s t o c k m a r k e t sr e P o r t I N G

I N v e s t m e N t c a s e sa r t I c l e

a m a G a z I N e P u b l I s h e d b Y v a l u e I N v e s t a s s e t m a N a G e m e N t s . a .

20

13

l u x e m b o u r g

3IntroductIon to the annual reportIng for 2012central Banks had a major influence onfinancial markets.

12caSeSlet's take a closer look at the american company heinz and the Japanese conve-nience store chainlawson.

4Stock MarketSexpansive monetary policies trigger rela-tively mild investment climate.

17how do wedeal wIth the eMotIonS of InveStIng?what role does fund managers emotional responses play?

A magazine by

ValueInvest Asset

Management S.A.

Publisher

valueInvest asset

Management S.a.

36, rue Marie-adelaïde

l-2128 luxembourg

tel: +352 315 155

fax: +352 315 155 31

info@valueinvest.lu

www.valueinvest.lu

Editor

helen cope

Layout and production

prinfohobro a/S

thurøvej 7

dk-9500 hobro

tel: +45 98 520 199

fax: +45 98 525 501

www.prinfohobro.dk

Disclaimer. ValueInvest Asset Management S.A. shall not be liable for the information contained in this magazine regardless whether contrary to expectation any such information should be incorrect. ValueInvest Asset Management S.A. shall therefore not be held liable for any damages or losses, directly or indirectly incurred on the basis of information contained in this magazine. The content of this magazine is intended as general information and can in no way be equated with advice. Investment may involve risk of loss, and historical returns are no guarantee of future returns. This material may contain information on historical returns and allocations, simulated earnings and forecasts that can not be seen as a guarantee of future returns or allocations. Returns may be reduced or increased as a result of currency fluctuations and changes in equity markets. It is therefore recommended always to seek professional investment advice and also advice on related individual tax systems, which could be affected by the current investment. Reservations are made for typographical errors, product changes, errors in prices, rates and the like. For further information, including prospectus, see www.valueinvest.lu

6reportIng valueInveSt lux gloBalvalueInvest global delivered a positive return in 2012 of 6.5%.

9defInItIonS for valueInveSt luxexplanations of terms used in the magazine.

10reportIng valueInveSt lux JapanvalueInvest Japan - delivered a negative return of 1.5%

541 371Tryksag

Printet on environmentally certified paper

Caution and discipline.Long term capital protection.

perfor-mancevaluestability

Va lu e I n V e s t 1 : 2 0 1 32

Dear Investor

The first half of the year was marked by the

mood shifts of a very positive first quarter

and then a more realistic second quarter. This

tendency continued in the second half of the

year, much influenced by the European debt

crisis and after the American presidential

election in November the American »fiscal

cliff« added to the uncertainties. Compared

to the fluctuating tendencies of the stock

market the ValueInvest portfolios continued

the year on the more stable course set from

the first half of the year. The Global port-

folio delivered for the year a positive return

of 6.5%, somewhat behind the global stock

market. The Japanese portfolio ended the

year with a small negative return, behind the

Japanese stock market. All returns are meas-

ured against the Morgan Stanley World Index

and the Japan Index inclusive of dividends

but excl. all costs.

The Central banks have played a major role in

2012 with their various initiatives and have

had a crucial influence on investors’ outlook

on the stock market and thereby also the

fluctuations seen on the stocks. In the Stock

Market reporting we take a closer look at the

financial crisis and among others the new

pro-active approach from the central banks.

It is especially the sector Financials that has

been the eye of the hurricane throughout

the financial crises. The initiatives made in

2012 have been positive for the sector and

its stock price development and has meant

that the financial stocks in the Morgan Stan-

ley World Index has been top dog in 2012

with a return of 27.1%. This sharply followed

by the Consumer Discretionary sector which

returned a positive 22.1%.

As can be seen in the portfolio reporting in

this magazine, the portfolios still do not have

any exposure to the sector Financials and

there is minimal exposure to the sector Con-

sumer Discretionary, hence, the part-taking

in the two best sectors has been limited.

However, to counter this, the portfolios do

not have much exposure at the other end of

the scale either. Of the three worst sectors;

Utilities, Energy, and Telecommunication,

ValueInvest has investments in Energy and

Telecommunication. Compared to mid-year,

the overall composition has not changed and

we continue to favour a majority investment

within the sectors Consumer Staples and

Health Care. The portfolios also have repre-

sentation from Information Technology and

Industrial in both portfolios, both of which are

in the middle section in terms of return.

In this magazine we take a closer look at two

of the companies in our portfolios; Lawson

and Heinz. The article »Emotions and Invest-

ment« goes in depth and analyses the con-

nection between the portfolio manager and

his investment and why they are so closely

linked to emotions.

Central Banks had a major influence on financial markets Introduction to the annual reporting for 2012

Throughout 2012 we saw a big commitment

from the Central Banks, trying to tackle the

negative curve and economic policies contin-

ue to be expansive. This has all played a role

in the historically low interest rates which put

pressure on the investor to take further risks

in order to continue to gain positive returns

after inflation. The reason for the expansive

policies from the Central Banks is the under-

lying weakness of the economic develop-

ment. When the financial markets loses its

faith in the monetary polices’ ability to act as

a crisis crusher, the weak economic develop-

ment comes to the forefront. This will trigger

big fluctuations on the financial markets in

2013, and no asset classes will be spared the

potentially large ups and downs.

We wish everyone a happy New Year and

hope you will enjoy the magazine.

With kind regards,

ValueInvest Asset Management S.A.

The Central banks have played a

major role in 2012 with their various

initiatives and have had a crucial

influence on investors’ outlook on

the stock market and thereby also

the fluctuations seen on the stocks.

Va lu e I n V e s t 1 : 2 0 1 3 3

Stock marketsReporting > Stock marketsExpansive monetary policies trigger relatively mild investment climate

In 2012 the global stock market was under

strong influence of the initiatives from the

world’s leading central banks. The central

banks continued to promote an expansive

monetary policy by offering the financial sec-

tor plenty opportunity and access to (cheap)

liquidity, which has kept the interest rates

very low. This in return has meant a relatively

mild investment climate for the stock market

despite, or maybe because of, a suppressed

economic growth. Hence the Morgan Stanley

World Index returned a positive 13.8% and

the Japan Index returned 6.3%. The Glo bal

portfolio also delivered a positive return of

6.5% and the Japanese portfolio returned a

negative 1.5%.

Materials and Telecommunication

swapped places in last quarter

As in 2011, the sector Materials was near the

bottom after the first three quarters. How-

ever, the sector flourished towards the end

of the year and finished 2012 with a respect-

able return just short of 10%. It was the sec-

tor Telecommunication that suffered in the

4th quarter and finished with a return just

below 5%, ending up 3rd from the bottom,

despite two digit returns in the first nine

months. The relatively weak development of

Materials had an indirect positive affect on

some of the Food Producing companies in

our portfolios. Having absorbed large increas-

es in input costs since 2009 these increases

eased off during 2012, which relieved the

pressure of implementing price increases on

the finished products. There are no invest-

ments in the sector Materials. We have only

two investments in the sector Energy, the

sector second from bottom, which applies to

both portfolios.

Finance went straight to the top

The second worst sector in 2011, Finance,

took full advantage of the generous central

banks in 2012 and was the best sector with

a positive return of 27.1%. Whereas the de-

selection of financial stocks was an advan-

tage in 2011 it became a disadvantage in

2012.

The Midfield

As ValueInvest is focusing on income stable

companies, it comes as no surprise that the

majority of companies fall into the midfield,

where there are less fluctuations. In general

there is more transparency in the companies

we have included in our portfolios, which

rewards a more stable stock price evalua-

tion. In this magazine we take a closer look

at two of these earnings stable companies;

Japanese Lawson, a company that has more

than 10.000 convenience stores mainly in

Japan, and American Heinz, which for many is

synonymous with Ketchup, but, as the article

reveals also has many other products.

Pro-active Central banks

The main problem is, and it is not a new one,

that many of the large economies battle with

a large and increasing debt. According to the

IMF the public debt in the mature markets

are at its highest since the 2. World War. In

Japan, USA and many European countries the

public debt is above 100% of GDP. But if this

is nothing new, then why is it now a prob-

lem? First and foremost because countries

Sat ned i 65% - filter ARC lower + ARC upper 15% samt gradient fil

Global afdelingen inkl. -0.6% forventet vækstAktiemarkedet inkl. 38% forventet vækst

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

3.7% 4.0% 4.2% 4.5% 4.7% 5.0% 5.2% 5.5% 5.7% 6.0% 6.2% 6.5% 6.7% 7.0% 7.2% 7.5%

Kurs

stig

ning

spot

entia

le

(31.12.2011-31.12.2012)

(31.12.2011-31.12.2012)

13.8%

0.1% 0.1%

4.5%

9.4% 11.3% 11.4%

14.0% 15.5%

22.1%

27.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

MSCI W

orld

Utilities

Energy

Telecomm

. Services

Materials

Information

Technology

Consumer

Staples

Industrials

Health Care

Consumer

Discretionary

Financials

6.3%

-20.1% -15.1%

-7.4% -4.7% -3.2% -2.3%

0.1% 0.5%

9.1%

26.5%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

MSCI Japan

Utilities

Energy

Information

Technology

Telecomm

.Services

Materials

Health Care

Industrials

Consumer

Staples

Consumer

Discretionary

Financials

Figure 1 MSCI World in EUR including reinvested dividends

Va lu e I n V e s t 1 : 2 0 1 34

Stock marketsSat ned i 65% - filter ARC lower + ARC upper 15% samt gradient fil

Global afdelingen inkl. -0.6% forventet vækstAktiemarkedet inkl. 38% forventet vækst

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

3.7% 4.0% 4.2% 4.5% 4.7% 5.0% 5.2% 5.5% 5.7% 6.0% 6.2% 6.5% 6.7% 7.0% 7.2% 7.5%

Kurs

stig

ning

spot

entia

le

(31.12.2011-31.12.2012)

(31.12.2011-31.12.2012)

13.8%

0.1% 0.1%

4.5%

9.4% 11.3% 11.4%

14.0% 15.5%

22.1%

27.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

MSCI W

orld

Utilities

Energy

Telecomm

. Services

Materials

Information

Technology

Consumer

Staples

Industrials

Health Care

Consumer

Discretionary

Financials

6.3%

-20.1% -15.1%

-7.4% -4.7% -3.2% -2.3%

0.1% 0.5%

9.1%

26.5%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

MSCI Japan

Utilities

Energy

Information

Technology

Telecomm

.Services

Materials

Health Care

Industrials

Consumer

Staples

Consumer

Discretionary

Financials

Figure 2 MSCI Japan in EUR including reinvested dividends

such as Greece, Portugal, and to a certain

extent also Spain and Italy were refused by

the government bond investors, who with

good reason wanted a higher interest rate in

return for investing in these countries’ debt.

The required interest rate became so high

that the countries could not afford it. This is

why the ECB (European Central Bank) in the

first half of 2012 stepped in and enabled the

banks, especially in Spain and Italy to buy the

government bonds. In addition to these facili-

ties, the ECB has also been pro-active in the

second half of the year and argues in favour

of a direct purchase of Spanish Government

bonds, among others. The ECB is not the only

one to be pro-active. Bank of Japan, Bank

of England, People’s Bank of China and FED

have all implemented various expansive ini-

tiatives.

What is the problem?

