A Case Study
20+YEARS MANAGING A STYLE PURE FIRM THROUGH AUM VOLATILITY A Case Study Brent V. Woods, CFA Chief Executive Officer
*As of 9/30/15. Separately Managed Accounts (SMA) are offered through the firm’s SMA Division. The SMA Division encompasses the firm’s “Separately Managed Account” business (subadvisory “wrap-fee” business with brokerage firms). Non-SMA assets include institutional accounts, pooled investment vehicles, and high net worth accounts outside of SMA (“wrap-fee”) programs. Margin of safety: The margin of safety for any security is defined as the discount of its current market price to what we believe is the intrinsic value of that security. Alpha: A measure of performance on a risk-adjusted basis. It takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Source: Investopedia.com FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
2
All Managers Deal With Investment Risk Must manage general business risks as well Examples of business risks faced by managers: Unplanned employee departures Leadership succession Change in business model/competitive environment Capitulating to short-term client factors – style drift
Prioritizing shareholders over investors Rapid change in AUM/profits
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 3
Brandes Faced Significant Drop in AUM Once loved, could do no wrong When it turned, it turned… Some clients lost sight of value – promises to be out of favour at times Change in investor risk appetite post 2008
Meaningful under performance in several (but not all) Brandes products through GFC
“…the entire small cap investment committee should be fired.” US-based analyst – 2008
Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 4
Managing a Style Pure Firm Through AUM Flux Today we will discuss how we: Responded to business challenges/AUM decline Maintained focus on investment and research Remained independent and financially sound
Came through: Capacity-constrained firm, well equipped to thrive
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 5
1995 – 2015 Style Pure, But Volatile AUM 1995
Ended year at $5.7 Billion* AUM
1998
AUM $25 Billion Start to soft close
2003
Hard close
2007
Peak AUM
2008
Global Financial Crisis
2009
Market rebounds
2010
All products open for new clients
2013
Low AUM post - GFC
2015
AUM >$28 Billion today
Throughout our history one single investment approach = Value
*as of 12/31/94 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 6
How Did We Manage High Growth Pre-GFC? Rational business practices Added employees – in a controlled, selective manner Material investments in systems – consultants and employees Modest product growth – only logical extensions of value Business management – specialize and professionalize Tracked employee compensation to industry – not firm AUM
Expanded ownership group No debt – all growth internally financed No acquisitions We were concentrated, knew our AUM could be volatile and managed conservatively FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 7
Impact of GFC 2008 -- 2010 Underperformance in largest products, but not all products Institutional clients behaviour changed: Emphasis on de-risking Shift to passive
Reputational challenges due to: High profile investment misses in the U.S.
Loss of some large clients
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 8
Large Client Departures: Examples Large U.S. Client
Opened: February 5, 1996 Closed: May 6, 2013 Portfolio/AUM: International Equity/ >$700 million at peak Performance 2/5/96 – 5/6/13: Account = 10.25% annualized (gross of fees) MSACWFXUS = 5.82% MSCI EAFE = 4.79%
Large Non U.S. Client
Opened: October 14, 1998 Closed: January 11, 2011 Portfolio/AUM: Global Equity/approximately $640 million at close, but total relationship >$7 billion at peak Performance 10/14/98 – 1/11/11: Account = 7.46% annualized (gross of fees) MSACWFREE = 5.40% MSCI World = 4.18%
During relationship, client also closed Asia ex-Japan account (> $700 million; open < 24 months) Past performance is not a guarantee of future results. No investment strategy can assure a profit or protect against loss. The sample client performance is for illustrative purposes only. Other investors in these strategies may have experienced different returns during the periods shown. Please note that all indices are unmanaged and are not available for direct investment. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 9
Global – Value vs Growth
15%
10%
Above Zero: Value Outperforms
-252bps at 9/30/2015
5%
0%
23 months
-5%
95 months
9 months -10%
Below Zero: Value Underperforms 40 months -15%
Sep-78 Sep-79 Sep-80 Sep-81 Sep-82 Sep-83 Sep-84 Sep-85 Sep-86 Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 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 Sep-15
Rolling 3-Yr. Annualized Relative Returns
Rolling 3-Year Annualized Relative Returns
