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Graham Kitchen Henderson UK Equity Fund Manager Can Megacaps ever perform?. Thursday 1 March 2007. What are Megacaps?. FTSE All Share market capitalisation = £1.85 trillion. Information ratio =. Source: Citigroup. As at 31 December 2006.

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Presentation Transcript
slide1

Graham Kitchen

Henderson UK Equity Fund Manager

Can Megacapsever perform?

Thursday 1 March 2007

slide2

What are Megacaps?

FTSE All Share market capitalisation = £1.85 trillion

Information ratio =

Source: Citigroup. As at 31 December 2006

Top 10 stocks account for almost 40% of the UK Market

uk market performance since 1995
UK market performance since 1995

FTSE100 has lagged the FTSE 250 in recent years

Source: Datastream

Total Returns in Sterling rebased to 100.

Mid-caps have significantly outperformed

megacaps have been a drag on market performance
Megacaps have been a drag on market performance

FTSE 100 impacted in 2006 by poorly performing Megacaps

Source: Citigroup (01.01.2006 to 31.12.2006)

Based on Top 10 stocks at the start of 2006 rebased to 100.

Megacap returns have disappointed

megacaps have underperformed the ftse 100
Megacaps have underperformed the FTSE 100

Performance of Megacaps relative to FTSE 100 (excl. top 10 stocks)

Source: Morgan Stanley. Rebased to 100.

Megacap returns have disappointed

megacaps have become more dominant
Megacaps have become more dominant

Top 10 stocks as a percentage of the FTSE All Share

%

Source: Citigroup

Concentration rose dramatically in the late 90’s

why have they underperformed
Why have they underperformed?

Valuations were too expensive in 2000

Megacaps trade at a discount to the rest of the market

Price/Earnings

27x

18x

14x

11x

Source: Citigroup based on 12 month forward earnings.

Megacaps are now more attractively valued

why have they underperformed1
Why have they underperformed?

Merger & Acquisition activity focused in mid-caps

% of index acquired

%

Source: Citigroup.

M&A has helped drive FTSE 250 outperformance

why have they underperformed2
Why have they underperformed?

Disappointment from some stocks:

  • Earnings downgrades (HSBC)
  • Poor newsflow (BP)
  • US dollar exposure (GlaxoSmithKline)

US$ exposure has also been an issue

%

Source: Citigroup. Sales exposure to key regions.

Megacap earnings have not been supportive

megacap performance has been mixed
Megacap performance has been mixed

Megacap performance in 2006 (%)

%

Source: Datastream. Price returns for 2006.

Stock specific issues have driven performance

performance driven by fundamentals
Performance driven by fundamentals
  • Barclays was a strong performer in 2006
  • Low valuation – 9x Price/Earnings
  • Upgrades to earnings forecasts
  • Strength at BGI and Barclays Capital offset concerns about rising default rates at Barclaycard

Barclays share price in 2006

pence

Interim results beat the market’s expectations

Source: Datastream.

Analysts forecasts were too pessimistic

megacaps now look cheap
Megacaps now look cheap

Megacaps trade at a discount to the rest of the market

Price/Earnings

14x

11x

Source: Citigroup based on 12 month forward earnings.

Megacaps are now more attractively valued

can megacaps ever perform
Can Megacaps ever perform?
  • Valuations are cheaper
  • Balance sheets are stronger
  • Larger M&A deals ...
  • … but earnings remain under pressure

Source: Citigroup and Henderson Global Investors

Lower earnings growth forecast for Megacaps

can megacaps ever perform1
Can Megacaps ever perform?

YES

especially if ……

  • Mid-cap M&A slows
  • Stop producing disappointing news
  • Become more shareholder friendly
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Henderson Global Investors

4 Broadgate London EC2M 2DA

Tel: 020 7818 1818 Fax: 020 7818 1819

Important information

This document is issued by Henderson Global Investors Limited and is solely for the use of professional intermediaries, defined as Market Counterparties or Intermediate Customers in the Glossary of the Financial Services Authority’s Handbook of Rules and Guidance for Authorised Firms made under the Financial Services and Markets Act 2000, and is not for general public distribution. Any other persons who receive this document should not rely on or act upon its contents.

This document may not be reproduced in any form without the express permission of Henderson Global Investors and to the extent that it is passed on care must be taken to ensure that this reproduction is in a form which accurately reflects the information presented here. No responsibility or liability is accepted by Henderson Global Investors or by any of its directors for any action taken on the basis of the content of this document.

This document has been produced based on Henderson Global Investors' research and analysis and represents our house view. The information is made available to clients only incidentally. Unless otherwise indicated, the source for all data is Henderson Global Investors. Any reference to individual companies is purely for the purpose of illustration and should not be construed as a recommendation to buy or sell or advice in relation to investment, legal or tax matters.

This document does not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase any investment, nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract for the same.

Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions may change if the law changes and the value of tax relief will depend upon individual circumstances.

Henderson Global Investors is the name under which Henderson Global Investors Limited, Henderson Fund Management plc, Henderson Administration Limited, Henderson Investment Funds Limited, Henderson Investment Management Limited and Henderson Alternative Investment Advisor Limited (each authorised and regulated by the Financial Services Authority and of 4 Broadgate, London EC2M 2DA) provide investment products and services. We may record telephone calls for our mutual protection and to improve customer service.