One can be inclined to ask why it is not

»real« investors, who should finance the

sovereign debt? A good source in order to

answer this question can be found in the

study »Growth in a Time of Debt« by profes-

sors Reinhart & Rogoff. Here they look at

growth, and others want to tighten the belt

and save, which will also impact growth. One

thing that the politicians can agree on is that

we do need GROWTH! However the prob-

lem is that by being indebted means that we

have borrowed from the future growth. On

top of this, some countries, such as Japan,

and Germany, are facing headwinds from the

demographic development. There will be few-

er and fewer hands to feed the increasing

population of pensioners. Another very seri-

ous problem is the unemployment, which in

Europe reached new records during autumn.

This, and especially the rising of youth unem-

ployment, may lead to unavoidable unrest in

some countries.

Expectations

In 2012, and foremost in 2011, we saw the

growth expectations of the stock mar-

ket decline during the year. Optimism was

replaced by realism and in October the IMF

lowered its expectations to growth in 2013.

Hence we can hope that we (the stock mar-

ket in general) will enter 2013 with relatively

subdued expectations, which in itself would

be positive for the stock market. The pro-

active approach by the central banks has

bought the politicians time to find sustaina-

ble solutions in order to lower the debt levels.

The global portfolio has a very low debt level

and the Japanese portfolio has a net debt of

zero. Most of the companies in the portfolios

are within industries with more predictable

operations than that of the market in gener-

al. The valuations of the companies are based

on earnings already made – we only base

a miniscule part of the valuation on future

growth. This is why we think that our portfo-

lios are well equipped to face an ever chang-

ing environment in 2013. Based on the Cen-

tral Bank’s rhetoric in 2012 we can expect

continued activity in 2013. In 2012 the stock

market often found inspiration from the poor

economic key figures, which triggered expec-

tations of further stimulus from the central

banks, and whereby the stock markets went

up. We expect this to continue in 2013, how-

ever with a diminishing effect on the stock

market.

Figure 3 Fair Value including market consensus, MSCI World and MSCI Japan 2012

World Japan World Japan Price/Fair Value 55.7% 65.6% Risk- Weighting Fair Value Weighting Fair Value Potential return 79.7% 52.4% categories Consensus expectations growth 6.4% 5.8% Weighted risk premium 75.2% 79.8% A 12.0% 43.7% 8.6% 43.6%Earnings yield 8.8% 7.5% B 21.1% 48.9% 19.2% 89.3%Dividend yield 2.7% 2.2% C 34.5% 48.3% 30.4% 51.6%Net debt/operating profit 1.8 2.4 D 25.5% 70.5% 35.0% 70.1%Number of companies in screening 6.804 1.397 E 6.8% 90.3% 6.9% 111.1%

Included companies in screening > EUR 100 Mio. Included sectors in screening All except Financials

the relation between a country’s economic

growth and its debt level. The study com-

prises a 200 year period and 44 countries.

The main conclusion is; when a county’s debt

rises above 90% of GDP it has a negative

impact on the country’s economic growth.

Thereby reducing the country’s possibilities

to repay the debt, and investing in such coun-

tries would naturally trigger a demand for a

higher risk premium by bond investors. It is

this situation that has forced the pro-active

approaches by the central banks, and mainly

because the politicians in the indebted coun-

tries have not acknowledged the problem in

time.

The dilemma

Should we save our way out of the crisis

or should we spend? This is the question

occupying most politicians. The Hawks say

»save« and the Doves say »spend«. Geo-

graphically in Europe the Hawks live in the

North and the Doves live in the South, rough-

ly speaking that is. The politicians are in a

difficult situation, where some want to kick-

start the economy with further debt, which

according to the mentioned study will impact

Va lu e I n V e s t 1 : 2 0 1 3 5

GlobalReporting > ValueInvest LUX Global- Delivered a positive return of 6.5%

Sat ned i 57% fra Excel

Midterste herefter sat op i 120%

Vandrette sat op i 110%

Nederste sat ned i 69%

Global akkumulerende

ValueInvest GlobalMSCI World

ValueInvestGlobal Acc.

MSCI World

ValueInvest Blue Chip ValueMSCI World

ValueInvest Blue Chip ValueMSCI Verden

ValueInvest JapanMSCI Japan40

60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

40

60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

50

60

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011

0.0% 10.0%

2.5%

3.1%

4.0%

6.9%

8.6%

10.4%

18.0%

38.4%

4.2%

1.7%

20.0% 30.0% 40.0%

Austria

Sweden

Belgium

Netherlands

France

United Kingdom

Switzerland

Japan

USA

Other Countries

Cash

Cash

Other Countries

USA

Japan

United Kingdom

Schwitzerland

France

Netherlands

Belgium

Ireland

Austria

Sweden

0.9%

2.6%

41.7%

16.4%

9.9%

7.7%

6.9%

3.7%

3.1%

2.6%

2.4%

2.1%

0.0% 10.0% 20.0% 30.0% 40.0%

Kontant andel

Andre lande

USA

Japan

Schweiz

Storbritannien

Frankrig

Holland

Belgien

Østrig

Irland

Canada

ValueInvest Global Acc.MSCI World

ValueInvest LUX Global AMSCI World

1.8%

3.6%

38.1%

18.1%

10.0%

9.0%

6.4%

3.6%

3.0%

2.4%

2.3%

1.7%

0.0% 10.0% 20.0% 30.0% 40.0%

2005 2006 2007 2008 2009 2010 2011 2012 Acc. Wholeperiod

2002 2003 2004 Akk. hele perioden

1. halvår 2012

-5.5%

-21.5%

33.1%

13.3%

-4.1%

4.4% 11.9%

-1.5%

-38.2%

26.8% 19.8%

-2.7%

8.4%

-2.6%

-40.0%

-60.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2007 2008 2009 2010 2011

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

10.6% 20.5%

-19.7%

14.7% 13.9% 17.5% 14.7%

-5.4%

-22.2%

25.3% 12.8%

-0.2%

4.1%

103.9%

-5.9% -12.8%

-32.5%

12.0% 5.3%

26.6%

7.5%

-1.5%

-38.2%

26.8% 19.8%

-2.7%

8.4%

-13.4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Akk. hele perioden 2012

1. halvår

-15.3%

14.9% 9.6%

16.5% 14.0%

-5.3%

-22.2%

30.8%

10.4%

-6.2%

6.5%

50.5%

-32.4%

11.7% 5.4%

26.3%

7.5%

-1.6%

-38.1%

26.8% 19.6%

-2.5%

13.8% 10.7%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2.2%

ValueInvest LUX japan AMSCI Japan

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Acc. Wholepriod

4.4%

15.8% 21.5%

-4.0%

-21.7%

-0.2%

0.8%

19.6%

5.0%

-1.5%

37.5%

14.0% 6.4%

44.7%

-4.8% -13.6%

-26.1%

3.6%

23.6%

-11.5%

6.3%

28.6%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0% Figure 1 Historical returns 31.12.2002 – 31.12.2012

tive worth by a significant smaller loss

than that of the stock market in general.

This is one of the crucial factors in order

to create a sound positive return in the

long term.

Historical returns

Figure 2 shows the historical results for

5 years, 7 years and 10 years. All periods

have delivered better returns compared to

the MSCI World Index, in combination with a

lower risk, measured by the annual standard

deviation. The portfolio is characterized by a

low beta in all periods as well as a high track-

ing error, which indicates large differences

in the portfolio composition relative to the

MSCI World Index. Despite the high tracking

error, strong risk adjusted performance has

been delivered as measured by the informa-

tion ratio.

Decomposition of return - countries

It appears from figure 3 that the majority of

the positive return delivered by ValueInvest

LUX Global in 2012 originates from exposure

to USA, Switzerland, and United Kingdom.

Belgium, Hong Kong and France delivered

negative contributions. The figure shows

how big a percentage of the total return –

positive or negative – per country.

Decomposition of return - sectors

Figure 4 shows the largest positive contribu-

tion came from the sector Packaged Foods

ValueInvest Global delivered a positive

return in 2012 of 6.5% against an equally

positive return from MSCI World of 13.8%.

In the lastest 10-year period ValueInvest

Global has accumulated a positive return

of 50.5% against an equally positive

return of 10.7% for MSCI World.

Figure 2 Historical returns incl. key figures

ValueInvest LUX Global 31.12.2002-31.12.2012 31.12.2005-31.12.2012 31.12.2007-31.12.2012 (10 years) (7 years) (5 years) Global MSCI World Global MSCI World Global MSCI WorldAcc. Return 77.69 63.89 21.18 10.32 12.22 4.22Return (p.a.) 5.92 5.06 2.78 1.41 2.33 0.83Return difference (p.a.) 0.85 1.37 1.50 Standard Dev. (p.a.) 10.82 13.11 11.51 13.89 12.80 15.53Sharpe Ratio 0.22 0.12 -0.06 -0.15 -0.09 -0.17Beta 0.68 0.69 0.70 Tracking Error (p.a.%) 6.25 6.32 6.82 Information Ratio 0.14 0.22 0.22

ValueInvest Global has delivered this

accumulated return with a lower risk

of losses than that of MSCI World. The

stock market has, in the time of ValueIn-

vest Global’s existence, had two extreme

years with negative returns – that of

2002 and later in 2008. In both years

the Global portfolio showed its protec-

Va lu e I n V e s t 1 : 2 0 1 36

and Meats, followed by Data Processing &

Outsourcing Services, and Pharmaceuticals.

Once again, it is the two most earnings sta-

ble sectors at the top of the list of positive

contribution to the return, including new-

comer Data Processing. It is in the sector

Data Processing we find the American com-

pany CSC that after a difficult 2011 has had a

successful turnaround in 2012, and was the

company with the largest contribution for

the year. Second largest contribution comes

from Kerry Group (Food Retail). Despite being

situated in Ireland, which has one of Europe’s

most challenged economies, Kerry Group has

shown impressive results in the global envi-

ronment. The most negative contribution

comes from the sector Integrated Telecom-

munications, where the negative return can

be attributed to the company France Tele-

com. In the same area, however in the sector

Wireless Telecommunication Service, we find

Japanese KDDI, but with a positive contribu-

tion for the year.

Country exposure

Figure 5 shows the country exposure. The

selection of companies and the composition

of the portfolios are based on an investment

Sat ned i 57% fra Excel

Midterste herefter sat op i 120%

Vandrette sat op i 110%

Nederste sat ned i 69%

Global akkumulerende

ValueInvest GlobalMSCI World

ValueInvestGlobal Acc.