3-Year Period Ending Rolling 3-Year Annualized Relative Returns; MSCI World Value Index less MSCI World Growth Index Source: MSCI via FactSet As of September 30, 2015. Annualized 3-year rolling returns. Past performance is not a guarantee of future results. Rolling periods represent a series of overlapping, smaller time periods within a single, longer-term time period. For example, over a 20-year period, there is one 20-year rolling period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth. Value stocks are represented by the MSCI The World Value Index. Growth stocks are represented by the MSCI The World Growth Index. For each period, relative performance was calculated by subtracting the annualized 3-year rolling returns of the MSCI The World Growth Index from the annualized 3-year rolling returns of the MSCI The World Value Index. A negative result in this calculation indicates that growth outperformed while a positive result indicates that value outperformed. Indices are unmanaged and not available for direct investment. MSCI The World Value Index 1-year: -9.33%, 5-year: 7.01%, 10-year: 3.61%. MSCI The World Growth Index 1-year: -0.80%, 5-year: 9.52%, 10-year: 5.78%. The inception date for the MSCI The World Growth and Value Indexes is December 8, 1997. Data prior to this date is the result of back-testing performed by MSCI. There are frequently material differences between back-tested performance and actual results. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 10
International – Value vs Growth Rolling 3-Year Annualized Relative Returns 15% Above Zero: Value Outperformed
10%
5%
-184bp at 9/30/2015
0%
10 months
Below Zero: Value Underperformed
-5%
77 months
8 months 18 months
Sep-77 Sep-78 Sep-79 Sep-80 Sep-81 Sep-82 Sep-83 Sep-84 Sep-85 Sep-86 Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 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 Sep-15
-10%
3-Year Period Ending MSCI EAFE VALUE INDEX LESS MSCI EAFE GROWTH INDEX; AS OF SEPTEMBER 30, 2015 | Source: MSCI via FactSet. Past performance is not a
guarantee of future results. Rolling periods represent a series of overlapping, smaller time periods within a single, longer-time period. For example, over a 20-year period, there is one 20-year period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth. The inception date for the MSCI EAFE Growth and Value Indexes is December 8, 1997. Data prior to this date is the result of back-testing performed by MSCI. There are frequently material differences between back-tested performance and actual results. Please see supplemental performance information in disclosure slide at end of this presentation. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 11
On the Positive Side What was happening internally? High degree of employee loyalty – low turnover
Product performance strong for a number of products coming out of GFC Many long-term clients remained – and added to their accounts Important lessons learned
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 12
How Did We Manage Post GFC? Adjusted business accordingly, but it takes time Reduced headcount Continued to track employee compensation with industry Re-examined investment approach/process Re-opened products Re-tooled vehicles: minimums, pricing
Partners absorbed contraction in profits – their role is to think long term
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 13
What We Did/Didn’t Do Continued to focus on investment process
What we DID do:
What we DID NOT do:
Maintained research team
Follow analyst’s advice – fire team
Strengthened process
Broaden business beyond core competencies
Re-emphasized our time horizon – generate alpha over the long term Sharpened our message as alpha component and building block
Launch funds/styles we were not set up to do
Sell and lose independence
Through all changes the firm remained profitable and debt free
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 14
Investment Process Review Investment approach broadly correct, but made some mistakes Faced a negative market cycle for value Inputs were generally good, consistent with disciplined strategy What did we miss? More critical eye on financial leverage More wary of government/regulator behavior in crisis periods More conscious of correlated risks when constructing portfolios
No major process revisions – remained confident in the core process and Graham & Dodd value principles
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 15
Business Lessons Learned Applying lessons to business Made tough choices – for cyclical and secular reasons Adopting a more nuanced approach to capacity/closure management Remained style pure, but more diversified: products, vehicles, distribution Ensure clients understand our approach and that value goes out of favour Things can always be more volatile than you expect – plan accordingly
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 16
