AXA Framlington UK Smaller Companies Fund
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2 October 2014
AXA Framlington UK Smaller Companies Fund
Henry Lowson – Fund Manager
Robert Bailey – Head of Wholesale Distribution
This communication is for professional advisers only and must not be relied
upon by retail clients. Circulation must be restricted accordingly.
19358Performance
Performance over 5 years
300
AXA Framlington UK Smaller Companies R Acc IMA UK Smaller Companies
250
200
150
100
50
0
Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14
3Y 5Y
1Y (cumulative) (cumulative)
AXA Framlington UK Smaller Companies Fund - net 20.60 82.57 155.40
FTSE Small Cap ex Investment Trusts 12.07 76.71 94.34
Excess over comparative benchmark 8.53 5.85 61.06
IMA UK Small Companies 12.97 62.50 116.87
Ranking 8/51 8/50 9/48
Quartile 1 1 1
Source: AXA IM as at 31/08/2014. Basis: R share class, bid to bid, net income reinvested, net fees in GBP. Past performance is not a guide to future
performance.
CR52521/11-14
1 19358AXA Framlington UK Smaller Companies Fund
UK Small Cap Team UK Fund Managers
Henry Lowson
Lead Fund Manager
Henry joined AXA Framlington as a UK equity analyst and trainee fund
manager in January 2005. He became lead fund manager of the AXA
Framlington UK Smaller Companies Fund in May 2012. He was also
responsible for management of the AIM Inheritance Tax Portfolio
Service until the sale of the Portfolio Management Team to Psigma in Nigel Thomas George Luckraft Richard Peirson
October this year UK Growth UK Income Balanced
34 yrs' experience 43 yrs' experience 42 yrs' experience
He is a CFA Charterholder and a Member of the Chartered Institute
for Securities and Investment
Henry graduated from Edinburgh University in 2004 with a MA (Hons)
degree in Economics and Geography
Chris St John
Secondary Fund Manager
Chris joined AXA Framlington in 2005. He is the lead manager for
the AXA Framlington UK Mid Cap Fund and several pension funds
He started his career at PricewaterhouseCoopers in 1995 as part of Jamie Hooper Jamie
the London Middle Market Business Advisory Service. After a short UK Growth Forbes-Wilson
period in the Corporate and International Tax department, he moved 19 yrs' experience UK Income
to Corporate Finance. He subsequently joined ISIS (which later 18 yrs' experience
became Foreign & Colonial) where he progressed from an equity
analyst onto becoming a Lead Portfolio Manager on four institutional
FTSE Small Cap Funds. In 2003, he was promoted to lead Fund
Manager of the UK Small Cap retail Funds
Chris graduated from Durham University with an honours degree in
Philosophy and Psychology in 1995. He qualified as a Chartered
Accountant in 1998
Source: AXA IM as at 01/07/2014. Years relate to investment experience.
2Potential attractions of small cap
Lack of research Undervalued securities
Premium earnings growth Due to the nature of their size/stage in their life cycle
Beneficiaries of Mergers and Acquisitions Improving confidence = more activity
More entrepreneurial Motivated and incentivised management
Large investment universe Dynamic and changing
IPO market New businesses, new opportunities
Circa 45% of company sales are ex UK
Geographic and sector diversification
Top stock under 2% of index1
Asset class for superior long term returns?
Source: AXA IM as at 31/07/2014. 1) FTSE Small Cap Index ex Investment Trusts.
3 19346FTSE Small Cap ex IT 1m Forward P/E
50.0 FTSE Small Cap 12m fwd PE excl. Investment trusts Avg - FTSE Small Cap
40.0
30.0
20.0
10.0
-
Sep 98 Sep 99 Sep 00 Sep 01 Sep 02 Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14
Still at an attractive valuation
Source: Citigroup as at 05/09/2014.
CR52521/11-14
4 19358FTSE Small Cap ex IT Earnings Revisions
Earnings revisions have stabilised
Source: Peel Hunt /Thomson Reuters Datastream as at 20/08/2014.
CR52521/11-14
5 19358FTSE Small Cap ex IT and M&A Deals in UK
250,000 UK M&A (Whole Market - Targets) 450
Deal Value ($m) (LHS)
400
No. of deals (RHS)
200,000
350
300
150,000
250
200
100,000
150
100
50,000
50
0 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
YTD
Historically small cap stocks benefited when M&A increased
Source: City Research as at 05/09/2014. Past performance is not a guide to future performance.