MSCI World

ValueInvest Blue Chip ValueMSCI World

ValueInvest Blue Chip ValueMSCI Verden

ValueInvest JapanMSCI Japan40

60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

40

60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

50

60

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011

0.0% 10.0%

2.5%

3.1%

4.0%

6.9%

8.6%

10.4%

18.0%

38.4%

4.2%

1.7%

20.0% 30.0% 40.0%

Austria

Sweden

Belgium

Netherlands

France

United Kingdom

Switzerland

Japan

USA

Other Countries

Cash

Cash

Other Countries

USA

Japan

United Kingdom

Schwitzerland

France

Netherlands

Belgium

Ireland

Austria

Sweden

0.9%

2.6%

41.7%

16.4%

9.9%

7.7%

6.9%

3.7%

3.1%

2.6%

2.4%

2.1%

0.0% 10.0% 20.0% 30.0% 40.0%

Kontant andel

Andre lande

USA

Japan

Schweiz

Storbritannien

Frankrig

Holland

Belgien

Østrig

Irland

Canada

ValueInvest Global Acc.MSCI World

ValueInvest LUX Global AMSCI World

1.8%

3.6%

38.1%

18.1%

10.0%

9.0%

6.4%

3.6%

3.0%

2.4%

2.3%

1.7%

0.0% 10.0% 20.0% 30.0% 40.0%

2005 2006 2007 2008 2009 2010 2011 2012 Acc. Wholeperiod

2002 2003 2004 Akk. hele perioden

1. halvår 2012

-5.5%

-21.5%

33.1%

13.3%

-4.1%

4.4% 11.9%

-1.5%

-38.2%

26.8% 19.8%

-2.7%

8.4%

-2.6%

-40.0%

-60.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2007 2008 2009 2010 2011

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

10.6% 20.5%

-19.7%

14.7% 13.9% 17.5% 14.7%

-5.4%

-22.2%

25.3% 12.8%

-0.2%

4.1%

103.9%

-5.9% -12.8%

-32.5%

12.0% 5.3%

26.6%

7.5%

-1.5%

-38.2%

26.8% 19.8%

-2.7%

8.4%

-13.4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Akk. hele perioden 2012

1. halvår

-15.3%

14.9% 9.6%

16.5% 14.0%

-5.3%

-22.2%

30.8%

10.4%

-6.2%

6.5%

50.5%

-32.4%

11.7% 5.4%

26.3%

7.5%

-1.6%

-38.1%

26.8% 19.6%

-2.5%

13.8% 10.7%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2.2%

ValueInvest LUX japan AMSCI Japan

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Acc. Wholepriod

4.4%

15.8% 21.5%

-4.0%

-21.7%

-0.2%

0.8%

19.6%

5.0%

-1.5%

37.5%

14.0% 6.4%

44.7%

-4.8% -13.6%

-26.1%

3.6%

23.6%

-11.5%

6.3%

28.6%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Figure 5 Country exposure

Figure 3 Decomposition of return - countries Figure 4 Decomposition of return - sectors

USA 47.1%Switzerland 15.4%United Kingdom 10.4%Ireland 10.0% 10%Austria 5.7%Sweden 2.5%Netherlands 2.4%Japan 2.1%Germany 1.6%Canada 1.5%Italy 1.3% 0%France -10.1%Hong Kong -10.2% -20%Belgium -79.7%

Packaged Foods & Meats 29.3%Data Processing & Outsourced Services 15.3% 10%Pharmaceuticals 8.0%Household Products 6.9%Industrial Machinery 6.8%Department Stores 6.2%Integrated Oil & Gas 5.0%Advertising 4.8%Systems Software 3.7%Wireless Telecommunication Services 3.5%Soft Drinks 3.4%Security & Alarm Services 2.9%Apparel, Accessories & Luxury Goods 1.4%Environmental & Facilities Services 1.2%Distillers & Vintners 1.1%IT Consulting & Other Services 0.6% 0%Office Electronics -4.6%Home Entertainment Software -4.8%Agricultural Products -5.5% -10%Food Retail -10.9%Brewers -11.5%Oil & Gas Exploration & Production -11.9%Specialty Stores -13.3%Integrated Telecommunication Services -37.5%

The numbers in Figure 3-7 are at 31.12.2012

Va lu e I n V e s t 1 : 2 0 1 3 7

Figure 7 Characteristics - Group Accounts

Figure 6 Company exposure

Company top 10 Country Sector Industry Risk category Weight

Nestle Switzerland Consumer Staples Packaged Foods & Meats A 5.5%GlaxoSmithKline United Kingdom Health Care Pharmaceuticals A 5.5%Kimberly-Clark United States Consumer Staples Household Products A 5.2%General Mills United States Consumer Staples Packaged Foods & Meats A 5.0%Roche Switzerland Health Care Pharmaceuticals A 4.9%Pfizer United States Health Care Pharmaceuticals B 4.6%Ahold Netherlands Consumer Staples Food Retail B 4.0%Merck & Co United States Health Care Pharmaceuticals B 3.8%ConAgra Foods United States Consumer Staples Packaged Foods & Meats B 3.3%KDDI Corp Japan Telecomm.Services Wireless Telecomm. Services D 3.2%

process that cuts across countries and sec-

tors. ValueInvest Lux Global only includes

companies and sectors that have been iden-

tified positively by our investment process.

The company selection has resulted in a large

exposure to companies based in USA, Japan

and Switzerland.

Company exposure

Figure 6 shows the 10 largest portfolio posi-

tions, which represent 45% of the total port-

folio, viewed as one company and provide

insight into the quality and stability of the

overall portfolio, level of leverage, cyclicality

based on exposure to the five risk categories,

and finally, upside potential and underlying

growth used to calculate the Fair Value of

the portfolio.

Comparing the portfolio characteristics in

the group accounts with the market charac-

teristics shown in Figure 3 under the ’stock

market’ section, Value Invest Global offers

a higher return potential and earnings yield

in combination with the higher exposure to

earnings stability (risk categories A and B) as

well as a stronger balance sheet.

» folio with exposure ranging from 5.5% to

3.2%. The portfolio is well diversified with

the 9 out of 10 largest positions invested in

the categories of earnings stability, A and B.

Group accounts

Figure 7 shows our consolidated balance

sheet and profit and loss account for all com-

panies in the portfolio based on data from

our Fair Value database. The group accounts

are a tool for monitoring risk in the port-

A S S e t S Marketable Securities 5.2%Cash 7.7%Own Shares 0.0%Debtors 12.4%Inventories 8.5%Other 3.9%Current Assets 37.7% Associated Companies 2.4%Tangible Fixed Assets 25.6%Intangible Fixed Assets 28.7%Other 5.7%total Fixed Assets 62.3% total Assets 100.0%

P R o F I t & Lo S S A C Co u nt Turnover 100.0%Costs -79.1%Gross Profit 20.9%Depreciations -5.5%Associated Companies 0.4%Minority Interests -0.4%operating Profit 15.3%Goodwill Amortisations -1.1%Financials. Net. -1.4%Tax -3.7%Extraordinary Activities -1.2%Net Profit 8.0% Dividend Yield 3.6%earnings yield 10.4%Price/Fair Value 39.7%Return to Fair Value 152.0%

L I A b I L I t I e S Interest Bearing Debt 5.5%Creditors 10.3%Other 9.8%Short term Debt 25.6% Interest Bearing Debt 23.2%Other 5.5%Long term Debt 28.8% Pensions 4.2%Other Provisions 1.4%total Provisions 5.5%Minority Interests 2.0%equity 38.1%total Liabilities 100.0%

R I S k C Ate G o RY

CAteGoRY A 35.0% CAteGoRY b 34.5% CAteGoRY C 19.7% CAteGoRY D 9.0% CAteGoRY e 1.7% Total 100.0% Weighted interest rate level 3.1%Weighted risk premium 52.4%Growth factor 1.8%net debt / ebItDA 1.4

Value Invest Global offers

a higher return potential and

earnings yield in combination

with the higher exposure to

earnings stability (risk categories

A and B) as well as a stronger

balance sheet.

Va lu e I n V e s t 1 : 2 0 1 38

Definitions for ValueInvest LUX- explanations of terms used in the magazine

EP E R F O R M A N C E

Beta

Beta is a ratio that shows how the return

on the portfolio has fluctuated against the

benchmark return. A beta of 1 means that

the portfolio will follow the benchmark. If,

however, the beta is higher than 1, fluctua-

tions will be stronger for the portfolio than

the benchmark – meaning that the port-

folio will increase or decrease more than

the benchmark. If, on the other hand, the

beta is less than 1, then the portfolio will

increase or decrease less than benchmark.

Earnings Yield

The earnings yield reflects the return

(before tax) an investor would receive if

the company was taken over, all outstand-

ing shares were bought at the current

stock price, the net debt was paid out and

assuming that the investor would then

receive the full operating profit - (operat-

ing profit (1+growth)) / (total market cap. +

net debt). The earnings yield for the total

portfolio would then assume that all hold-

ings are acquired 100%. Importantly, the

earnings yield should always be analyzed in

conjunction with the earnings stability. The

more stable the earnings (i.e. risk category

A), the higher probability of getting the

expected earnings yield.

Fair Value

In our internal portfolio group accounts, the

Fair Value is calculated on the basis of the

aggregated earnings for all the companies

discounted at the required rate of return

deducted by the net debt: (((operating

profit) * (1+growth)) / (global risk free rate

of return * (1+ risk premium)) – net debt

(+ if positive liquidity).

Global Screening

The Fair Value calculation in the global

market screening excluding Financials is

based on analyst consensus estimates of

operating profits for the current (or latest

unreported) fiscal year.

Growth Factor

The growth factor (earnings growth)

applied in the Fair Value calculations can

only go two years out in the future. How-

ever, we do take more than two years of

earnings expectations into the calcula-

tion if the growth factor is expected to be

negative more than two years ahead. In the

portfolio group account the growth factor

is the expected growth in the aggregated

earnings for all the portfolio companies.

Information Ratio

Information ratio is a measure of how an

actively managed portfolio has performed

relative to a benchmark. The active return

(return beyond benchmark return) obtained

by deviating from the benchmark is com-

pared to the benchmark risk, which is calcu-

lated as the standard deviation of excess

returns (tracking error). The information

ratio indicates whether a deviation from

the benchmark has been rewarded and a

positive information ratio indicates that the

portfolio has outperformed the benchmark.

Net debt / EBITDA

The ability to repay debt with the operat-

ing profit generated in number of years.

The net debt is defined as short and long

term interest bearing debt plus pension

liabilities after deduction of cash and mar-

ketable securities. The level of net debt

tolerated depends on the stability in earn-

ings. A company in risk category A would

be required to be able to repay debt within

5 years, B 4 years, C 3 years, D 2 years and

finally E 1 year of EBITDA.

Portfolio Group Accounts

Our internal portfolio group accounts are

the consolidated balance sheet and profit &

loss account for all the companies included

in the portfolio based on data from Value-

Invest Asset Management’s Fair Value

Database. They are a tool for monitoring

the risk in the portfolio as if it was a sin-

gle company and provide a snap-shot of

the quality and stability of the combined

portfolio; the level of leverage, the level of

cyclicality based on the exposure to the

five risk categories, and finally the upside

potential and underlying growth assump-

tion used to calculate the Fair Value of the

portfolio. Also the portfolio group accounts

can be used to compare the portfolio with

the overall global market excluding Finan-

cials. The characteristics of the global port-

folio versus the global screening excluding

financial stocks are: higher earnings stabil-

ity, lower net debt, higher earnings yield

and finally a higher return potential based

on a conservative growth estimate.

Return to Fair Value

This is the upside potential to the calcu-

lated Fair Value against the current market

value of the portfolio.

Risk Category

As a shareholder and owner of a company,

the risk we are concerned about is related

to the volatility in earnings. How fast and

how sure can we be to get our money back

from the future earnings. Five risk catego-

ries have been established A, B, C, D and E,

where A is the least cyclical companies, and

E the most cyclical companies. All compa-

nies in our global universe have been clas-

sified into one of these five risk categories.

In order to minimize and limit the downside

risk of the portfolio, at least 2/3 of the

portfolio must, at any time, be invested in

the risk categories A, B and C.

Risk Premium

The risk premium is the additional return

required above the global risk-free rate of

interest to reflect the riskiness, i.e. earn-

ings volatility, of an investment. Based on

an extensive analysis of a minimum of 10

years of earnings history for 8,000 global

companies the risk premium has been

scaled and calibrated for the five risk cate-

gories A, B, C, D and E. For risk category A

the risk premium is 25%, B 50%, C 75%,

D 100% and E 150%. The required rate of

return used to calculate the value of the

operating profit is then derived as follows;

(1+risk premium) * global risk-free rate.

Sharpe Ratio

The Sharpe ratio is a measure of portfolio

returns relative to risk and is calculated by

using the portfolio excess returns - returns

beyond the risk-free rate of return (set at

3.5%) divided by the standard deviation of

portfolio returns. Investors will seek the

highest excess returns per risk unit, and if

the portfolio has a positive excess return,

then the higher the Sharpe ratio the better.

