrieta and Mario González-Pérez, earlier in 2014.

Belinchón Azpeitia, who has a Bachelor of Business Administration and is EFPA (European Financial Planning Association) holder, started his professional career at Deloitte, in the marketing and institutional relations department. After that, he moved to Barclays where he held a number of different positions, latterly that of Premier Relationship Manager.

Capital Group now has eight offices in Europe, having opened in Luxembourg, Milan, Madrid, Zurich, Frankfurt and Amsterdam since 2012 – in line with its growth strategy for its European business.

Grant Leon, Senior Vice President at Capital Group, said: “Alberto’s appointment responds to our strategy of expanding our presence in the Spanish market while also ensuring we continue to deliver world-class client service. This is also aligned with our goal of continuing to establish new – and deepen our existing – relationships with intermediaries and our distribution partners in Spain and across Europe.”