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International Investing: Does Style Matter?

International Investing: Does Style Matter?. Stephen P. Dexter Chief Investment Officer Global and International Growth Equity Putnam Investments. Defining Growth and Value. Typical characteristics looked at by growth managers Rate of revenue growth Rate of earnings growth

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International Investing: Does Style Matter?

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  1. International Investing: Does Style Matter? Stephen P. Dexter Chief Investment Officer Global and International Growth Equity Putnam Investments

  2. Defining Growth and Value Typical characteristics looked at by growth managers • Rate of revenue growth • Rate of earnings growth • Rate of cash flow growth • Return on invested capital/ROE • Rate of change in market share • Application of new technologies • Rate of new product development

  3. Defining Growth and Value Typical characteristics looked at by value managers • Rate of growth and stability of cash flow • High cash-flow conversion ratio (rate at which earnings actually turn into cash flow) • Free cash-flow yield (after capex and debt service) • Price to book value • Enterprise value/EBITDA • Debt/EBITDA • Management signaling (e.g., change in capex trends,change in share count, dividend payout, debt/equity ratios) • Operating leverage

  4. Growth vs. Value: United States ROLLING 12-MONTH RELATIVE PERFORMANCE (JULY 1990–JANUARY 2008) (%) Growth outperforms Growth–Value performance Value outperforms 2008 Sources: Putnam Investments and S&P/Citigroup data. Data calculated as the difference between Standard & Poor’s/Citigroup Primary Market United States Growth and Value indices over rolling 12-month periods.

  5. Growth vs. Value: World ex-U.S. ROLLING 12-MONTH RELATIVE PERFORMANCE (JULY 1990–JANUARY 2008) (%) Growth outperforms Growth–Value performance Value outperforms 2008 Sources: Putnam Investments and S&P/Citigroup data. Data calculated as the difference between Standard & Poor’s/Citigroup Primary Market World ex-United States Growth and Value indices over rolling 12-month periods.

  6. Growth PEs are as cheap as they have been relative to value PEs S&P/CITIGROUP GROWTH P/E REL S&P/CITIGROUP VALUE P/E

  7. Characteristics ofgrowth and value environments Environments where growth stocks perform well: • Slow and steady, mildly improving economic expansion — an environment in which what is going well can do even better. Slow and steady economic growth gives people confidence to extend their investment time horizon • Because of higher profitability and their ability to reinvest in themselves, classic growth companies can self-finance in periods of difficult liquidity • Periods of slow economic growth can be a positive — scarcity of profit growth results in the market placing greater value on the assured revenue and profit gains produced by growth companies

  8. Characteristics ofgrowth and value environments Environments where value stocks perform well: • Periods of broad economic expansion — often times when rebounding from a recessionary slowdown • When companies are able to grow their nominal earnings, it pays to be mindful of valuation as opposed to growth characteristics of a company • When the market environment becomes challenging, the value style provides a bit of a defensive quality in the form of dividends and share repurchases • In periods of plentiful liquidity in the markets, capital intensive/highly levered companies perform well (bankruptcy risk reduced)

  9. Applying domestic practices overseas • Historically, U.S. investors have used styled approaches to structurally minimize growth and value extremes • Growth vs. Value cycles are typically more closely associated with sector, not region • With globalization and greater relevance of sectors, applying a styled approach to overseas investing is intuitive

  10. Convergence of sector andregional influences • Since 2000, regional return dispersion has been greatly reduced (%) 12-month average adjustedR-squared Source: Putnam.Based on results of a monthly cross-sectional regression modeling local excess returns of the MSWORLD stocks by sector and region classification. The adjusted percentage of variance explained is smoothed with a 12-month moving average. The MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of 23 Developed Market countries in North America, Europe, and the Asia/Pacific Region. Indexes are unmanaged. You cannot invest in an index.

  11. Finding the opportunities • With past crises (Asian currency, Russian debt, Enron, etc.) comes increased globalization • Accounting • Regulatory • Political • U.S. equity market, particularly large cap, remains the most efficient of any global equity market • In addition to exploiting styles, overseas markets offer attractive return per unit of risk due to greater inefficiency

  12. Risk-adjusted returns have become increasingly more attractive overseas • Greater inefficiency, more diversification SHARPE RATIO Source: Putnam Investments. Data from October 1992 to December 2007.