Tracking Error

Tracking error is a relative risk measure and

measures the standard deviation of the

active return (return beyond benchmark

return) obtained by deviating from the

underlying benchmark. Equity portfolios

which shadow the stock market closely will

have a low tracking error. A tracking error,

e.g. of 8% p.a., indicates that the annual

returns are likely to be within + / - 8% com-

pared to benchmark returns. Please also

see the explanation for information ratio.

Weighted Interest Rate Level

A global risk-free interest rate is applied

in all the Fair Value calculations since the

investment universe is global equities. The

global risk-free interest rate is derived from

an average of the historical rates and the

weighted global current rates in order to

smooth out any short-term fluctuation in

interest rates which should not influence

the value of a company (Fair Value).

Weighted Risk Premium

The weighted risk premium of the port-

folio is the portfolio weighted share of

risk category A (25%), B (50%), C (75%), D

(100%) and E (150%) multiplied by the risk

premiums.

E A R N I N G S Y I E L D

Va lu e I n V e s t 1 : 2 0 1 3 9

JapanReporting > ValueInvest LUX Japan- delivered a negative return of 1.5%

Sat ned i 57% fra Excel

Midterste herefter sat op i 120%

Vandrette sat op i 110%

Nederste sat ned i 69%

Global akkumulerende

ValueInvest GlobalMSCI World

ValueInvestGlobal Acc.

MSCI World

ValueInvest Blue Chip ValueMSCI World

ValueInvest Blue Chip ValueMSCI Verden

ValueInvest JapanMSCI Japan40

60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

40

60

80

100

120

140

160

180

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

50

60

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011

0.0% 10.0%

2.5%

3.1%

4.0%

6.9%

8.6%

10.4%

18.0%

38.4%

4.2%

1.7%

20.0% 30.0% 40.0%

Austria

Sweden

Belgium

Netherlands

France

United Kingdom

Switzerland

Japan

USA

Other Countries

Cash

Cash

Other Countries

USA

Japan

United Kingdom

Schwitzerland

France

Netherlands

Belgium

Ireland

Austria

Sweden

0.9%

2.6%

41.7%

16.4%

9.9%

7.7%

6.9%

3.7%

3.1%

2.6%

2.4%

2.1%

0.0% 10.0% 20.0% 30.0% 40.0%

Kontant andel

Andre lande

USA

Japan

Schweiz

Storbritannien

Frankrig

Holland

Belgien

Østrig

Irland

Canada

ValueInvest Global Acc.MSCI World

ValueInvest LUX Global AMSCI World

1.8%

3.6%

38.1%

18.1%

10.0%

9.0%

6.4%

3.6%

3.0%

2.4%

2.3%

1.7%

0.0% 10.0% 20.0% 30.0% 40.0%

2005 2006 2007 2008 2009 2010 2011 2012 Acc. Wholeperiod

2002 2003 2004 Akk. hele perioden

1. halvår 2012

-5.5%

-21.5%

33.1%

13.3%

-4.1%

4.4% 11.9%

-1.5%

-38.2%

26.8% 19.8%

-2.7%

8.4%

-2.6%

-40.0%

-60.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2007 2008 2009 2010 2011

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

10.6% 20.5%

-19.7%

14.7% 13.9% 17.5% 14.7%

-5.4%

-22.2%

25.3% 12.8%

-0.2%

4.1%

103.9%

-5.9% -12.8%

-32.5%

12.0% 5.3%

26.6%

7.5%

-1.5%

-38.2%

26.8% 19.8%

-2.7%

8.4%

-13.4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Akk. hele perioden 2012

1. halvår

-15.3%

14.9% 9.6%

16.5% 14.0%

-5.3%

-22.2%

30.8%

10.4%

-6.2%

6.5%

50.5%

-32.4%

11.7% 5.4%

26.3%

7.5%

-1.6%

-38.1%

26.8% 19.6%

-2.5%

13.8% 10.7%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2.2%

ValueInvest LUX japan AMSCI Japan

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Acc. Wholepriod

4.4%

15.8% 21.5%

-4.0%

-21.7%

-0.2%

0.8%

19.6%

5.0%

-1.5%

37.5%

14.0% 6.4%

44.7%

-4.8% -13.6%

-26.1%

3.6%

23.6%

-11.5%

6.3%

28.6%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Figure 1 Historical returns 31.12.2002 - 31.12.2012

has shown its protecting worth over the whole

period, and especially in the difficult year of

2008 where the market dropped by 26%. It is

this protective worth, together with the posi-

tive years of the stock market that has created

the accumulated positive return. The start of

2012 fared well for the home market oriented

companies in the portfolio that we not caught

out by the strengthening of the yen. However

the latter months of 2012 brought expecta-

tions of a win for Shinzo Abe and the inevi-

table initiative to weaken the Japanese yen.

This had a profound effect on the interest in

the Japanese stock market and the year ended

with keen interest in the more export oriented

industries that would benefit from a weakened

yen. Thus the portfolio lost its comfortable

head start from the summer compared to MSCI

Japan and ended the year status quo. We are

sceptic of whether or not Japan can win such a

»currency war« as many countries will put their

own currencies first.

Historical returns

Figure 2 shows the historical results at 5,

7, and 10-year periods. All periods outper-

formed the MSCI Japan Index, in combination

with a lower risk, measured by the annual

standard deviation. The portfolio is charac-

terized by a low beta in both periods as well

as a high tracking error, which indicates large

differences in portfolio composition relative

to the MSCI Japan Index.

ValueInvest Japan delivered a negative return

of 1.5% in 2012 against a positive return from

the MSCI Japan Index of 6.3%. In the 10 calen-

dar years ValueInvest Japan has existed the

portfolio has accumulated a positive return of

37.5% against a positive return of 28.6% for

the MSCI Japan Index.

The outperformance delivered by ValueInvest

Japan was generated with a lower standard

deviation than that of MSCI Japan. Measured

since inception until 31.12.2012 the Japanese

stock market has had one significant positive

year - 2005 with a gain of 44.7% where Val-

ueInvest Japan could not keep up. However, as

shown in the accumulated return the portfolio

Figure 2 Historical returns incl. key figures

ValueInvest LUX Global 31.12.2002-31.12.2012 31.12.2005-31.12.2012 31.12.2007-31.12.2012 (10 years) (7 years) (5 years) Global MSCI World Global MSCI World Global MSCI WorldAcc. Return 37.46 28.59 -6.44 -26.79 24.41 -11.01Return (p.a.) 3.23 2.55 -0.95 -4.36 4.46 -2.31Return difference (p.a.) 0.69 3.41 6.77 Standard Dev. (p.a.) 11.55 16.38 11.12 14.50 12.14 16.13Sharpe Ratio 0.15 0.06 -0.22 -0.40 0.24 -0.24Beta 0.51 0.51 0.51 Tracking Error (p.a.%) 8.04 8.39 9.08 Information Ratio 0.09 0.41 0.75

Va lu e I n V e s t 1 : 2 0 1 310

Japan

sheet and profit and loss account for all com-

panies in the portfolio based on data from

ValueInvest Asset Management’s Fair Value

Database. The group accounts are a tool for

monitoring the risk of the portfolio, taken as

a single company.

They provide a picture of the quality and sta-

bility of the overall portfolio, level of leverage,

cyclicality based on exposure to the five risk

categories, and finally, the upside potential

and underlying growth rate applied to calcu-

late the Fair Value of the portfolio.

Decomposition of returns - sectors

Figure 3 shows the various sectors that con-

tributed to the return delivered by ValueIn-

vest LUX Japan. The sectors Food Retail and

Industrial Machinery generated the most

positive contributions whereas the most

negative contributions came from Packaged

Foods and Meats and Education Services.

From the sector Food Retail the highest

contribution came from Circle K Sunkus and

from Industrial Machinery the contribution

came from Makita. Circle K Sunkus was taken

over by its parent company at the start of

2012 and the portfolio benefitted i.a. due to

a material rise in stock price. From the sec-

tor Industrial Machinery the best performer is

Makita. Makita is one of the companies that

benefits from the weakening yen, due to the

company's large scale exports. The two larg-

est negative contributions came from the

companies House foods and Benesse.

Company exposure

Figure 4 shows the 10 largest portfolio posi-

tions, which represent 50% of the total port-

folio with exposure ranging from 5.4% to

4.6%. The portfolio is well diversified with

the 6 of the 10 largest positions invested

in category B, the second best category of

earnings stability.

Group accounts

Figure 5 shows our consolidated balance

Figure 5 Characteristics Group accounts

Figure 4 Company exposure

Company top 10 Country Sector Industry Risk category Weight

Asahi Group Japan Consumer Staples Brewers B 5.4%Makita Japan Industrials Industrial Machinery C 5.4%Nippon Flour Mills Japan Consumer Staples Packaged Foods & Meats B 5.3%Konica Minolta Japan Info. Technology Office Electronics C 5.1%Kirin Japan Consumer Staples Brewers B 5.1%KDDI Corp Japan Telecomm. Services Wireless Telecomm. Services D 5.0%Lawson Japan Consumer Staples Food Retail B 4.8%House Foods Japan Consumer Staples Packaged Foods & Meats B 4.8%Itochu Enex Japan Energy Oil & Gas Refining & Marketing D 4.6%Mitsubishi Tanabe Japan Health Care Pharmaceuticals B 4.6%

Figure 3 Decomposition of returns – sectors

Food Retail 40.0%Industrial Machinery 26.6% 20%Wireless Telecommunication Services 12.8%Apparel Retail 10.2%Security & Alarm Services 8.9%IT Consulting & Other Services 1.5% 0% Brewers -0.8%Household Products -2.0%Office Electronics -6.7%Pharmaceuticals -6.8%Oil & Gas Refining & Marketing -9.1% Home Entertainment Software -12.5%Oil & Gas Exploration & Production -12.5%Education Services -17.4% -20%Packaged Foods & Meats -32.0%

The numbers in Figure 3-5 are at 31.12.2012.

Comparing the portfolio characteristics in the

group accounts with the market character-

istics shown in Figure 3 under Stock market

section, it can be concluded that the portfo-

lio offers a higher return potential and higher

exposure to earnings stability (risk categories

A and B) and a stronger balance sheet.

A S S e t S Marketable Securities 11.6%Cash 10.4%Own Shares 0.0%Debtors 16.7%Inventories 8.2%Other 6.4%Current Assets 53.3% Associated Companies 3.6%Tangible Fixed Assets 24.8%Intangible Fixed Assets 10.4%Other 7.8%total Fixed Assets 46.7% total Assets 100.0%

P R o F I t & Lo S S A C Co U nt Turnover 100.0%Costs -83.9%Gross Profit 16.1%Depreciations -4.6%Associated Companies 0.2%Minority Interests -0.5%Operating Profit 11.2%Goodwill Amortisations -0.6%Financials. Net. 0.1%Tax -4.2%Extraordinary Activities -0.9%Net Profit 5.6% Dividend Yield 2.7%earnings yield 15.0%Price/Fair Value 39.6%Return to Fair Value 152.5%

L I A b I L I t I e S Interest Bearing Debt 6.1%Creditors 9.9%Other 10.6%Short term Debt 26.6% Interest Bearing Debt 12.0%Other 2.7%Long term Debt 14.7% Pensions 1.7%Other Provisions 0.3%total Provisions 2.0%Minority Interests 1.5%equity 55.2%total Liabilities 100.0%

R I S k C Ate G o RY CAteGoRY A 0.0% CAteGoRY b 64.6% CAteGoRY C 19.9% CAteGoRY D 12.6% CAteGoRY e 2.9% Total 100.0% Weighted interest rate level 3.1%Weighted risk premium 64.2%Growth factor -2.6%net debt / ebItDA no Debt

Va lu e I n V e s t 1 : 2 0 1 3 11

It is very few companies whose name has become

synonymous with a product, but this is exactly what has

happened to the American company Heinz and ket-

chup. Of course Heinz is more than ketchup, with more

than 5700 product varieties ranging from baby food,

canned beans, soups, ready meals to ketchup.