CR52282/09-14
6 19358The balance of power has shifted from the debt holders to the
equity holders
900
MSCI Europe ex-Financials Cash on Balance sheet (€bn) 80% Europe ex-Financials Net Debt/Equity IBES Forecast
800
75%
700 70%
65%
600
60%
500
55%
400 50%
45%
300
40%
200
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
35%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13e14e
Corporate balance sheets appear in good shape
Source: JP Morgan as at 31/12/2013.
CR52521/11-14
7 19358UK small cap remains under owned despite strong performance
15.0 140
UK Smaller Companies (AUM) £bn (LHS) AUM w/ Performance Stripped Out (Index - RHS)
13.0 120
11.0 100
9.0 80
7.0 60
5.0 40
3.0 20
Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14
Inflows into asset class yet to begin
Source: Liberum/Investment Management Authority as at 31/05/2014.
CR52521/11-14
8 19358AXA Framlington UK Small Cap Strategy
Key features
Select companies that can potentially grow their profits and cash sustainably faster than
the market
Growth at a reasonable
price Seek companies with attractive valuation, relative to growth prospects
Optionality: focus on companies where not all the potential good news is reflected in the
share price
Emphasis on companies with secular growth characteristics
Fundamentally driven Stock selection incorporates a qualitative and quantitative approach
process
Importance of company meetings to identify good quality companies and management
Team led by Henry Lowson who has over 10 years’ market experience
Experienced Supported by experienced UK Equity Investment Team
management team
Insights from other specialist teams
Source: AXA IM as at 01/07/2014.
CR52532/11-14
9 19358AXA Framlington UK Smaller Companies Fund
Investment process
1 Top-down sector/theme 2 Stock Selection 3 Portfolio Construction 4 Risk Management
Portfolio Review
Micro/macro economic drivers Organic growth Individual stock weightings Portfolio monitored and reviewed
Constantly reviewed Pricing power resulting from constantly with respect to risk
High barriers to entry – level of conviction/expected exposures and client objectives
Management and industry
feedback Customer diversification upside Daily monitoring of portfolio active
Appropriate funding structure – Normally no greater than 3% exposures, and risk metrics
size Weekly Portfolio Review
Valuation AXA Framlington Team meetings
– Market capitalisation spread
– Sector diversification
– Economic scenario/market
environment
Typically 75 to 95 stocks
Source: AXA IM as at 31/12/2012.
CR52521/11-14
10 193581. Top-down sector theme analysis
Strategy/thematic views
US Recovery Elementis, Tyman
Emerging Markets’ development Avon Rubber, Regenersis
Health & Safety Porvair, Sprue Aegis
Global Healthcare efficiency Synergy, Clinigen
Growth in data / internet / mobile communications IOMART / Accesso / GB Group
Increasing capital efficiency RPC, Lavendon
Beneficiaries of credit crunch Booker, 4Imprint
Self help / management change Restore, STV, Brammer
Economic tailwind rather than headwind
Source: AXA IM as at 31/03/2014.
CR52521/11-14
11 193582. Bottom-up analysis
Combining a qualitative & quantitative fundamental approach
Targeting quality growth companies…. With a discipline towards absolute valuation
Management track record Earnings yield and growth
Organic growth
Superior dividend growth
Pricing power
Free cashflow
High barriers to entry
Return on capital
Customer diversification
Appropriate funding structure
Drivers for a quality portfolio Focus on companies whose upside
has not yet been priced
Assessment of management’s ability to guard capital whilst capitalising on market position
CR52521/11-14
12 19358AXA Framlington UK Smaller Companies Fund
Market Cap & Sales Exposure as at 31/08/2014
By Market Cap (%) By Sales exposure (%)
Other
4% Asia
4%
US
17%
AXA Framlington
UK Smaller UK
53%
Companies
EMEA
22%
Fund
%
Other
FTSE 100 0.0 5% Asia
6%
FTSE 250 21.0 US
10%
FTSE SMALLCAP 40.0
FTSE Small Cap
EMEA
FTSE FLEDGLING 0.6 Ex Investment Trusts UK 20%
59%
FTSE AIM 29.9
OTHER 5.8
CASH 2.6
Source: FactSet as at 31/08/2014.