“Flat-Footed” on Re-Opening Closed for 10 years in several products, didn’t act fast enough Didn’t have an up-to-date marketing and sales department Needed improvements: client communication and setting expectations
Lost touch with new group of decision-makers
Difficult to change perception that we were no longer closed
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 17
Style Pure and Diversified Across Mandates 12/31/1995 Total: $5,698
9/30/15 Total: $26,146
All Other Strategies 6% International Equity 68%
All Other Strategies 36%
International Equity 37%
Global Equity 26%
Global Equity 27%
Other Strategies include: Emerging Markets Equity European Equity Global Balanced Global Small-Mid Cap Equity International Small-Mid Cap Equity
International Small Cap Equity Japan Equity Other Equity* U.S. Equities*
AUM, $ millions
Other Strategies include: Emerging Markets Equity Emerging Markets Opportunities Emerging Markets Value Equity European Equity Fixed Income** Global Balanced Global Small-Mid Cap Equity
Global Opportunities Value Global Small Cap Equity International Small-Mid Cap Equity International Small Cap Equity Japan Equity Other Equity** U.S. Equities**
*Other Equity and U.S. Equities: Asia ex-Japan, Latin America, EMEA, International Concentrated, Global Concentrated, International Core, Global Core, U.S. Small-Mid Cap Value, U.S. Small Cap Value, U.S. Value. **Fixed Income, Other Equity and U.S. Equities: Canadian Equity, Asia Pacific (ex-Japan), Global Micro Cap, U.S. Small-Mid Cap Value, U.S. Small Cap Value, U.S. Value, Core Plus, Corporate Focus, Enhanced Income, Global Income FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 18
4. It Can Always be More Volatile Than You Think Role of partners Think/act long term Prioritize client and employee interests Remain style pure Absorb the shock – accept highly variable income
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 19
Where Are We Now? Purpose – built for value Investment Team: 8 Global Sectors covered by 25 Analysts 13 Research Associates Responsible for researching company fundamentals 7 Investment Committees responsible for establishing intrinsic value estimates and constructing portfolios
Investment team manages the same process — at any asset level
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 20
Improvements Paying Off Stronger market presence 5 institutional sales professionals Offices in Singapore (3 employees) and Dublin (7 employees) Canada (Bridgehouse): 55 people Partnering with Lazard, Sionna and Greystone
YTD gross sales of $3 billion*
Built a retail mutual fund complex to over $3 billion in 3 years
* As of 3/31/15 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 21
The Key to Endurance Independence and control Financially sound with no debt Continuity of culture and care – key staff
Institutional discipline and long-term focus Partnership is designed to weather volatility and avoid a liquidity event
“My name stays on the door.” - Charles Brandes
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 22
Small-Cap Investment Committee
Small-Cap Investment Committee
Committee Member
Title
Years with Firm
Years on Committee
Years Industry Experience
Ralph Birchmeier, CFA
Director
15
13
21
Yingbin Chen, CFA
Director
13
10
13
Mark Costa, CFA
Senior Analyst
15
5
15
Luiz Sauerbronn
Director
13
11
20
As of September 30, 2015
Page 23
Disclosures Unlike bonds issued or guaranteed by the U.S. government or its agencies, stocks and other bonds are not backed by the full faith and credit of the United States. Stock and bond prices will experience market fluctuations. Please note that the value of government securities and bonds in general have an inverse relationship to interest rates. Bonds carry the risk of default, or the risk that an issuer will be unable to make income or principal payment. There is no assurance that private guarantors or insurers will meet their obligations. The credit quality of the investments in the portfolio is no guarantee of the safety or stability of the portfolio. Investments in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. Please note that all indices are unmanaged and are not available for direct investment. Separately Managed Accounts (SMA) are offered through the firm’s SMA Division, which was created on January 1, 2006. The SMA Division encompasses the firm’s “Separately Managed Account” business (subadvisory “wrap-fee” business with brokerage firms). Non-SMA assets include institutional accounts, pooled investment vehicles, and high-net-worth accounts outside of SMA programs The margin of safety for any security is defined as the discount of its market price to what the firm believes is the intrinsic value of that security. The foregoing reflects the thoughts and opinions of Brandes Investment Partners ® exclusively and is subject to change without notice. Brandes Investment Partners® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada.
