This action might not be possible to undo. Are you sure you want to continue?
Quarterly Report To Clients
TO OUR CLIENTS:
INSIDE THIS ISSUE The market today is faced with the age old conundrum of whether to believe what it sees or what it fears. Corporate proﬁtability has remained robust, yet the market is giving these proﬁts a below average valuation. The reason for this anomaly seems clear; the ﬁnancial crisis in the Eurozone and the fear that its effects will spill over and infect the global economy. The near death experience in the developed economies that started almost 5 years ago is still fresh in the market’s mind. This persistent fear is keeping overall equity valuations low, and in many good cyclical businesses the valuations are extremely low. As investors try to make sense of the current environment, they are also questioning whether value investing – identifying good, but undervalued companies – still works in a world that has reacted to global macro events more than company fundamentals this year. In our Commentary section starting on page 2, we look at the cycles of value investing, and observe that despite all the day-to-day noise in the market, the underlying cycles of value investing are as relevant as ever. In fact, 58 months since the peak of the last cycle, value’s performance relative to the broad market is right in line with the historical averages. Furthermore, the wealth of attractively valued, cyclical companies available today has resulted in our portfolios being among the cheapest in our history. Illustrative of these opportunities is Staples, Inc., our Highlighted Holding on page 14. Staples was one of the pioneers in the ofﬁce supply superstore concept, and, along with its internet and delivery channels, is now the largest supplier of ofﬁce products worldwide (not to mention the world’s second largest on-line retailer). Investors penalized Staples in 2011 as sentiment toward economic growth dimmed, driving the stock down by over 40%. Despite these cyclical concerns, we see a business that has industry leading proﬁtability, a strong balance sheet, and a free cash ﬂow yield in excess of 10%. Staples has captured market share from its weaker competitors during the downturn, and, we believe, is well positioned to beneﬁt from an eventual upturn in employment. As we start 2012, we acknowledge the pain investors have endured. Yet as disciplined value investors we are mindful that history teaches that the real investment opportunities are often hidden among the weeds of deepest fear. Warren Buffet’s wisdom on this point seems particularly timely; “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others FOURTH QUARTER 2011 VALUATION SUMMARY are greedy and greedy when others are Portfolio Universe fearful.” P/N* P/N** From time to time the market deliv11.3x 6.5x U.S. Large Cap Value ers the message that valuations do not 11.7x 6.8x U.S. Value matter. This happens when greed is at a 12.9x 8.5x U.S. Mid Cap Value fervor pitch, and it happens when fear is 12.3x 7.4x U.S. Small Cap Value at its most severe. Value investors thrive 10.4x 6.2x Global Value when fear dominates. While we can never 10.1x 6.1x EAFE Value know exactly when the fear will ease, or 8.7x 5.4x European Value what the precise triggers are that cause 11.2x 7.1x Emerging Markets Value the shift in sentiment, human behavior is encouragingly consistent and we remain poised to beneﬁt.
*Price-to-Normalized Earnings ratio. **Reflects the investment universe price-to-normalized earnings ratio for the related strategy.
2 4 6
The cycles of value investing appear ﬁrmly intact, and the current cycle is on-par with where we might expect to be since the prior peak.
Global Research Review
Good cyclical businesses continue to dominate our research this quarter.
We focused mainly on building positions initiated during the third quarter. Portfolios are among the cheapest in our history.
Staples, Inc., the world’s largest ofﬁce supplies company, is a prime example of an industry leader left behind in investors’ ﬂight to safety.
PZENA INVESTMENT MANAGEMENT | 120 WEST 45TH STREET | NEW YORK, NY 10036 | TEL: (212) 355-1600 | WWW.PZENA.COM
Although no two cycles are exactly alike, the current cycle is remarkably consistent with the four prior. If history is a guide, there should continue to be signiﬁcant opportunity in the deep value space.
Is Value Investing Dead?