Nevertheless Heinz is best known for its ketchup. How do you sup-

port such a statement of a brand? One way, even though not scientif-

ic, could be to mention the largest ketchup producers in the world and

then ask the question: »how many of these companies do you think

of in connection to ketchup?« The largest ketchup producers are:

Heinz, Unilever, Kagome, Kikkoman and Nestle - all well-known com-

panies. The point is; that for the most of us it is actually only Heinz

that we associate with ketchup, even after the other companies have

been mentioned! This is, in our view, the essence of a brand. Heinz

has been in the Global portfolio since 2002.

Henry John Heinz is the man behind the company Heinz. In 1869 Hen-

ry J. Heinz and a friend started the company Heinz & Noble, which sold

bottled horseradish. The company went bust in 1875. The year after

Henry J. Heinz, together with his brother and cousin, started a new

company in the name of F & J Heinz. One of the first products was

tomato ketchup. In 1888 Henry J. Heinz bought out his partners and

renamed the company H.J. Heinz, as we know it today. The company

was listed with the New York Stock Exchange in 1946.

The story behind a slogan

Many know Heinz from the slogan: »57 Varieties« which among oth-

ers is seen on the neck of the ketchup bottle. In addition to the fact

that the slogan is placed exactly where a »firm tap« eases the ketch-

up out of the bottle, the intention behind the slogan was to draw

attention to the many product varieties from Heinz and indeed the

57 varieties! The funny thing is; that at the time when the slogan

was launched back in 1896, Heinz already had more than 57 product

varieties. So why this false marketing from Heinz? There are many

explanations; some quite extensive - others shrouded in mystery. This

could be considered publicity worthy in its own right. According to

Heinz, the story goes that Henry J. Heinz was on a train in New York

and passed a shoe shop with a sign saying »21 styles«. Heinz found

this wording very clever and together with his lucky number 57, the

slogan »57 Varieties« was coined. Other sources say that the num-

ber 5 was the lucky number of Henry J. Heinz whereas the 7 was the

lucky number of his wife – and they could hardly go wrong with that

combination! A totally different explanation of the number 7, and

maybe a bit far-fetched, was that Heinz should have said the number

7 was selected specifically because of the psychological influence

of that figure and of its enduring significance to people of all ages.

Regardless of the nexus, that fact is that the »57 Varieties« is not

entirely true, and never was. However, nobody can deny the effec-

tiveness!

Heinz – more than ketchup!

Today Heinz has 3 overall product categories: »Ketchup & Sauces«,

»Meals & Snacks« and »Infant/Nutrition«, with 45%, 38% and 11%

respectively of the revenue of USD 11.6 bn. The size of the »pure«

ketchup sales is a well-kept trade secret, but part of the business

section Ketchup & Sauces. Heinz has the following to say about its

ketchup sales: »We sell 650 million bottles of Heinz ketchup every

year and approximately two single-serve packets of ketchup for every

man, woman and child on the planet«.

Heinz is more than just the world's largest ketchup producer with

market leading positions in 7 out of 10 of the world’s largest ketchup

markets. The company is also the second largest global player in the

slightly broader product category »Ketchup & Sauces«, only sur-

passed by Unilever - a product category with an estimated global

market value of $110 billion. In addition Heinz is the third largest with-

in Prepared Baby Food, only surpassed by Nestle and DANONE, and

number 5 in the slightly broader baby/child category, »All Infant Nutri-

tion«. The 15 »power brands« as Heinz puts it, from which Heinz is

just one generated 70% of total company revenue. So one can hardly

claim that Heinz is a »one-product company«. These include brands

such as Plasmon, T.G.I Fridays, Weight Watchers, ABC and Qeuro.

casescasesH.J. HeinzH.J. Heinz

By Claus Juul, Portfolio Manager, ValueInvest Asset Management S.A.

11% 6%

45%38%

Ketchup and Sauces

Meals and Snacks

Infant/Nutrition

Others

Va lu e I n V e s t 1 : 2 0 1 312

Looking to the future

To bring matters to a head, one could ask: Where is the future growth

of Heinz going to come from? Can we in the West actually consume

more ketchup? Maybe we can squeeze down a little bit more, but

growth has to come from emerging markets through an increasing

wealth and buying power. This is expected to be the trend in both

short- and long-term.

In the short-term a 1% yearly growth is expected until 2015 for

»Packaged Foods«, both within Europe and USA, in comparison to

an expected 10% yearly growth in China, 9% in both Indonesia and

India, 8% in Russia, and 6% in Brazil. In China and India it is expected

that the combined middle-class and the upper-middle class will dou-

ble to 680 million up until 2015 compared to 2010. And that is only

for these two »members« of the emerging markets! The long-term

expectations also include large financial displacements between the

countries. In 2007 the emerging markets only had two »representa-

tives« in the top-10 on the GDP list: China and Brazil, however by

2050 this figure is expected to have reached 6. China, India, and Brazil

will take 1st, 2nd and 4th place. The weight is shifting and with such

a pace that these countries are unlikely still to be in the category

emerging markets by the time we reach 2050!

How does Heinz position itself to such development? The compa-

ny has done this during several years by fine-tuning of the product

palette, sell-offs, acquisitions primarily in emerging markets, and a

strong focus on sales of the previous mentioned 15 power brands.

In 2002 7% of the company’s revenue came from emerging markets,

compared to 21% in the latest fiscal year. The development has been

achieved by organic growth

from existing Heinz activities

combined with selected acquisitions

in China and Brazil amongst others. It is

Heinz’s ambition to double the sale within emerging

markets by 2016 compared to 2012, in order for it to constitute 30%

of revenue, or 5 bn. USD in absolute terms against 2.4 bn. USD today.

The latest quarterly accounts showed that 23% of revenue came

from emerging markets.

One cannot accuse Heinz for putting all eggs in one basket concern-

ing their emerging markets plan. The geographical spread is widely

founded. This year Heinz expects that the following emerging mar-

kets regions: Eastern Europe, Venezuela, Brazil, Indonesia and China,

individually will achieve at least 400 bn. USD in revenue. One of the

reasons behind Heinz's success in emerging markets has been the

acquisitions of local players with strong brands and to then apply

the »Heinz factor«. An example is selling the local ketchup to the

mainstream segment and then in addition offering Heinz as the pre-

mium product. The advantages are obvious: more consumers can be

reached with a wider product range and lower unit costs due to »sav-

ings« on the sales and distribution links among others.

In the period from 2007 to 2012, where Heniz's emerging markets

revenue has gone from 1.1 bn. USD to 2.4 bn. USD, the challenge for

Heinz is, as for all companies, can the earnings keep up with the rev-

enue? Growth is expensive, especially short-term, due to the start-

up costs, and when the growth has happened via acquisitions things

get more complicated. However, Heinz has managed to find a good

balance between growth and earnings, as the yearly growth in the

5-year period for revenue and operating profit has been 18% and 15%

respectively.

Heinz has over several years made large investments in building the

emerging markets section. Hence, the company knows it has to deliv-

er. Heinz has issued goals for revenue for 2016, however in relation

to earnings the company has been a bit vague. Heinz has said that

»pricing and margins to improve over time« with no further definition

of »over time«. The »problem« is, that the potential in the emerg-

ing markets is still seen as significant, and growth is expensive in the

short-term.

Considering that Henry J. Heinz started the company we today know

back in 1869, it would definitely fall in the category »long-term«. We

are confident that Heinz will continue to make the decisions that will

create results in the long run. Finally, and more as a curiosity and sup-

porting fact of Heinz's patient and capable approach, we should men-

tion that Heinz, since the beginning in 1869, has only had 6 managing

directors, and that is including the current President & CEO, William R.

Johnson, who has been with the company since 1998.(1) Global, weighted 10 year government rate: 10 year government bond rate weighted together compared to MSCI World shares' weighting between countries. So-called risk free return.

casescases

H e i n z www.heinz.com

Home USAEstablished 1888Employees 32,200Products Ketchup & Sauces (45%), Meals & Snacks (38%)

and Infant/Nutrition (11%)

Revenue, Developed countries: 79%geographically Emerging markets: 21%Strengths Strong brand in Heinz ketchup. Broad exposure to emerging marketsWeaknesses Competition from private label products. Weak growth potential from developed countriesOpportunities Increased sales from emerging markets. Minor strategic bolt-on acquisitions Threats Emerging markets politically unstable. Increasing prices of raw material.

Revenue 04/2012 USD 11.649.079.000 é 8.8% comp. to 04/2011

Market value incl. debt USD 22.980.303.140 Expected profit (EBIT) 04/2013 USD 1.613.786.420 Operating profit (EBIT) comp. todebt free company 7.02% (Earnings Yield)Global, weighted 10 year government rate(1) 1.76%Return for shareholder 5.26% point

Earnings stability Very High High Medium Low Very low

Va lu e I n V e s t 1 : 2 0 1 3 13

Lawson is the second largest convenience store chain in Japan, only

exceeded by Seven-Eleven. In total Lawson has 11.067 stores across

the country and serves around 8-9 million Japanese on a daily basis. In

addition Lawson operates some convenience stores in three foreign

markets, among others 374 stores in China. The sale of food prod-

ucts, such as fast food, ready meals, fresh food etc., is still the main

source of revenue for the convenience stores. Other everyday neces-

sities and services make up only 11% of total sales in the stores. With

a market share of 20% in Japan based on revenue and an extremely

efficient distribution network, Lawson has a strong market position

and benefits from economies of scale compared to smaller operators.

Lawson’s convenience stores are split into three main formats: Law-

son, Lawson Store 100, and Natural Lawson. Only 5% of the stores

are run directly by Lawson and the rest are based on franchise, where

the franchisees are responsible for the daily operation. Lawson is

responsible for product development, IT-infrastructure, advertising

campaigns, purchasing, and distribution of goods to the individual

stores. In order to participate the franchisees pay a fee to Lawson

depending on contract type. Sales from convenience stores (fran-

chise fees and sales from own stores) contribute 86% of Lawson’s

combined sales, and the rest is derived from, among others, income

from ticket sales, e-trade and the operation of cash point machines.

Despite the struggling Japanese economy which during the past 10

years has shrunk by 0.8% annually, Lawson has in the same period

produced a considerable growth and the operating profit has risen

by 70%, equal to an annualized growth rate of 5.4%. The number of

stores has also played a part with an annual growth of 2.9%. Without

doubt, Lawson currently enjoys a healthy development and for the

latest fiscal year 02/2012 Lawson reported the highest earning ever.

This year the operating profit is expected to increase by just below 7%.

The elderly Japanese population is an opportunity

At first glance, and keeping the demographic development in mind, it

may not seem that investing in Japanese convenience stores is the

most obvious investment opportunity. Japan has the oldest popula-

tion in the world with a median age of 45.4 years, and fact is that in

Japan today, more people die than people are born. In 2011 the total

population decreased by 0.2%. Hence, in the long term the pool of

potential consumers will shrink and the percentage of elders will

increase. In 2011 the number of people aged 65 and above was 29.8

million, equalling 23.3% of the total population. It is estimated for

2050 that this number will have increased to 37.7 million, equalling

38.8%.

