UBS explains its themes at Lausanne Summit

InvestmentEurope’s recent Lausanne Summit saw ten management groups outline their unique investment ideas, including UBS.

Kevin Barker, managing director and senior equity strategist at UBS, presented the UBS USA Growth Fund to delegates, arguing America’s economy is “not in bad shape” and corporate earnings growth is “moderate but positive”.

While valuations on US equities markets do not represent a “give-away”, they are still 30% cheaper than the last 15 years, Barker said.

The belief was, he added, that the US would “grow its way out of their problems” – as evidenced by the Federal Reserve more than tripling its balance sheet, via stimulus, since 2007.

Barker did not deny action is needed on the long-term debt problem. However, even though this, plus the fiscal cliff, will provide for “bumps in the road”, the long-term prospects are good. At a stock level, Barker pointed to the top-five IT growth stocks averaging 31.3% earnings per share growth in 2011, though this was skewed by 83% EPS growth at Apple. The expected EPS growth this year for those same stocks – Apple, Microsoft, IBM, Google and Oracle – this year is 21.6%, and then 13% for 2013.

At the same time, Barker added, growth companies are cheap compared to their histories. Growth as a theme extends beyond IT, he added, pointing to gaming and conference hotel developer, Las Vegas Sands, with its projected growth rate of 38% over the coming five years. The portfolio manager of UBS’s Luxembourg-domiciled Sicav, Lawrence Kemp, brings 26 years’ experience to his task, He and his team aim to outperform the Russell 1000 Growth index by 3% per annum over the course of a market cycle, with between 35 to 55 holdings and an ex-ante tracking error of between about 4% and 9%.

They turn over between 40% and 60% of the portfolio a year, and remain almost fully invested at all times.

In analysing companies the team screen sectors for companies with characteristics of a good business or attractive valuation, then organise the universe by measures such as valuation, return on earnings, and earnings revisions. They also assess the sustainability of profitability and growth, before establishing valuations based upside / downside scenarios.

Business models are assessed for pricing power, high and improving ROIC, and market share growth. High barriers to entry, and management placed with appropriate financial incentives, consistency of their message, and a good capital allocation strategy are all preferred.

To assess the attractiveness of price, scenario-based discounted cashflow analysis is conducted, as well as peer group valuations and free cashflow yields.

 

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