CR52521/11-14
13 19358/CR50793Top 10 holdings
% of Comparative
portfolio benchmark Difference
Regenersis plc 2.4 -- 2.4
Tyman Plc 2.3 1.4 0.9
RPC Group Plc 2.0 -- 2.0
CLS Holdings plc 2.0 0.7 1.4
4imprint Group plc 2.0 0.6 1.4
Scapa Group Plc 1.9 -- 1.9
Entertainment One Ltd. 1.9 -- 1.9
Avon Rubber p.l.c. 1.9 0.5 1.3
Acal plc 1.8 -- 1.8
Spirit Pub Company plc 1.8 1.5 0.3
20.0 4.6 15.4
Source: AXA IM as at 31/08/2014. CR52521/11-14
14 19358Share Price
Description 3.80
World leader in filtration and separation technology
Porvair plc
3.30
Strategic attraction of investment
Reorientation of business towards higher growth regulated market 2.80
segments and greater levels of IP and design in its products
2.30
Bottom-up analysis
A global leader in microfiltration and metals filtration 1.80
Solid base of long term recurring revenues giving good visibility
due the consumable/replacement nature of their product 1.30
High barriers to entry as their filters are often accredited, bespoke
and designed into their customer’s product
Supportive regulatory backdrop in their end markets 0.80
Strong cash generation has led to an improved balance sheet,
giving financial flexibility 0.30
Opportunity to materially improve margins from 7% to 10% Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14
Source: AXA IM as at 31/08/2014. Past performance is not a guide to future performance.
15 19358Share Price
Description
4.0
Leading commercial broadcaster and content production
business in Scotland 3.6
3.2
pounds
Strategic attraction of investment 2.8
Free to air advertising structurally resilient through the cycle 2.4
and will benefit from increased advertising spend 2.0
Targeting 33% of earnings coming from non-TV broadcasting Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14
sources by 2015 through growth in digital and production, Dividends Per Share
Earnings Per Share
leading to a more diversified earnings stream
0.08
Retransmission revenues offer another source of growth 0.50
Data as at August 2013 Data as at August 2013
Data as at August 2014
Introduction of City channels and apps create more 0.45
Data as at August 2014
0.07
opportunities to generate advertising revenues 0.40
0.06
0.35
Bottom-up analysis 0.30
0.05
Winning market share in Scotland from Channel 4 0.25 0.04
Improvement in commercial terms with ITV, leading to lower 0.20 0.03
working capital and better visibility on the cost of content
Estimate 2015
Estimate 2015
0.15
Estimate 2014
Estimate 2014
Estimate 2015
Estimate 2014
Impressive growth in high margin digital and production
Estimate 2014
Estimate 2015
Estimate 2013
0.02
Actual 2013
Actual 2013
revenues 0.10
Strong cash flow has led to an improved balance sheet, with 0.01
Estimate
0.05
2013
little capital requirements
0.00 0.00
Source: AXA IM as at 31/08/2014. Past performance is not a guide to future performance.
16 19358Market outlook
In our view geopolitical/macro economic uncertainty will create stock market volatility.
Access to credit is improving for corporates and this should be positive for company growth
plans and potential shareholder returns.
Smaller companies continue to be an overlooked area of the market in spite of their strong
performance in recent years. Recent flows into equities are supportive for markets.
Small Cap valuations continue to look attractive both in a historical context and relative to other
asset classes.
Mergers and acquisitions, share buybacks and dividend growth are typically all supportive of
Small Cap equities.
Source: AXA IM as at 31/03/2014. Past performance is not a guide to future performance
17 19358Important notice
This communication is intended for Investment Professional use only and should not be relied upon by retail clients. Circulation must be restricted
accordingly. Any reproduction of this information, in whole or in part, is prohibited.
This communication does not constitute an offer to sell or buy any units in the Fund. Information relating to investments is based on research and analysis
undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA Group
of Companies which, in turn, may have acted on it. Whilst every care is taken over these comments, no responsibility is accepted for errors and omissions that
may be contained therein. It is therefore not to be taken as a recommendation to enter into any investment transactions.
This communication should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA investment service or product and is
provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of any
company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability towards
third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.
Information relating to investments may have been based on research and analysis undertaken or procured by AXA Framlington for its own purposes and may
have been made available to other expertises within the AXA Investment Managers Group, who in turn may have acted upon it. Information in this document may
be updated from time to time and may vary from previous or future published versions of this document.
Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the
amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller
companies offer the possibility of higher returns but may also involve a higher degree of risk. The price of units and the income from them can go down as well as
up and investors may not get back the amount originally invested. An initial charge is usually made when you purchase units. Your investment should be for the
medium to long term i.e. typically 5-10 years. Changes in exchange rates will affect the value of trust investments overseas.
AXA Framlington is an expertise of AXA Investment Managers UK Limited. Issued by AXA Investment Managers UK Limited which is authorised and regulated
by the Financial Conduct Authority. Registered in England and Wales No: 01431068 Registered Office: 7 Newgate Street, London EC1A 7NX. Telephone calls
may be recorded for quality assurance purposes. 19224.09.2014
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