Originally the primary target group for the convenience stores were

the busy men in the age group 20 to 40, whose long working days

meant that they were forced to buy something to eat on their way to

or from work. Today the focus has shifted to the elderly consumers,

and with good reason. Consumer patterns are a function of age, and

consumption reflects the different life phases a person goes through.

Convenience stores thrive in the country with the world’s

oldest population. We have put focus on the Japanese

convenience store chain, Lawson, and why we believe

this is a good investment.

Convenience stores originate in the USA

Convenience stores are an American invention and the first store can

be dated back to 1927. Once the Japanese discovered the potential

of the convenience stores, and since the first stores opened in the

beginning of the 70’ies, they have become an important part of Japa-

nese retail and a permanent feature of the Japanese street scene.

The first stores were very American; however the concept has since

been adjusted to the Japanese lifestyle and food culture and is now

»Made in Japan«. In addition to offering its customers a wide variety

of food products and other everyday necessities, other services are

also offered, such as photocopying, cash machines, invoice payments,

sending of parcels, concert ticket sales and phone cards, to mention

some.

Lawson in brief

The first store opened in June 1975 based on a franchise model from

Lawson Milk Co., which has its origins back in 1939 as Lawson’s dairy

store in Ohio, USA. The development has gone quickly and today

(1) Global, weighted 10 year government rate: 10 year government bond rate weighted together compared to MSCI World shares' weighting between countries. So-called risk free return.

LawsonLawson

By Klaus Petersen, CFA, Portfolio Manager, ValueInvest Asset Management S.A.

L A W S O N www.lawson.jp/en

Home JapanEstablished The first Lawson store opened in 1975Employees 6.475Products Convenience stores (86.4%) and other services (13.6%) incl. ticket sales, e-trade, cash point machines i.a.

Revenue, Japan: 98.9%geographically Strengths Multiple store formats and a broad range of products have expanded customer base.Weaknesses Primarily dependent on Japanese economy. Limited exposure to

growth economies.Opportunities Increased sales of medicine and other health products. Increase number of stores outside Japan.Threats The Japanese market is saturated with risk of increased competition.

Revenue 02/2012 JPY 478.957.000.000 é 8.5% comp. to 02/2011

Market Value incl. debt JPY 649.880.105.580 Expected operating profit (EBIT) 02/2013 JPY 65.729.030.000 Operating profit (EBIT) comp. to debt free company 10.11% (Earnings Yield)Global, weighted 10 year government rate(1) 1.84%Return for shareholder 8.27% point

Indtjeningsstabilitet Very high High Medium Low Very low

Va lu e I n V e s t 1 : 2 0 1 314

The demographic development in Japan triggers a fundamental

change in the consumer pattern; hence in a competitive retail market

it is important to cater to the elderly’s needs. This can clearly be seen

when you compare the needs of an elder or smaller household to that

of a family with children; the elderly want smaller portions, but also

the possibility to buy fresh food and preferably in local proximity. Con-

sumer statistics show that the elderly population spend a larger share

of their income on fresh food compared to the younger generation.

In order to extend the customer base Lawson has adapted the por-

tions to the needs of the elderly and already in 2005 Lawson started

to offer fresh food. Since then the development has gone very quick-

ly and today about half of Lawson’s stores sell fresh food. Lawson

has even developed a new store concept called Lawson Plus, where

the aisles are wider and signs have large writing in order to help the

elderly customers. Lawson plus also offers some more specialised

products requested by the elderly especially. It looks like Lawson

has found the right recipe and got a good hold on the elderly popu-

lation. All in all, it is fair to say that Lawson’s customers on average

have become older: in 2004 approx. 20% were above 50 years of age,

which has risen to 33% in 2011.

Medicine for the elderly is a great growth opportunity

for Lawson

The increasing number of elderly in Japan will increase the demand for

medicine and thereby making the sale of prescription medicine and

other pharmaceutical products an obvious growth opportunity for

the convenience stores, which already has a good hold of the elderly

population. Lawson is prepared to get a slice of this growth by incor-

porating pharmacies in many of their stores in cooperation with Qol

that operates a chain of pharmacies in Japan. Lawson currently sells

prescription medicine via 20 stores (Pharmacy LAWSON), and the plan

is to expand this to 100 by the end of the accounting year 02/2014.

Increased focus on health attracts women

The fact that lately more focus has been put on healthy products

has also meant more women in the convenience stores. The share of

female customer has gone from 27% in 2004 to 36% in 2011. The

female consumer group is very important, especially considering the

growing number of women in the workforce. Lawson is focused on

tailoring the product range for women, and has, among others, intro-

duced Natural Lawson, which offers healthy food products with low

calorie content and other health products based on natural ingredi-

ents. It is estimated that about 45% of customers in the Natural Law-

son stores are women.

The growth of convenience stores at the expense

of other retail sales channels

Research shows that the convenience stores have successfully

adapted to the needs of both the elderly and women and thereby

expanded the customer base. During the past 10 years sales in the

Japanese retail industry has fallen by 0.2% annually, whereas the

convenience stores have enjoyed an annual growth in sales of 2.5%.

Sales growth in the supermarkets have also underperformed con-

venience stores and have stayed more or less flat during the past 10

years, with an annual growth of just 0.2%. These are all indicators

that the convenience stores have advanced at the expense of other

retail sales channels. Convenience stores are becoming a larger part

of Japanese retailing; 10 years ago the combined revenue for con- »

LaWson CurrentLy seLLs presCrip-tion mediCine via 20 stores (phar-maCy LaWson), and the pLan is to expand this to 100 by the end of the aCCounting year 02/2014

Va lu e I n V e s t 1 : 2 0 1 3 15

»

Figure 1 Top 4 market share measured on revenue

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To export the Japanese convenience store seems obvious

In the long term it would be important for Lawson to »export« the

Japanese convenience store concept and thereby establish a profit-

able business outside Japan which could drive future growth . How-

ever, it will take time to build critical mass and an efficient distribu-

tion network in foreign markets, and the overseas expansion should

therefore be seen in a more long term perspective. China’s rapid eco-

nomic growth has triggered a massive relocation to the cities which

in return favours the convenience store business, making the Chinese

market very attractive. Lawson was the first Japanese convenience

store chain to enter China in 1996. Today Lawson has 374 stores in

China and is confident of the long term growth potential. Other for-

eign activities include stores in Indonesia and the latest venture is

the opening of 2 convenience stores in Hawaii, USA.

The value of Lawson’s business model is underrated

Lawson is considered to have a strong competitive position and a

strong foundation for profitable growth going forward based on a

multi-pronged growth strategy. Firstly, the growth is expected to be

driven by a broader customer base achieved by differentiating the

store formats, and by more focus on fresh food products, health, and

healthy products in general. Secondly, Lawson is expected to extract

further value by utilising the data on consumer habits from Ponta

Card. Finally, in the long run the overseas expansion is expected to

contribute to earnings and thereby drive growth and reduce the

dependency on the Japanese Market.

The earnings potential and Lawson’s defensive qualities are, based

on the current market value of the company, considerably under-

rated. This is best illustrated by the current earnings yield of 10.1%,

defined as the operating profit including growth for the current year

divided by the total value of Lawson (net debt plus market value of all

shares). This is the pre-tax return an investor would get if he or she

owned Lawson 100% on a debt free basis. This is a very attractive

return, especially when compared to today’s global weighted inter-

est rate of 1.8%. Besides this, the earnings yield does not take into

account any long term growth potential for Lawson.

Lawson has over time shown a disciplined allocation of capital and

creating shareholder value by requiring a high rate of return on invest-

ments. Furthermore management has demonstrated a strong com-

mitment to distribute profits to shareholders. During the last 10 years

Lawson has increased the yearly dividend per share by 15.9% annu-

ally and for the latest fiscal year Lawson distributed 45% of the net

earnings to the shareholders. With an expected dividend per share of

200 Yen for the current fiscal year the stock offers an attractive divi-

dend yield of 3.4%.

Lawson has been part of the ValueInvest Japanese portfolio since

2005 and has been added to the Global portfolio in April 2012.

venience stores accounted for approx. 5% of the retail sales in Japan.

Today this share has risen to almost 7%.

The small convenience stores lose ground

Large-scale operation and an efficient distribution network is crucial

for success and the reason why the earnings gap between the larg-

est and the smallest has become even bigger. Competition for market

share has increased and this puts pressure on earnings of the smaller

chains. During the last 10 years the Japanese convenience store mar-

ket has become more concentrated and everything indicates that this

development will continue. The biggest players; Seven-Eleven Japan,

Lawson, FamilyMart, and Circle K Sunkus have during the past 10

years increased their combined market share by 9%-point to 84.9%.

It is estimated that Lawson will have the possibility to increase its

share even further, especially because Lawson has demonstrated the

ability to stimulate the market by expanding its range and offer fresh

food products in more stores. A significant element in order to cre-

ate further expansion is the launch of a new and improved franchise

contract type, which will ease the burden for the franchisee. The

new model dictates that Lawson covers part of the uti lity expenses

and some of the costs linked to waste. This new set-up is expected

to trigger a more aggressive marketing from some of the stores and

thereby increase market share.

Lawson knows what the customers want

Lawson has access to valuable and detailed information about its

customers' shopping habits. In March 2010 Lawson decided to can-

cel its own loyalty card (Lawson Pass) and instead join Ponta Card in

order to get access to a greater pool of card holders. Pont Card has

46.2 million card holders and the scheme is established in cooperation

with Mitsubishi Corporation, Showa Shell, and Geo. Ponta Card gives

insight into shopping habits and could help the stores to ensure that

they have the right products on the shelves and thereby minimize

waste. Approximately 45% of the total revenue is generated by Pon-

ta Card holders and the goal is to increase this to 50% by end of the

current fiscal year and to a further 60% in 2013.

Va lu e I n V e s t 1 : 2 0 1 316

and accounting. According to the authors, the

book »sets out to increase understanding

of the real world of the fund manager. What

is it like to be a fund manager? What are the

situations facing these people? How do they

make sense of what they do and deal with

the challenges they confront? What role do

their emotional responses play?« We believe »

How do we deal with the emotions of investing?

By Denis Kostyukovich, CFA, Portfolio Manager, ValueInvest Asset Management S.A.

In each edition of the ValueInvest Magazine, we take up a certain topic which we believe is relevant to our investments

or our research process and explain our view on the issue. This time, we have decided to take a look at what has

been happening around us in academic financial research and how it relates to what we do and how we do it.

One of the most unusual and interesting

works that came out in 2012 and caught our

attention was the book called »Fund Man-

agement: An Emotional Finance Perspective«

written by professors David Tuckett from

University College London, who teaches psy-

choanalysis, and Richard J. Taffler from War-

wick Business School, who teaches finance

the answers to these questions could be

very interesting to people who entrust their

savings or the wealth of their clients to us.

We are not machines running on strict algo-

rithms. We are all human, and humans have

emotions that interfere with or enhance any

process based on rational thought. In this

17VA lu e I n V e S t 1 : 2 0 1 3

» article, we will try to present our view of the

emotional aspects of the fund management

process and compare it to what the authors

of the book inferred from their extensive

interviews with more than 50 fund manag-

ers from different countries that run funds

like ours.

