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Fund Manager Focus - November 2009

Bart Baetens, Petercam - Brussels

Brussels-based Petercam was created in 1968 after the merger of two family-owned brokers Peterbroeck and van Campenhout. Today Petercam is an independent partnership involved in asset management, institutional sales & trading and corporate finance. It has approximately $19 billion (€14.2 billion*) under management including approximately 30% ($5.7 billion) invested in equities. Petercam manages both private client and institutional assets. As well as managing a number of core equity and bond funds, Petercam also offers more specialized thematic funds such as Petercam Equities Agrivalue and Petercam Equities Energy. The firm has offices in Amsterdam, Brussels, Geneva, Luxembourg and Paris.

Petercam’s World Fund – Petercam Equities World 3F (3F stands for Foundation For the Future) - is a long only global equity fund. It was created in 2001 but on April 1 2008, the investment philosophy was changed as explained below.

Bart Baetens has managed the World 3F Fund since April 2008. He started his career in 1999 at ING Investment Management and afterwards worked at Fortis Investment Management and KBC before joining Petercam in 2005.

What is Brussels like as an investment centre?

“Brussels is the capital of Europe. Senior management of companies are often visiting Brussels for discussions with the European Administration, which gives us the opportunity to meet them as well. In addition, Brussels benefits from excellent travel connections with the rest of Europe, and, the city offers very good access to a large pool of highly trained, highly educated multi-lingual staff. At Petercam, the entrepreneurial approach is deeply embedded in the company, which makes us the employer of choice for highly experienced portfolio managers or analysts returning to Belgium after a couple of years of working in London, Paris or Amsterdam.”

Investment Style?

“Petercam is an active equity manager. Our stable investment teams apply a fundamental research process to evaluate companies on their merits. Company meetings form an integral part of our process. The selection process is further enhanced by the introduction of investment themes that help us to optimally position our portfolios. Whenever we consider a theme to be of structural nature, we may decide to dedicate a specific fund to the theme. This is the case of Petercam Equities World 3F which aims to capture those companies and regions that will benefit the most from economic growth in the coming decades. There is an important distortion between the weight of the emerging markets and especially Asia in today’s MSCI World GDP Weighted Index and that region’s contribution to GDP 15 years from now. Our fund will therefore have a natural overweight towards this region to capture the vast opportunities. This regional bias will be further enhanced by secondary investment themes also driven by long term fundamentals such as demographics, energy or agriculture. So, we will buy Teva, the biggest producer of generic medicines in the world. And we will have Telecom Indonesia as everybody wants a cell phone. Growing wealth in the emerging markets makes these kinds of products available to an ever increasing number of people: the population is growing enormously so top line growth is 25% or more. Telecom Indonesia has cash on the balance sheet and is well managed. Also, because we are forward looking, we want to buy into companies that will still be there in 2020 to truly benefit from the growth in the coming decades. We therefore applied three filters: we excluded financials, we demand 10 years of continuous profits and also 10 years of continuous dividends.”

What influences your decision to buy a stock?

“We are looking to capture quality companies worldwide and don’t discriminate between emerging and developed countries. As I said, 10 years of profit and 10 years of continuous dividend are a key factor. On the dividend side, we are not looking for the highest yield; we are looking for stable to growing yields with relatively low pay-out ratios. In order to comply with this, management has to focus on the quality of the balance sheet and we feel that such companies are simply better managed. Demanding 10 years of continuous profits teaches us something about the behavior and management of a company across an economic cycle.”

Typical investment time horizon?

“A three to five year perspective at least. One of the advantages of being a partnership is that we are not forced to invest for the next quarter. We are looking for trends not the latest hype.”

Do you split sectors?

“No. But we don’t invest in financials. Banks are merely passing on money and don’t really produce any tangible assets. We want to invest in companies with long histories and long track records of producing tangible goods. Banks were also getting quite complicated to analyze and we want straightforward companies with real products. Apart from the financials, we can invest in any sector although our 10 year constraint means will may miss some sectors – for example biotech as they need constant equity investment and don’t pay dividends.”

Market cap constraints?

“In theory no but logically due to the fact that we want long track records with good management we tend to have more of a large cap bias. Our natural minimum would be around €3 billion ($4.4 billion) – so one could argue that we have a mid to large cap approach.”

Average market cap of a holding?

“80% of the portfolio is above €30 billion ($44 billion).”

Active share ratio?

“We are benchmark aware but not benchmark driven. We compare ourselves to the MSCI World GDP Weighted Index, but it is a yardstick rather than a benchmark. We cover the whole world but we only have 40 – 50 shares in our portfolio so that shows we are quite convinced about the stocks we put into our fund. At Petercam, we do have some “benchmark funds” – for example in our European Equity funds (€2 billion/$2.9 billion) where we apply a 4% to 6% tracking error - but this is clearly not the case for Petercam Equities World 3F.”