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 24
*As of 9/30/15. Separately Managed Accounts (SMA) are offered through the firm’s SMA Division. The SMA Division encompasses the firm’s “Separately Managed Account” business (subadvisory “wrap-fee” business with brokerage firms). Non-SMA assets include institutional accounts, pooled investment vehicles, and high net worth accounts outside of SMA (“wrap-fee”) programs. Margin of safety: The margin of safety for any security is defined as the discount of its current market price to what we believe is the intrinsic value of that security. Alpha: A measure of performance on a risk-adjusted basis. It takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Source: Investopedia.com FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
2
All Managers Deal With Investment Risk Must manage general business risks as well Examples of business risks faced by managers: Unplanned employee departures Leadership succession Change in business model/competitive environment Capitulating to short-term client factors – style drift
Prioritizing shareholders over investors Rapid change in AUM/profits
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 3
Brandes Faced Significant Drop in AUM Once loved, could do no wrong When it turned, it turned… Some clients lost sight of value – promises to be out of favour at times Change in investor risk appetite post 2008
Meaningful under performance in several (but not all) Brandes products through GFC
“…the entire small cap investment committee should be fired.” US-based analyst – 2008
Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 4
Managing a Style Pure Firm Through AUM Flux Today we will discuss how we: Responded to business challenges/AUM decline Maintained focus on investment and research Remained independent and financially sound
Came through: Capacity-constrained firm, well equipped to thrive
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 5
1995 – 2015 Style Pure, But Volatile AUM 1995
Ended year at $5.7 Billion* AUM
1998
AUM $25 Billion Start to soft close
2003
Hard close
2007
Peak AUM
2008
Global Financial Crisis
2009
Market rebounds
2010
All products open for new clients
2013
Low AUM post - GFC
2015
AUM >$28 Billion today
Throughout our history one single investment approach = Value
*as of 12/31/94 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 6
How Did We Manage High Growth Pre-GFC? Rational business practices Added employees – in a controlled, selective manner Material investments in systems – consultants and employees Modest product growth – only logical extensions of value Business management – specialize and professionalize Tracked employee compensation to industry – not firm AUM
Expanded ownership group No debt – all growth internally financed No acquisitions We were concentrated, knew our AUM could be volatile and managed conservatively FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 7
Impact of GFC 2008 -- 2010 Underperformance in largest products, but not all products Institutional clients behaviour changed: Emphasis on de-risking Shift to passive
Reputational challenges due to: High profile investment misses in the U.S.
Loss of some large clients
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 8
Large Client Departures: Examples Large U.S. Client
Opened: February 5, 1996 Closed: May 6, 2013 Portfolio/AUM: International Equity/ >$700 million at peak Performance 2/5/96 – 5/6/13: Account = 10.25% annualized (gross of fees) MSACWFXUS = 5.82% MSCI EAFE = 4.79%
Large Non U.S. Client
Opened: October 14, 1998 Closed: January 11, 2011 Portfolio/AUM: Global Equity/approximately $640 million at close, but total relationship >$7 billion at peak Performance 10/14/98 – 1/11/11: Account = 7.46% annualized (gross of fees) MSACWFREE = 5.40% MSCI World = 4.18%
During relationship, client also closed Asia ex-Japan account (> $700 million; open < 24 months) Past performance is not a guarantee of future results. No investment strategy can assure a profit or protect against loss. The sample client performance is for illustrative purposes only. Other investors in these strategies may have experienced different returns during the periods shown. Please note that all indices are unmanaged and are not available for direct investment. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 9
Global – Value vs Growth
15%
10%
Above Zero: Value Outperforms
-252bps at 9/30/2015
5%
0%
23 months
-5%
95 months
9 months -10%
Below Zero: Value Underperforms 40 months -15%
Sep-78 Sep-79 Sep-80 Sep-81 Sep-82 Sep-83 Sep-84 Sep-85 Sep-86 Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 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 Sep-15
Rolling 3-Yr. Annualized Relative Returns
Rolling 3-Year Annualized Relative Returns