Background

Traditional finance assumes that inves-

tors are rational decision makers. Behavioral

finance introduces psychological variables

(such as cognitive biases and asymmetrical

perceptions of positive and negative out-

comes) that affect individuals’ investment

decision making. Emotional finance goes a

step further: it focuses on financial decision

making when outcomes can be guessed or

imagined but never known, so emotion has a

dynamic influence on thought and therefore

cannot be easily taken out of the decision

making process. In finance, cold and rational

calculation is still idealized. In contrast, mod-

ern psychologists generally recognize emo-

tion (or »gut feeling«) as central to all think-

ing and experience. From the psychological

perspective, thoughts, feelings, and actions

are seen as inextricably linked. The traditional

emotional palette of investing is defined as

greed, fear, and hope. Tuckett and Taffler

advocate adding at least three other »colors«

which could be just as important: excitement,

anxiety, and denial. One of our major tasks

as fund managers is to take the best our gut

feelings can offer. We have to identify, har-

ness and channel productive gut feelings and

restrict the influence of counterproductive

emotions that attack us on a daily basis.

Main features of fund managers'

experience

Tuckett and Taffler identify five recurring

features of fund managers’ experience that

define and help to understand their task

from the emotional finance perspective.

These five dominant themes identified by

the authors have the potential to combine

and lead to conflicted states of mind and

dysfunctional outcomes that we as portfolio

managers must strive to overcome. We will

go over them and explain how they relate to

us at ValueInvest in particular and how we

deal with them in our daily work. We empha-

size that the work of Tuckett and Taffler

taken as the basis for our discussion is much

broader in scope than the aspects that we

touch upon in this article, for which we only

pick the themes most relevant to us.

Feature #1: the need to be exceptional

and pressure to perform

Active managers (as opposed to passive

ones who simply replicate an index) are paid

to make investments that perform better

than their benchmarks after adjustments for

relative risk in a highly competitive environ-

ment where big institutions spend enormous

amounts of money on human and techno-

logical resources and where boutiques led by

new »geniuses« spring up almost daily. By

taking an active stance, managers effectively

declare themselves superior to »average«

peers. Obviously, half of them eventually fail

to outperform their benchmarks before fees,

and probably as many as ¾s fail to do so after

fees. While both academic literature and per-

sonal experience of most long-term investors

strongly suggest that it is unreasonable to

expect even the most successful fund man-

agers to consistently achieve exceptional

results, managers in general see themselves

under constant pressure to do just that.

James Montier addressed this pressure to a

certain extent in his book »Behavioral Invest-

ing: A Practitioners Guide to Applying Behav-

ioral Finance«. Using simulated examples

derived from real-life characteristics of mutu-

al funds, he showed that truly great fund

managers would have been fired many times

over a few decades simply as a function of

two factors: normal market volatility and

reactionary policies of typical big financial

institutions that tend to »drive forward look-

ing in a rear-view mirror,« to borrow a widely

spread metaphor. As we can see, this pres-

sure is not simply a case of collective para-

noia. What’s more, the prevalent hierarchical

structure of most large asset management

businesses means that this pressure to per-

form increasingly comes from within – name-

ly, from the top management often detached

from the day-to-day realities of the portfolio

management job.

This ultra-competitive atmosphere brings

many emotional distractions. Exposed to

anxiety fed by market volatility, managers

may pay undue attention to short-term rela-

tive performance (being ahead of or behind

a benchmark) that may compromise long-

term results and lead to a failure to meet

investment objectives. Real or perceived cli-

ent impatience and managers’ fear of los-

ing clients further enhance that anxiety.

This tension may lead to decisions dictated

by defensive emotional responses and the

search for safety. For example, young man-

agers and seasoned managers of young

funds tend to »herd« around the index with-

out straying too far in order »not to be the

worst« and get their careers or their funds

off the ground. Herding can also be expect-

ed in situations when managers lack strong

ideas or aim to lock relative gains or limit rela-

tive losses for a calendar period. This tactic

is inconsistent with the active mandate but

consistent with the emotional stimuli of the

managers’ environment. Excessive moni-

toring of results is another way managers

try to deal with the pressure of short-term

performance on the emotional level. During

bad times, checking portfolio performance

frequently enhances the illusion of control;

during good times, it provides the reward-

ing feeling of excitement. In extreme cases,

when anxiety is too great to overcome, it

takes the form of »screen gazing«, when

managers feel compelled to watch the mar-

ket and portfolios »in real time« rather than

to look ahead and spend valuable time on

research. In response to pressure from within

the organization that we had mentioned,

managers may develop feelings of loneliness,

alienation, or even resentment, which may be

extremely counterproductive.

At ValueInvest, we address these powerful

and counterproductive emotions in several

ways. Even though we keep an eye on the

Va lu e I n V e s t 1 : 2 0 1 318

index and certainly like to be ahead of it in

the long run, we do not view »beating the

benchmark« as an end in itself. We aim to

give our clients a relatively safe exposure to

stocks with a high degree of downside pro-

tection. In other words, we frame our objec-

tive in terms of risk, not returns. Delivering

a positive and consistent level of alpha (the

industry term for risk-adjusted outper-

formance) is of course very nice, but we see

it only as a byproduct of successfully meet-

ing our primary objective. This view allows

us to abstract from the day-to-day grind

of the push and pull against a benchmark

index, suppress herding instincts that may kill

positive returns, and focus on the long term,

which is a much less emotionally intensive

environment than that faced by most com-

petitors. While we do have portfolio perfor-

mance monitors set up on our Bloomberg ter-

minal (which is physically separate from our

working desks), we normally only check them

once in the morning or before important

meetings to know where we are. We feel lit-

tle urge to observe short-term fluctuations.

Being independent from big investment

houses, we have a very flat management

structure, and, as a consequence, we feel no

destructive internal pressure experienced by

many managers. Our CEO is literally next door

to the portfolio managers with whom he has

contacts almost daily. The same non-hierar-

chical mindset is shared across the firm, so

we are able to avoid the gap between unre-

alistic management expectations and real-

ity that poisons relationships and emotional

atmosphere at many large firms. That is not

to say we feel no internal pressure – we do,

but it is similar to the positive pressure team-

mates exert on each other.

To spread the risks and reduce the intensity

of emotions related to any particular portfo-

lio, big firms (and often individual managers)

run multiple portfolios and strategies. Value-

Invest does not have the luxury of running

multiple strategies that would insulate us

from temporary unfavorable market effects.

Instead, we sell only one strategy and live

by its performance. Therefore, we must deal »

THe negaTIVe eMoTIons and consequences of a loss can be MucH sTronger and More sIgnIfIcanT THan THe posITIVe eMoTIons and consequences of a wIn (THaT’s asyMMeTrIcal HuMan MInd!).

with fears of bad performance and loss of

clients through other means. First and fore-

most, we try to be on the same emotional

wavelength as our clients. This can only be

achieved through clear communication. We

can explain our strategy to clients in detail.

Full transparency is our preferred remedy

for clients’ anxiety. We know that our clients

understand our process and can emotionally

survive adverse periods better than clients

of »black-box« funds whose strategies are

shrouded in mystery, often merely to create

an impression of sophistication and exclusiv-

ity with only little substance to back it up. We

believe that our clients would normally not

pull the plug on us at the first whiff of head-

wind; and if they do, then we probably did

a poor job explaining what we do and have

only ourselves to blame. Transparency leaves

us with more spare emotional capacity to

deal with daily stresses.

Given that the negative emotions and conse-

quences of a loss can be much stronger and

more significant than the positive emotions

and consequences of a win (that’s asym-

metrical human mind!), the natural conclu-

sion for many managers is that avoiding big

losses is the key to the emotional well-being

of the manager and the survival of his or her

business. At ValueInvest, we tend to share

this view, but our implementation of it in the

investment process differs from that of most

managers’. A typical mutual fund portfolio

is broader than ours, with smaller positions

in individual stocks and less deviations from

benchmark indices. This is explained by the

facts that rivals’ teams are normally bigger

and that they often purchase some research

from outside suppliers. ValueInvest is a rela-

tively small team, and we do all our research

ourselves, naturally leaving us with fewer

stocks, stronger views, and wider deviations

from benchmarks. These differences to some

extent define the perception of losses: for

us, they are absolute; for some managers,

they are relative. To minimize losses, we try

to be more selective about what goes into

our funds because almost every stock is a

significant holding in a portfolio that looks

nothing like the index, whereas some manag-

ers can afford to be less scrupulous because

each stock is relatively insignificant in a port-

folio which is much closer to the index.

For the purposes of our discussion, we group

the next three features identified by Tuckett

and Taffler and discuss their relevance to us

in combination because they are united by

the single underlying theme of uncertainty.

Feature #2: Decisions are based on incom-

plete information.

Feature #3: Prices are determined by market

participants’ perceptions of value.

Feature #4: Managers’ assumptions and

claims about the assets are uncertain.

Portfolio managers must make decisions

based on information which is incomplete,

open to competing interpretations, and often

contradictory. While modern managers have

access to mountains of data, no amount of

available information will ever allow clear-cut

decisions. Computing power is of very little

help in this environment. Instead, subtle dif-

ferences in subjective interpretations of the

same information lead managers to differ-

ent decisions as people paint the informa-

tion blank spots with interpretations that are

often based on emotions about past experi-

ence in addition to pure rational thinking.

Furthermore, fund managers know that asset

Va lu e I n V e s t 1 : 2 0 1 3 19

» prices are determined by a collective percep-

tion of underlying value based on beliefs

that cannot be ascertained. The prevailing

story about an asset’s future determines the

asset’s current value. While each manager

may have an idea of where a true fundamen-

tal value may lie, nobody knows how long

it would take to reach it (if it could ever be

reached!) and how much this fundamental

value may change in the meantime. Humans

have an ingrained desire to rationalize what

is going on around them, so every fund man-

ager has a coherent picture of the market

and of how his or her stocks fit in with their

unique properties. Managers’ expectations

clash with reality constantly redefined by the

market, and these perpetual clashes of each

individual’s »rationality« with the »irrational-

ity« of the market may lead to frustration if

the path to the imagined price destinations is

too volatile, too long, or eventually proves to

be simply wrong.

To make matters even more complicated,

managers know that their own claims about

the qualities of assets they hold are based on

uncertain assumptions. Essentially, invest-

ment decisions are made on the basis of

informed guesswork. In the process, manag-

ers implicitly assume that they hold an infor-

mation advantage over their competitors (in

other words, they know something that oth-

ers do not). Everyone’s information level can-

not be above average, so many managers are

eventually disappointed or disillusioned.

all of us, beIng fraIl HuMans, need eMoTIo-nal Tools and MenTal sTrucTures To Make sense of and cope wITH cHallengIngsITuaTIons.

This leaves us with a very complex picture

of the fund manager’s working environment.

All of us, being frail humans, need emo-

tional tools and mental structures to make

sense of and cope with challenging situa-

tions. From the overriding themes described

above, it is evident that fund managers have

to repeatedly make investment judgments

with conviction in an uncertain and competi-

tive environment. To do so, the pre-eminent

psychological tools they employ are selec-

tive interpretation and »storytelling«. Essen-

tially, selective interpretation of available

information is a pre-condition for develop-

ing a story to be told to themselves or to

clients. Sure, fund managers employ various

asset valuation models that range between

fairly straightforward and very complex, but

it appears that the actual valuations still

depend on narrative-based beliefs about

the future as well as on valuation methods

the managers choose to use. Managers tell

those stories that feel true and justify action

when information is incomplete or contra-

dictory and when predicting the future is

nearly impossible. In other words, investment

propositions that are expressed in »cold« and

highly uncertain numbers are recast as more

plausible »warmer« stories in fund manag-

ers’ minds and in explanations to clients.

If people were to tally up pros and cons of

investments without a coherent narrative

or a common thread running through them,

then they would simply end up with nothing

more than a version of an accounting balance

sheet where every asset is matched by a

liability. Storytelling is central to establishing

meaning, in particular of past events. Stories

of eventual success (failure) invoke feelings

of pride (sorrow) in the teller and admiration

(pity) in the listener.