  13. Market evolution • Attractive international opportunities justify a shift away from domestically dominant portfolios Source: Putnam Investments. Data from October 1992 to December 2007.

  14. Stock example: Gildan Activewear • Market cap: USD 4.7 billion • Canada Source: Bloomberg.

  15. Stock example: Suzuki Motor • Market cap: USD 14.9 billion • Japan Source: Bloomberg.

  16. Stock example: K+S • Market cap: USD 12 billion • Germany Source: Bloomberg.

  17. Have We Forgotten About Growth?

  18. Have we become style unbalanced in recent years? • Late 90’s, Value became the forgotten style • Following the bursting of the bubble, Growth has been largely avoided • Maintaining a balanced approach to style investing will ultimately yield more attractive risk-adjusted returns

  19. International initial funding by style • Since beginning of 2003, International searches have been dominated by Core and Value in a strong Value environment $ BILLIONS Source: InterSec Research.

  20. Putnam view on U.S. dollar • U.S. dollar undervaluation becoming stretched, however, no near-term catalyst for a reversal • Current influences keeping the dollar under pressure • U.S. rate cuts • U.S. current account deficit, credit market fallout • Diversification of petrodollars and central bank reserves • Dollar recovery may enter the picture in late 2008/ early 2009

  21. Conclusions • Style market characteristics, closely followed historically in the U.S., are prevalent overseas — similar approach to investing may be appropriate • Value has dominated Growth since the bursting of the tech bubble; all signs now pointing towards another style swing • Important to stay balanced — recent data suggests plan sponsors have become heavily value-biased; growth opportunities in abundance

  22. Appendix

  23. Growth vs. Value: Europe ROLLING 12-MONTH RELATIVE PERFORMANCE (JULY 1990–JANUARY 2008) (%) Growth outperforms Growth–Value performance Value outperforms 2008 Sources: Putnam Investments and S&P/Citigroup data. Data calculated as the difference between Standard & Poor’s/Citigroup Primary Market Europe Growth and Value indices over rolling 12-month periods.

  24. Growth vs. Value: Japan ROLLING 12-MONTH RELATIVE PERFORMANCE (JULY 1990–JANUARY 2008) (%) Growth outperforms Growth–Value performance Value outperforms 2008 Sources: Putnam Investments and S&P/Citigroup data. Data calculated as the difference between Standard & Poor’s/Citigroup Primary Market Japan Growth and Value indices over rolling 12-month periods.

  25. Growth vs. Value: Asia Pacificex-Japan ROLLING 12-MONTH RELATIVE PERFORMANCE (JULY 1990–JANUARY 2008) (%) Growth outperforms Growth–Value performance Value outperforms 2008 Sources: Putnam Investments and S&P/Citigroup data. Data calculated as the difference between Standard & Poor’s/Citigroup Primary Market Asia Pacific ex-Japan Growth and Value indices over rolling 12-month periods.

  26. Growth vs. Value:Emerging Markets ROLLING 12-MONTH RELATIVE PERFORMANCE (DECEMBER 1997–JANUARY 2008) (%) Growth outperforms Growth–Value performance Value outperforms Sources: Putnam Investments and MSCI data. Data calculated as the difference between MSCI Emerging Markets Growth and Value indices over rolling 12-month periods.

  27. This presentation is provided for limited purposes, is not definitive investment advice, and should not be relied on as such. The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, Putnam Investments does not guarantee the accuracy, adequacy, or completeness of such information. Putnam Investments does not guarantee any minimum level of investment performance or the success of any investment strategy. As with any investment, there is a potential for profit as well as the possibility of loss. Predictions, opinions, and other information contained in this presentation may no longer be true after the date indicated on the cover. Putnam Investments disclaims any obligation to provide any updates on the subject in the future.This material is directed exclusively at investment professionals. Any investments to which this material relates are available only to or will be engaged in only with investment professionals. Any person who is not an investment professional should not act or rely on this material.This material may not be distributed to the public. The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC and Putnam Investments Limited®.

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