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Fund Manager Focus - March 2015

Amundi - London

Amundi has almost $1 trillion (€850 billion) of assets under management worldwide, making it the largest asset manager in Europe and in the top 10 worldwide. It has approximately $126 billion (€109 billion) invested in equities.

Nicholas Melhuish joined Amundi in 2014 as Head of Global Equities. He was previously at UBS Global Asset Management (2007-2012) where he was Head of Global Equities. Prior to that, he was with Nicholas- Applegate Capital Management (2003-2007) in San Diego, California and London. Previously he was at Putnam Investments in Boston (1999-2003). Nick began his career at Schroder Investment Management (1991-1999). Nicholas holds a BA (Hons) Degree in Modern History from New College, Oxford.

You were hired to "develop the equity management capability" - please explain.

"We had a global equity product based in Paris but we decided it made more sense to locate it here in London, partly because we get a more consistent flow of companies coming through and partly because it's a much more natural financial centre for a global equity business. So we constituted a team last year, moving some people over from Paris and also making a few hires. There are now six of us plus an intern here in London. Total investment headcount at Amundi is c.750 so we are a very small piece but an important one strategically going forward."

Amundi has investment offices in Paris, London and Asia - can you please explain what each office does?

"The investment platforms are essentially in Paris but in Asia we operate a Japanese equity and fixed income business out of Tokyo and two other Asian businesses out of Hong Kong and Singapore. London is where most of the global product is - so global fixed income, global rates, global FX and obviously now we've got a global equity product too."

How do the different offices interact with each other in terms of US equities for example?

"The entire US capability is here in London. The way that I set the team up is to be quite independent - so we don't confer with our colleagues often but in certain sectors there is a good exchange with Paris. We have our own research capability embedded in our process. The most important thing for us is that an investment actually fits with our investment process and philosophy as defined here in London."

Do you split sectors and geographies?

"We split sectors but not geographies so we break out into six super sectors: technology/ telecoms; healthcare; financials; energy and materials; industrials and consumer. This is the rebuild of a team so in some cases we've hired sector specialists and in some cases we've hired seasoned investors who've switched sectors and some new blood. It's good to have a mix. You want to have people with lots of experience but then you want to have other people who are up and coming. Having that bench strength is important and it is also good for culture."

What do you look for in a company?

"Our investment process is very bottom up so we all spend time analysing companies and ultimately trying to find companies which we think meet the requirements for our process which is called Thesis Valuation Timing. Basically, we look for a material level of undervaluation. Ultimately, therefore we are core value investors."

Do you have a goal for increasing equity assets under management?

"In terms of global equity assets under management from London, I think we are very undersized relative to our distribution capability and capacity of the product. I think $20 billion is too big but I think $2 billion is far too small. We are under $2 billion right now but we could very easily be $10 billion but it's going to take a while to get there."

What is your investment universe?

"We invest in US, European, Asian and emerging market equities. The cut off is $500 million market cap and we need turnover of $12 million a day and this will rise over time as the product grows. That gives us a universe of about 3,300 companies which is a lot for six people. We refine that universe very significantly using quantitative screens. We have a very disciplined investment process which is not to say there isn't room for creativity but the way we have defined it is quite precise in terms of what falls inside the process and what doesn't."

Which screens do you use?

"We use a third party, quasi proprietary screen. We run the 3,300 companies in our investible universe through it and there are 53 factors. Over time it has proved to be extremely effective in identifying outperformers. It has a strong valuation tilt and capital efficiency is important too. We also use HOLT."

Which benchmarks do you use?

"ACWI (All Country World Index including emerging markets)."

Do you have a target price when you buy a stock? i.e. 20% upside?

"Absolutely - that's the beauty of present value (which we use when valuing stocks). For every stock we produce a hard value that we think the company is actually worth. We are aiming to own a stock for 2 - 3 years. If the expected return from equity markets is 7%, clients want us to do +3% per annum so we really need 20-30% upside. So our base case is somewhere between 25 - 30%. More in a blue sky case. Typically if a stock has less it's not going to make it."

Average length of a holding?

"Typically I'd say 18 months would be the average but the range is 6 months to 3 years plus."

Average market cap? Market cap cut off?

"We are bottom up stock pickers but $5 - $15 billion is our sweet spot. Having said that we've found quite a lot of value in mega caps such as large cap tech stocks that are cash generative. For example, Microsoft, Apple, HP. There's been a surprising amount of mispricing of large cap tech stocks. This is also true of large pharma. The R&D cycle in pharma means value has been unlocked. A lot of the so-called "boring" companies have been left behind so there's an opportunity in large cap names."

Typically - what size of positions do you take? Value of largest position?

"There are 30 stocks in our flagship fund and positions are from 2 - 4%. An average position is 3%."

Any sectors you won't invest in?

"No - we care about a company's cash flow profile and how it is priced by the market."

Does a stock have to be profitable?

"No we would invest in something that's not profitable. However, we'd be unlikely to invest in a highly priced start up in social networking for example. We'd prefer companies that have fallen on hard times, companies that are doing a major restructuring etc can be very interesting. We are unlikely to invest in a Facebook."

Are SRI considerations important?

"Amundi takes SRI very seriously. We do an in-house ESG score for every company. We can't buy the bottom tier. For example, within the A&D space we can't buy companies which are involved with cluster munitions. I think SRI/ESG is quite important for long term investors - particularly governance. Our dashboard includes a mandatory ESG box. It has A to G ratings and if it is lowly rated in governance, we would want to discuss governance with the company."

Do you vote your proxy?

"We have a department in Paris that votes proxy. Sometimes things get flagged."

How important is it for you to meet companies?

"Very. There are 3,300 companies in our investible universe and ~500 are possibles. We own around 30 stocks and there are about 30 stocks we are actively researching. So there are about 60 companies we want to see. So we are very selective. I tell my team 'if you don't really want to see a company - don't waste your time and their's. Don't take meetings to fill your diary.' When we do take meetings, it is important to ensure we've done our homework; we've been through the numbers and have strategic questions and questions on numbers to ask."

What do you think of the new regulations in the UK regarding corporate access?

"The direction the FCA is traveling in is entirely correct. We don't pay hard dollars (or client commissions) for access. We do direct access where we can instead of going through a broker. It is up to companies themselves to take responsibility for who they see. There are some great long/short funds but most are very short term. Large long only institutions, for example, are often long term and supportive shareholders. These are the kinds of investors companies should encourage. Companies need to work out who their core holders are and who they want to be their holders. They need to target long term holders, those who'll hold for 3, 5 and 10 years."

Should US companies visit Amundi in Paris or London or both?

"Most of our analysts in Paris are very Euro-centric but there are one or two exceptions. For example, some US tech stocks are also covered out of Paris. But generally, US companies should consider visiting us in London."

How do you like to meet corporate management?

"It really depends why we want to see them. It is sometimes helpful to meet at their HQ as it is good to meet divisional managers, get a feel for the culture and how the company works but that is obviously very time consuming. It's also very expensive! If we have a large holding in a company then a private meeting in our offices is better. For an initial meeting, a group meeting is good as it can be useful to hear what other people think. I hate 2/1 or 3/1 meetings as if you don't know the other person, they can be painful. We do a lot more conferences and groups as we are not that big. We are not Fidelity or Capital!"

How does it work culturally - i.e. working for a French institution in London?

"Amundi wants to internationalise the business. It is currently very French and in many ways this is a strength. The challenge lies in tailoring our strengths to suit the different markets and developing local offices and investment centres, like Amundi London, is part of that process."

This interview also appeared in IR Magazine Spring 2015

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