Va lu e I n V e s t 1 : 2 0 1 320

Despite the fact that ValueInvest’s portfo-

lio managers rely on a strict valuation model,

each of our investment cases has a story

that we must believe in in order to invest.

After all, we must understand (or imagine)

what would drive the appreciation of our

investments to their calculated fair values.

Our main task is to balance available facts

and imagination in a way that would let us

reflect what we know and use our gut feel-

ing for what we do not, leaving enough safe-

ty margins for possible errors in the process.

How do we keep faith in our stories without

allowing their imaginary elements to domi-

nate our decision making? While regularly

challenging our investment cases in team

discussions keeps us on our toes, our valua-

tion model provides an additional control. The

attractiveness of each company under our

model in numerical terms ultimately depends

on three variables: market interest rates,

the company’s risk category, and its operat-

ing profits. We have no control over interest

rates established by the market and increas-

ingly by the manipulative central banks. We

have a limited influence on risk categoriza-

tion because we can raise (but never reduce)

the risk discount for companies that do not

fit the model risk profile. Finally, we have

the most power over the projected sustain-

able level of operating profits, limited by our

one- or two-year horizon. Only if we fear a

deterioration of earnings power beyond the

two-year horizon we take a longer and even

more cautious perspective. If we believe the

future is brighter, we nevertheless only stick

to the present, effectively putting brakes on

our imagination and on the extent to which

it can influence the valuation. We feel that

our model is flexible enough to respond to a

changing reality and rigid enough not to be

swayed or overwhelmed by our stories.

While many managers adopt different strat-

egies or change styles in response to weak

performance, poor sales, frustration, lack of

ideas, or fear over inadequacy of their tools,

we have managed to keep confidence in our

approach and stick to our guns through thick

and thin for more than a decade. Emotional

composure should probably take some credit

for that.

Feature #5: Fund managers have highly

emotional relationships with their stocks.

Finally, we come to the romantic part of the

story! Investment relationships of equity

fund managers with their stocks are often

highly emotional. This is particularly true of

stock-picking (or bottom-up) managers and

those who do not belong to the so-called

»quant« camp (a broad group of strategies

relying predominantly on numerical models

in their quest for disciplined and unemotion-

al investing). They »love« companies that

deliver what is expected and »hate« those

that disappoint. Therefore, stock investments

have capacity to gratify and frustrate, trig-

gering powerful and often volatile emotions.

At the stock selection stAge, two emotions could be especiAlly dAngerous: excite-ment And feAr

For most managers, selling a stock is a par-

ticularly difficult decision. If managers hold

a »winner« that met or exceeded expecta-

tions in the past, they may find themselves

less demanding in their assumptions and

forecasts and end up holding an overpriced

stock. If they hold a »loser« that disappoint-

ed, the situation is more complicated. If they

still believe that the investment rationale (or

»story«) is intact and they simply »bought

early« (while in fact they could be in denial),

they may add to the position as the price

moves lower. If they lost faith in the stock or

became unsure about it, they may still face

a strong urge to »get even« or wait for a

better chance to cut their losses, which may

never come. The lack of proper selling disci-

pline opens the door to the strong feeling of

regret.

As ValueInvest’s clients are well aware, we

do consider ourselves stock pickers. How-

ever, our process of selecting stocks for the

portfolio starts from two rather unemotional

sources: our stock valuation formula and the

monthly screening of the global market. The

screening tool ranks all stocks by their under-

valuation and displays other properties that

we deem important such as debt coverage,

return on capital, dividend yield, size, and

some others. Then we go down the list and

undertake a basic preliminary research, trying

to understand whether the calculated under-

valuation is genuine or illusory (our valua-

tion model may simply miss some risks well-

known and discounted by the market).

Certainly, the process of selecting candi-

dates for more detailed research is subjec-

tive and could be influenced by emotions,

but we have several safeguards built into the

process that would not allow us to get car-

ried away in one direction or another. At the

stock selection stage, two emotions could be

especially dangerous: excitement and fear.

The search for excitement is tempered by

several monitored and enforced restrictions.

Our stocks must be solid from the debt-load

perspective and have a minimum margin of

safety of at least 35% (margin of safety is

defined as the distance between the pur-

chase price and the Fair Value of a stock).

Our portfolio must hold at least 2/3s in

stocks with below-average or average risk

profile (as defined by our risk classification

system).

The influence of fear is limited by the same

factors (we know that we have a breakwater

protecting our harbor from the worst effects

of a storm), reinforced by rigors of our fun-

damental valuation process which requires

us to understand what each company does

and how it earns money. Some managers

never open annual reports or never read their

notes, relying exclusively or predominantly

on quantitative models fed by data provid-

ers. Consciously or unconsciously, people fear

the unknown, and our process requires us

to shrink the unknown as much as possible, »

Va lu e I n V e s t 1 : 2 0 1 3 21

even though sometimes it means formulat­

ing stories, as mentioned in the previous sec­

tions. Naturally, despite all these safeguards,

some stories do not develop according to the

script…

Once the stock has been bought, the Value­

Invest team employs several strategies of

emotional defense in order to avoid falling

into the traps of »stock love«, denial, and

regret.

Firstly, we try to maintain a certain distance

from the company to remain as impartial as

possible. This is why we never visit compa­

nies, believing that as non­professionals in

our companies’ businesses, we could be eas­

ily impressed by something quite ordinary or

fall under the spell of a particularly convinc­

ing and charismatic executive. In addition, vis­

its are very time­consuming, and law­abiding

executives would never tell us anything they

would not tell our competitors, so we see

company visits as little more than personal

entertainment. For many managers, how­

ever, company visits are a source of excit­

ing human contact (often with very power­

ful people!) that is largely missing in their

daily routine. That said, we do occasionally

accept visits from company executives who

wish to meet us in our offices during their

tours of institutional investors. In addition,

we contact investor relations departments

of companies or executives directly when we

have questions or need clarifications, usually

about accounting or strategic issues.

Secondly, our diverse team of portfolio man­

agers discusses all controversial matters,

and any individual emotions get tempered

in a consensus­seeking process. Some may

say this committee­type teamwork dilutes

»color« and suppresses individuality. Our

response is that there are other venues for

expressing individuality: there are one­man­

ager funds where individuals can play their

»star« roles as much as they want with all

the emotional ups and downs for themselves

(and their clients). In addition, those investors

who want more »color« and less predictabil­

ity may consider other funds. We only wear

one hat – that of the Value investor.

Thirdly, we have our valuation model that

highlights prime selling candidates for situ­

ations when we must provide cash to inves­

tors or should rebalance our portfolios. No

stock, no matter how much loved, may over­

stay its welcome once it approaches fair

value – it must give way to a more attractive

replacement.

Still, none of the above »emotional safe­

guards« can help in situations when we have

to deal with stocks that fall significantly

in price on disappointments. Many ques­

tions and alternatives for action go through

our heads. Should we revise expectations?

Should we give the management another

chance? Should we exit right away? There

are no easy answers here as each case is

unique, and these are the most emotionally

excruciating moments – nobody likes to lose!

Sometimes we curse ourselves for holding on

too long; sometimes wipe the sweat, exhale,

and congratulate each other for selling and

avoiding further losses. It also happens that

we lose faith somewhere close to the bot­

tom and »pull the plug«; often we clench our

teeth and hold on, and the stock recovers

nicely. However, the main question we ask

ourselves at ValueInvest in such situations is

whether the investment case is still intact. If

we decide that it is, we often add to our posi­

tion at more attractive prices. We understand

that catching stocks at their bottom prices is

a rare occasion, so we build positions gradu­

ally through several entry points. Some of the

best buying opportunities are presented by

the manic­depressive »Mister Market« who

frequently overreacts to negative events. We

try to use these opportunities to improve the

upside potential and the downside risk profile

of the overall portfolio. Experience and abil­

ity to apply cool judgment must come to the

fore in these difficult situations, and we hope

we have been gaining them: John Bogle, the

outspoken index fund pioneer and the leader

of the opposite »passive« investing camp for

whom we hold great respect, mentions that

the manager’s average tenure at one fund is

only 5 years; our average experience manag­

ing ValueInvest’s funds is now 8 years.

Conclusion

We hope that the discussed elements of

Tuckett and Taffler’s work and our interpre­

tation of them allow our investors to bet­

ter understand the emotional undercurrents

of our job. As for us at ValueInvest, reading

about the topic was like taking a look in the

mirror and seeing ourselves from the outside

in the context of our peers with whom we

very rarely interact directly. As always, we

believe that becoming just a little bit wiser

should allow us to do a better job for our

investors.

»

References

Tuckett, David and Taffler, Richard

J., 2012. »Fund Management: An

Emotional Finance Perspective«.

The Research Foundation of CFA

Institute.

Montier, James. 2007. »Behavioral

Investing: A Practitioners Guide to

Applying Behavioral Finance«. John

Wiley & Sons, Ltd.

Bogle, John.2008. »A Question So

Important That It Should Be Hard to

Think about Anything Else.« Journal

of Portfolio Management, vol. 34,

no. 2 (Winter): 95-102.

Va lu e I n V e s t 1 : 2 0 1 322

Company informa-tionCompany information

ValueInvest LUX

Incorporated on 12 September 2001,

ValueInvest LUX SICAV is an open-

ended investment fund regulated by

the CSSF in Luxembourg and consists

of two Euro-denominated sub-funds

focusing exclusively on value invest-

ing (figure A). Investment certificates

are sold through a number of financial

institutions in Luxembourg, Germany,

Austria, Sweden and Switzerland.

Please refer to www.valueinvest.lu

where net asset value is updated on a

daily basis and further information on

prospectus, Key Investor Information

Document (KIID), subscription form,

etc. is available.

ValueInvest Asset Management S.A.

ValueInvest Asset Management S.A.

was founded on 13 January 1998. The

company is domiciled in Luxembourg

and is under the supervision of the

CSSF. ValueInvest Asset Manage-

ment S.A. is investment manager of

ValueInvest LUX SICAV and one of

the few asset management compa-

nies in Europe to focus exclusively on

investment in value stocks. Moreover,

ValueInvest Asset Management S.A.

is investment advisor to Investerings-

foreningen ValueInvest Danmark and

offers discretionary contracts for ma-

nagement of equity portfolios.

Contact information

Interested investors are always wel-

come to contact Jacob Vendelbo or

Markus Wiering either by phone, by

sending a fax or an e-mail to obtain

more information on ValueInvest LUX

SICAV.

Please also refer to the homepage

www.valueinvest.lu for further

information.

ValueInvest Asset Management S.A.

36, rue Marie-Adelaïde

L-2128 Luxembourg

Tel: +352 315 155

Fax: +352 315 155 31

Jacob.Vendelbo@valueinvest.lu

Markus.Wiering@valueinvest.lu

Fund name ISIN Codes

ValueInvest LUX, Global ACap. Dist.

LU0135991064LU0135990504

ValueInvest LUX, Japan ACap. Dist.

LU0135991148LU0135990769

Figure A

PHO

TO: VA

LUEIN

VEST A

SSET MA

NA

GEM

ENT S.A

.

www.valueinvest.lu

Va lu e I n V e s t 1 : 2 0 1 3 23

Common sense.Solid investment principles.

ASSET MANAGEMENT S.A .H O U S E O F VA L U E

DANMARK

As value investors we solely invest in companies

trading at prices significantly below their Fair Values. To limit

downside risks further, we focus on companies

with high earnings stability and low debt.

ValueInvest AssetManagement S .A .36, rue Mar ie-Adela ïdeL-2128 Luxembourg

Tel : +352 315 155Fax: +352 315 155 31

info@valueinvest . luwww.valueinvest . lu

www.valueinvest.lu