3-Year Period Ending Rolling 3-Year Annualized Relative Returns; MSCI World Value Index less MSCI World Growth Index Source: MSCI via FactSet As of September 30, 2015. Annualized 3-year rolling returns. Past performance is not a guarantee of future results. Rolling periods represent a series of overlapping, smaller time periods within a single, longer-term time period. For example, over a 20-year period, there is one 20-year rolling period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth. Value stocks are represented by the MSCI The World Value Index. Growth stocks are represented by the MSCI The World Growth Index. For each period, relative performance was calculated by subtracting the annualized 3-year rolling returns of the MSCI The World Growth Index from the annualized 3-year rolling returns of the MSCI The World Value Index. A negative result in this calculation indicates that growth outperformed while a positive result indicates that value outperformed. Indices are unmanaged and not available for direct investment. MSCI The World Value Index 1-year: -9.33%, 5-year: 7.01%, 10-year: 3.61%. MSCI The World Growth Index 1-year: -0.80%, 5-year: 9.52%, 10-year: 5.78%. The inception date for the MSCI The World Growth and Value Indexes is December 8, 1997. Data prior to this date is the result of back-testing performed by MSCI. There are frequently material differences between back-tested performance and actual results. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 10
International – Value vs Growth Rolling 3-Year Annualized Relative Returns 15% Above Zero: Value Outperformed
10%
5%
-184bp at 9/30/2015
0%
10 months
Below Zero: Value Underperformed
-5%
77 months
8 months 18 months
Sep-77 Sep-78 Sep-79 Sep-80 Sep-81 Sep-82 Sep-83 Sep-84 Sep-85 Sep-86 Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 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 Sep-15
-10%
3-Year Period Ending MSCI EAFE VALUE INDEX LESS MSCI EAFE GROWTH INDEX; AS OF SEPTEMBER 30, 2015 | Source: MSCI via FactSet. Past performance is not a
guarantee of future results. Rolling periods represent a series of overlapping, smaller time periods within a single, longer-time period. For example, over a 20-year period, there is one 20-year period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth. The inception date for the MSCI EAFE Growth and Value Indexes is December 8, 1997. Data prior to this date is the result of back-testing performed by MSCI. There are frequently material differences between back-tested performance and actual results. Please see supplemental performance information in disclosure slide at end of this presentation. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 11
On the Positive Side What was happening internally? High degree of employee loyalty – low turnover
Product performance strong for a number of products coming out of GFC Many long-term clients remained – and added to their accounts Important lessons learned
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 12
How Did We Manage Post GFC? Adjusted business accordingly, but it takes time Reduced headcount Continued to track employee compensation with industry Re-examined investment approach/process Re-opened products Re-tooled vehicles: minimums, pricing
Partners absorbed contraction in profits – their role is to think long term
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 13
What We Did/Didn’t Do Continued to focus on investment process
What we DID do:
What we DID NOT do:
Maintained research team
Follow analyst’s advice – fire team
Strengthened process
Broaden business beyond core competencies
Re-emphasized our time horizon – generate alpha over the long term Sharpened our message as alpha component and building block
Launch funds/styles we were not set up to do
Sell and lose independence
Through all changes the firm remained profitable and debt free
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 14
Investment Process Review Investment approach broadly correct, but made some mistakes Faced a negative market cycle for value Inputs were generally good, consistent with disciplined strategy What did we miss? More critical eye on financial leverage More wary of government/regulator behavior in crisis periods More conscious of correlated risks when constructing portfolios
No major process revisions – remained confident in the core process and Graham & Dodd value principles
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 15
Business Lessons Learned Applying lessons to business Made tough choices – for cyclical and secular reasons Adopting a more nuanced approach to capacity/closure management Remained style pure, but more diversified: products, vehicles, distribution Ensure clients understand our approach and that value goes out of favour Things can always be more volatile than you expect – plan accordingly
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 16
