10 Year Anniversary Tocqueville Value Europe

Value investing and a decade of Value investing and a decade of outperformance:

the case of Tocqueville Value Europe

Sebastien Lemonnier / Don Fitzgerald

May 2010

Table of content

� The principles of Value Investing p 3

� Review of Value Investing p 14

� Outperformance of Tocqueville Value Europe p 17

� Outlook for Value Investing and TVE in this context (“TVE”) p 26

� Conclusion p 32

� Appendices p 35

The principles of Value Investing


“Value” investing: investing in a company that is trading at a substantial discount to its intrinsic value

� Independence of investment: no constraints in terms of sectors, geographical areas or

stock market capitalisation

4

� Contrarian stance

� Evaluation of company fundamentals at core of investment process

� Margin of safety as necessary condition for investing


� Independence of investment

“Don’t trust anyone over thirty. And don’t trust anyone thirty and under. Do your own work” Joel Greenblatt from the book “How to be a stock market genius”

� Be confident in your own judgement

5

� Be confident in your own judgement

� An investment consists of buying a small part of a company, not its shares on the stock market

� Ignore market’s noise to capitalise on occasional inefficiencies

� The composition of the index is not a factor in portfolio construction


� Independence of investment

� Investor perception:

• Distant Norwegian company with limited analyst coverage

• Competitive industry subject to discretionary consumption

6

• Competitive industry subject to discretionary consumption

• Uncommunicative management

• Conservative balance sheet

� The company’s intrinsic quality:

• Market leader with strong brands and exclusive relations with retailers

• Market share gains and geographical expansion

• Strong profitability and return on capital

• Management team that concentrates on organic growth

• Stable and attractive dividend policy



“Be greedy when others are fearful, and be fearful when others are greedy” Warren Buffett

• Beware of passing fads

• Be prepared to be counter-cyclical

Our hunting ground:

7

Our hunting ground:

� A series of profit warnings

� Turnaround situations

� Fallen angels

� Limited coverage by financial analysts

� Disappointing IPOs

� Company break-ups

� Optimisation of balance-sheet structures



8Source : Bloomberg

Bought Bought


� Evaluate the fundamentals

“Don’t confuse growth with sustainable competitive advantage” Warren Buffett

� Is it a solid and sustainable business model in terms of the structural environment, entry barriers and competitive advantages?

9

� Is it a solid and sustainable business model in terms of the structural environment, entry barriers and competitive advantages?

� What are the operational and financial risks?

� How credible and motivated is management?

� What are the principal catalysts?


� Evaluate the fundamentals

� Why is it a solid and sustainable business model?

• Strong brands: Omega, Breguet, Blancpain, Rado, Longines, Swatch…• High margins• Vertical integration• Near monopoly in the production of watch mechanisms

10

• Near monopoly in the production of watch mechanisms

� What are the operational and financial risks?

• Discretionary consumer spending• High fixed costs

� How credible and motivated is management?

• Family ownership structure: Hayek with a 38% stake• Nicolas G Hayek restructured the Swiss watch industry in the 1980s

� What are the principal catalysts and operating levers of the business?

• Market share gains• Bringing profitability back in line with historical standards• Possible optimisation of the group’s excess cash reserves


� Margin of safety

“Confronted with the challenge to distil the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY”

Ben Graham, Intelligent Investor

Why is margin of safety important?

11

� Over time market price should converge to intrinsic value

� Valuation is an imprecise art

� The future is unpredictable

� Protects against bad luck, poor investment timing and errors of judgement


� Margin of safety

� Replacement value of the group’s assets �65

� 8.7x 2009 EV/EBITDA, average private market transaction multiple �€75

� If shares traded in line with peers � €70

� 7.0x EV/EBITDA on normalised earnings � €72

12

BoughtBought

Intrinsic valueIntrinsic value

Source : Bloomberg

� Independent thought beats the consensus

� The best ideas are the least appreciated

� Dissociate fundamental investment from speculation


� Value investing: Applying common sense

� Dissociate fundamental investment from speculation

� Protect capital using margin of safety

13

Review of Value Investing


� Value Investing has outperformed over the last decade

15Source : Bloomberg


Strengths Weaknesses

• “Mr Market” is stronger in the short term

• Short-term prospects are often

disappointing

• Risk of a “value trap”: cheap for good

reasons

• Common sense approach

• Margin of safety

• Investment independence allows one

to outperform indices

• Takes account of company strengths

16

An attractive risk/return ratio over time

• At times invest in shares with limited

liquidity

• A rigorous value approach can lead to

lost opportunities

• Takes account of company strengths

and weaknesses in valuation

• Valuation of company over the

economic cycle

Tocqueville Value Europe’s outperformance


18Source: Europerformance, past performance is no indication as to future performance and is not constant over time