Do you vote your proxy?

“Yes. We outsource the actual voting to a proxy voter, but they are quite active on our behalf. We decide mostly on a case-by-case basis, but we do have some internal rules, so for example, we will always vote against poison pill constructions.”

How do you allocate geographic exposure in The World Fund?

“It might sound strange, but today the BRIC countries are not represented in the MSCI World GDP Weighted Index. Yet the difference in growth between developed and emerging markets is 5% so their importance is growing. We looked at the IMF projections for 2020 and divided the world into four parts. Europe, US, Japan and the rest of the world. Taking into consideration the IMF forecasts for GDP growth in 2020, we made the following allocations: 20 – 25% in Europe, 20 – 25% in the US, around 10% in Japan and 40 – 50% in emerging markets. We don’t focus on domicile, but on sales! For example, you can invest in Singapore Telecom which is a 100% emerging markets company: domicile and sales are in Asia – that’s one possibility. But you can also invest in Procter & Gamble which has around 40% of sales in the US, 30% in Europe and around 25% going to the rest of the world so you combine those things to get to the desired allocation. We want to look forward not backwards and see how the future will look to capture the upside.”

Favorite companies?

“Procter & Gamble. They’ve been paying a dividend for ages (since 1890!). General Mills is another we have in the portfolio. They’ve been paying a dividend continuously for 111 years. These are typical companies that fit into our ideas. Why we like a company like P&G is that they are also able to reinvent themselves. They have a lot of brands; they started off with a few and over the years added others through acquisitions. For example, they acquired Gillette a few years ago and were able to keep it as a strong brand and push it through their own distribution channels. Also, they are continuously reevaluating their portfolio. For example, their coffee brand in the US was sold last year to Smucker, an indication that they are looking for new products and new areas but at the same time they don’t forget that every product should be profitable. They think of the shareholder too by consistently paying a dividend for such a long time. Moreover, P&G is getting more and more exposed to the emerging consumer and we are a big believer that the emerging markets consumer will be one of the biggest drivers going forward. So that is a typical holding.

GDF Suez. On the utilities side it’s more difficult to go into other regions but they have a good position and generate very good cash flows, they have a diversified asset base as they are in nuclear, hydro and other alternative energies. They are quite big in France and Belgium. Also, they might be one of the beneficiaries of the electric car so that gives them extra opportunities going forward.”

Sectors you favour?

“Because we can’t invest in financials, we need to be overinvested in other sectors. We are invested in oil & gas, partly through the majors but also via emerging markets so for example we are invested in GazProm in Russia and PetroBras in Brazil. GazProm for the fact that they own the biggest gas reserves and they can exploit them by gaining more contracts with Europe. They are also building a pipeline to China! We own PetroBras as demand for oil will continue and Brazil is one of the few places where you can still find oil in a relatively stable political environment.”

Which sectors don’t you favour?

“We are not particularly enthused with consumer cyclical stocks but we may increase these. In Europe, there are a growing number of unemployed people which will have an impact on consumer demand. We expect price wars so we are cautious on margins going forward.”

How important is corporate access?

“We want to have at least one meeting with management before we invest. We regularly travel to Asia and the US and we try and visit as many companies as possible. We also do a lot of conference calls with emerging market companies. For example, we recently spoke with Shoprite - a South African Wal-Mart - which fits into my theme of African consumers (often forgotten) and is an attractive company.

Also, we always read one or two annual reports before we invest and then contact IR to ask for more in-depth details about the company. We like IR to have had operational experience.”

Who do you prefer to see?

“It’s always interesting to see the top management but it’s not always easy or necessary to get one-on-ones with large cap companies like Exxon. When speaking to IR or the management level just below the top you still get a lot of information. We also participate in conference calls and from those you can get an idea of the direction in which the CFO wants to take the company. Obviously, direct management access is more important when investing in smaller companies as these are often less covered by the broker community.”

Current holdings?

“We have 40 – 50, equally weighted holdings in the World Fund. That shows our conviction before we put a stock into the fund. Every time we want to put a new stock in we re-think the position of the other ones as otherwise you dilute all the rest. We have an advisory board every month to make sure we are not missing out on anything before switching from one stock to another. On the US side for example, we have: 3M, Emerson, Exxon, IBM, Intel, McDonalds, Microsoft, Monsanto, Nike, Oracle, Pfizer and Procter & Gamble. On the European side for example, we have: Air Liquide, GDF Suez, Vinci, BASF, Eon, Siemens and a few Belgian names such as AB InBev and Umicore”

* as of 30 September 2009

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