“Flat-Footed” on Re-Opening Closed for 10 years in several products, didn’t act fast enough Didn’t have an up-to-date marketing and sales department Needed improvements: client communication and setting expectations
Lost touch with new group of decision-makers
Difficult to change perception that we were no longer closed
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 17
Style Pure and Diversified Across Mandates 12/31/1995 Total: $5,698
9/30/15 Total: $26,146
All Other Strategies 6% International Equity 68%
All Other Strategies 36%
International Equity 37%
Global Equity 26%
Global Equity 27%
Other Strategies include: Emerging Markets Equity European Equity Global Balanced Global Small-Mid Cap Equity International Small-Mid Cap Equity
International Small Cap Equity Japan Equity Other Equity* U.S. Equities*
AUM, $ millions
Other Strategies include: Emerging Markets Equity Emerging Markets Opportunities Emerging Markets Value Equity European Equity Fixed Income** Global Balanced Global Small-Mid Cap Equity
Global Opportunities Value Global Small Cap Equity International Small-Mid Cap Equity International Small Cap Equity Japan Equity Other Equity** U.S. Equities**
*Other Equity and U.S. Equities: Asia ex-Japan, Latin America, EMEA, International Concentrated, Global Concentrated, International Core, Global Core, U.S. Small-Mid Cap Value, U.S. Small Cap Value, U.S. Value. **Fixed Income, Other Equity and U.S. Equities: Canadian Equity, Asia Pacific (ex-Japan), Global Micro Cap, U.S. Small-Mid Cap Value, U.S. Small Cap Value, U.S. Value, Core Plus, Corporate Focus, Enhanced Income, Global Income FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 18
4. It Can Always be More Volatile Than You Think Role of partners Think/act long term Prioritize client and employee interests Remain style pure Absorb the shock – accept highly variable income
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 19
Where Are We Now? Purpose – built for value Investment Team: 8 Global Sectors covered by 25 Analysts 13 Research Associates Responsible for researching company fundamentals 7 Investment Committees responsible for establishing intrinsic value estimates and constructing portfolios
Investment team manages the same process — at any asset level
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 20
Improvements Paying Off Stronger market presence 5 institutional sales professionals Offices in Singapore (3 employees) and Dublin (7 employees) Canada (Bridgehouse): 55 people Partnering with Lazard, Sionna and Greystone
YTD gross sales of $3 billion*
Built a retail mutual fund complex to over $3 billion in 3 years
* As of 3/31/15 FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 21
The Key to Endurance Independence and control Financially sound with no debt Continuity of culture and care – key staff
Institutional discipline and long-term focus Partnership is designed to weather volatility and avoid a liquidity event
“My name stays on the door.” - Charles Brandes
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 22
Small-Cap Investment Committee
Small-Cap Investment Committee
Committee Member
Title
Years with Firm
Years on Committee
Years Industry Experience
Ralph Birchmeier, CFA
Director
15
13
21
Yingbin Chen, CFA
Director
13
10
13
Mark Costa, CFA
Senior Analyst
15
5
15
Luiz Sauerbronn
Director
13
11
20
As of September 30, 2015
Page 23
Disclosures Unlike bonds issued or guaranteed by the U.S. government or its agencies, stocks and other bonds are not backed by the full faith and credit of the United States. Stock and bond prices will experience market fluctuations. Please note that the value of government securities and bonds in general have an inverse relationship to interest rates. Bonds carry the risk of default, or the risk that an issuer will be unable to make income or principal payment. There is no assurance that private guarantors or insurers will meet their obligations. The credit quality of the investments in the portfolio is no guarantee of the safety or stability of the portfolio. Investments in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. Please note that all indices are unmanaged and are not available for direct investment. Separately Managed Accounts (SMA) are offered through the firm’s SMA Division, which was created on January 1, 2006. The SMA Division encompasses the firm’s “Separately Managed Account” business (subadvisory “wrap-fee” business with brokerage firms). Non-SMA assets include institutional accounts, pooled investment vehicles, and high-net-worth accounts outside of SMA programs The margin of safety for any security is defined as the discount of its market price to what the firm believes is the intrinsic value of that security. The foregoing reflects the thoughts and opinions of Brandes Investment Partners ® exclusively and is subject to change without notice. Brandes Investment Partners® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada.
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Page 24