Tocqueville Value Europe’s outperformance per 30/04/2010

Volatility

VolatilityTocqueville Value

EuropeMSCI Europe

1 month 14.43 18.74

19

1 month 14.43 18.74

1 year 13.47 16.59

3 years 19.19 20.57

5 years 16.13 17.36

Since inception 14.98 17.07

Source: Europerformance at 30/04/10, past performance is no indication as to future performance and is not constant over time

3,47%2,93%

0%

5%


Market sensitivity

-4,14%

-2,76%

-5%

0%

Bear market Bull market

MSCIE Total return TOCQUEVILLE VALUE EUROPE

Participation rate in araising market: 84.53%

Participation rate in afalling market: 66.73%

20Source: Tocqueville Finance Europe, past performance is no indication as to future performance and is not constant over time


Performance/Volatility since inception

20,00

40,00

60,00

80,00

21

Moyenne

-80,00

-60,00

-40,00

-20,00

0,00

0,00 5,00 10,00 15,00 20,00 25,00Volatility

Source : Europerformance from 31/03/2000 to 31/03/2010


2000-2002: bursting of the TMT bubble

Tocqueville Value Europe -10.8%* versus MSCI Europe -48%*

� Limited exposure to telecoms, media and technology

22

� Limited exposure to telecoms, media and technology

� Small and mid caps out of favour

� Invested in companies with resilient margins

� Takeovers and structural changes in 2001: Britax, Isis, Européenne de Casino, Cristaleria, Rolo Banca…

� Prudent management with a cash reserve up to 15% in 2002

*Source: Europerformance, past performance is no indication as to future performance and is not constant over time


2003-2006: stock market and economic recovery

Tocqueville Value Europe +93.8%* versus MSCI Europe +75.4%*

� Restructuring and turnaround stories were important investment themes

23

� Restructuring and turnaround stories were important investment themes

� Market recognition of the undervaluation of small and mid caps

� Began to find more investment opportunities among large caps from 2005 onwards

� Several takeovers: Mecatherm, Urbium, Beru, McCarthy & Stone, Société du Louvre…

� Successful investments: Fielmann, Ekornes, Carillion, K+S, OPG, BASF…



2007: the start of a financial crisis

Tocqueville Value Europe -9.4%* versus MSCI Europe +0.1%*

� Underperformance limited to the second half of the year (TVE -15.5% vs. MSCI Europe -7.2%)

24

� Underperformance limited to the second half of the year (TVE -15.5% vs. MSCI Europe -7.2%)

� Exposure to small caps was detrimental

� Excessive exposure to UK consumer spending

� Value Investing forsaken in favour of growth stories (emerging markets and commodities) and financial

leverage

� Continued repositioning towards large caps



2008-2010: historical crisis followed by a market rally

Tocqueville Value Europe -15%* versus MSCI Europe -28.3%*

� Prudent management with liquidity ranging between 10% and 20%

� Portfolio diversification in terms of market capitalisation

25

� Portfolio diversification in terms of market capitalisation

� Limited exposure to banks and insurers

� Investments in companies with solid balance sheets were favourable

� Preference for companies with sound fundamentals

� Successful investments: Ansaldo, Parmalat, BASF, BHP Billiton, Ekornes, Michelin…

� Takeover: Elf Aquitaine

*Source: Europerformance, from 31 December 2007 to 30 April 2010

Outlook for Value Investing and TVE in this context


� The “Bears” point to:

� Government stimulus as not sustainable

� A move to a less favourable regulatory environment

� Industrial overcapacity

� Public deficits

27

� Public deficits

� Household deleveraging

� Demographic problems


� It is also easy to be a “Bull”

� The risk of a “systemic crisis is behind us”

� Company balance sheets are healthier

� Revival of mergers and acquisitions

� Attractive valuations in a low interest-rate, low inflation environment

28

� Attractive valuations in a low interest-rate, low inflation environment

� Equities are the most profitable asset class in this context

� Restructuring efforts and structural improvements in profitability

� Global growth driven by emerging countries


� Historical market valuations based on normalised earnings

29Source: FactSet, Exane BNP Paribas estimates – Cyclically adjusted market P/E, based on current price and 10-year moving average EPS - MSCI Europe


� It is time to be pragmatic by favouring stock-picking

� Beware of excessive optimism, as well as pessimism

• Market over-reaction to sovereign debt levels

• Sceptical of an infatuation with emerging market growth

30

� Look out where:

• Economic recovery is fully priced into valuations: BASF, ArcelorMittal, Rheinmetall…

• Restructuring efforts are largely reflected in valuations: Assa Abloy, Saab…


� The markets still contain some inefficiencies.

� We currently favour:

• Structural winners: Publicis, Lufthansa, Marr…

� It is time to be pragmatic by favouring stock-picking

31

• Structural winners: Publicis, Lufthansa, Marr…

• Quality companies that have been overlooked:

Nestlé, Vicat, Finmeccanica, DCC, Diageo, Adidas…

• Small caps that have been forgotten: Jungheinrich, Southern Cross Healthcare…

• Forced sellers: Irish Continental Group, HeidelbergCement…

• Disappointing IPOs: Gategroup…

Conclusion

Conclusion

� Our approach to Value Investing has many advantages:

� Solid historical performance

� Below average volatility

An approach that makes particular sense in the current context of:

33

� An approach that makes particular sense in the current context of:

• Uncertainty... • … but continued investment opportunities

Reasonable risk/reward ratio

Conclusion

� Tocqueville Finance has proven expertise in managing equity funds in:

� France: Ulysse ranked No.1 since its creation *

� Europe: Tocqueville Value Europe ranked No.2 since its creation **

� US: Tocqueville Value Amérique ranked No.1 since its creation ***

34

� US: Tocqueville Value Amérique ranked No.1 since its creation ***

* from 07/10/93 to 30/04/2010, source Europerformance, general French equities category

* * from 31/03/2000 to 30/04/2010, source Europerformance, general European equities category

*** from 31/12/1998 to 30/04/2010, source Europerformance, general North American equities category

Appendices

Tocqueville Value Europe…

�100% fundamental value fund

� Flexible and independently-managed mutual fund

• No limitations in terms of geography, sector or market capitalisation

European expertise established over the last decade

Conclusion

� European expertise established over the last decade

� Significant outperformance since inception

• The No.2 ranked fund out of 67 funds in its category since its inception (Source Europerformance, from

31/03/00)

� Lower volatility than indices since inception

� Common sense and transparent management

• No leverage or complex instruments (derivatives, etc.)

Isin : FR0010547067 (Part C)

Isin : FR0010600239 (Part I)

36

Fund structure per 30 April 2010

37

Evolution of weightings by region

50%

60%

70%

80%

90%

100%

38

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

France UK Allemagne Italie Reste EuropeGermany Italy Rest of Europe

Evolution of weightings by market capitalisation

50%

60%

70%

80%

90%

100%

39

0%

10%

20%

30%

40%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009

< € 1bn between 1 and € 5bn between 5 and € 10bn > € 10bn

Evolution of the portion invested in equities

88%

90%

92%

94%

40

80%

82%

84%

86%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

95,3%

60%

80%

100%

Portfolio liquidity

1,4% 3,3%0,0%

0%

20%

40%

< 10 days between 10 et 50 days

between 50 and 100 days

> 100 days

95.3% of portfolio lines can be fully liquidated in less than 10 days…

41

Sébastien Lemonnier (30)

� Fund manager, TVE, since January 2006

� Since 2003 dedicated financial analyst Tocqueville Value Europe

� Master « Financial Management » from Université Paris I – Panthéon Sorbonne (2003)

Tocqueville Value Europe’s managers

Don Fitzgerald, CFA (35)

� Financial analyst, TVE, since February 2007 and fund manager, TVE, since January 2008

� 7 years expertise in identifying, analyzing and investing in undervalued securities in both the

European equity & high yield / distressed debt markets

� Prior to that 7 years experience in corporate & investment banking

� Degree in Business Studies and German from Trinity College, Dublin

� CFA charter-holder

� Cross-cultural experience having worked in Dublin, London, Frankfurt & Paris

� Irish national, fluent French & German speaker

42

• This document is strictly confidential and intended solely for the recipients. It must not be reproduced, distributed or published, in whole or in part, without the prior and written authorisation of Tocqueville Finance S.A.

• This marketing document should not be interpreted as a contractual or pre-contractual commitment by Tocqueville Finance S.A. It is provided for purely indicative purposes and may be modified at any time without notice.

• The information and analysis contained in this document, especially quantified information, is derived in part from external sources considered to be reliable. However, Tocqueville Finance SA cannot guarantee the complete, precise and up-to-date nature of this analysis and information.

Disclaimers

• Tocqueville Finance S.A. draws investors’ attention to the fact that the past performance presented is based on figures relating to past years and is not a guarantee of future performance.

•Tocqueville Finance S.A. does not guarantee in any manner the current or future performance of funds referred to in this document.

• This is a reminder that any financial investment involves risks (market risks, capital risks and currency risks) and may result in financial losses. Accordingly, Tocqueville Finance S.A. recommends that, prior to any investment, the recipient of this document reads carefully the prospectuses of the funds referred to, which are available free of charge at our head office at 8 rue Lamennais, Paris 75008 or on our internet site www.tocquevillefinance.fr, and ensure that he or she has sufficient experience and expertise to make an investment decision, particularly with regard to its legal and tax consequences.

43