Equity investors have been shaken to the core. The cumulative pain of the last ﬁve years is palpable, and has been compounded by the market decline and incessant volatility of the last six months. Add to that the proliferation of high-frequency trading, ETFs and other new market participants, and investors are questioning the very foundation of value investing: the notion that, over the long term, the value of a good, but undervalued, business will ultimately be recognized by the market. We are hearing echoes of 1999, the last time the death knell of value investing gained currency. Investors are asking whether there is a new paradigm, one in which the long term view is overwhelmed by short term traders reacting to macro events half way around the world. Will value investing ever work again? There is no denying that an obsession with macroeconomic events dominated market activity during 2011. The correlation of stock returns is the highest it has ever been, an indication that markets are being driven by broad, unspeciﬁed fears. Volatility has also spiked, with the MSCI ACWI moving by more than 1% on 28 trading days in the July – December period. The “risk-on, risk-off” trade has come to dominate market activity, driving cash ﬂows into sectors considered safe on days when fears spike, merely to reverse back into economically sensitive sectors when fears abate. Taking a step back from the day-to-day market noise, however, provides a useful perspective in which to assess recent market activity, and possibly even identify hidden opportunities otherwise obscured. We studied the performance of a naïve deep value benchmark (referred to as “value” in this article and deﬁned as the cheapest quintile of the 1000 largest U.S. listed companies on a price-to-book basis) versus the S&P 500 index over the last 42 years, and have a number of key observations: - Recent experience is highly consistent with the historical ebbs and ﬂows of the cycles of value investing; - The most recent period of value outperformance, which started in December 2008, was interrupted in mid-2011 for six months, as investor sentiment shifted from optimism to uncertainty on concerns over sovereign debt, Eurozone stability, and slowing global economic growth; - We experienced similar interruptions in almost all value cycles over the last 42 years, and both the magnitude and duration of the mid-2011 interruption are consistent with prior cycles (Figure 1); - The last peak in the value cycle was 58 months ago – a seeming eternity in the investment world. Since then, value has underperformed the S&P 500 by a cumulative 11.8%. As it turns out, this cycle-to-date relative performance for value versus the broad market is almost exactly the average of the last four full value cycles (Figure 2); - If history is a guide, there is signiﬁcant pent-up opportunity in the value category (Figure 2); - The ﬂight to safety and across-the-board, indiscriminate selling of cyclical businesses has left a wealth of deeply undervalued, industry leading companies with solid business franchises, high free cash ﬂows, and solid balance sheets. Conversely, businesses considered safe (i.e., stable earnings or high dividend paying such as utilities and consumer staples) are at record high valuations rela-
Figure 1: Interruptions Are Common During Cycles of Value Outperformance*
# of Months of Value Outperformance Jul 73 - Jul 79 Dec 80 - Aug 88 Nov 90 - Aug 95 Mar 00 - Feb 07 A Prior Cycles Average P i C l Dec 08 - Present 73 93 58 84 77 37 (so far) Interruptions of Greater than 5% in Relative Underperformance During Value Outperformance Cycle Cumulative Outperformance 176.4% 254.1% 134.6% 171.9% 184 3% 184.3% 51.5% so far Number 4 2 0 2 2 1 Magnitude -7.2% -7.8% -8.2% -5.8% -6.0% -5.9% N/A** -6.2% -10.4% 7 2% -7.2% -8.8% Duration ( # of months ) 3, 3, 3, 9 6, 6 N/A** 1, 5 4.5 6
*Cheapest quintile price-to-book of 1,000 largest U.S. stocks; Measured from the start of value outperformance vs. S&P 500. Data through 12/31/11 **The Nov 90 - Aug 95 cycle had three relatively short, mild interruptions of 2.7%, 2.7% and 2.0% lasting two months each Source: Sanford C. Bernstein & Co., Pzena Analysis
PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011
two temporary interruptions.8% 51. 2008.7% 15. actually starting right after the U. share price volatility provides opportunity without outsized risk of permanent loss relative to the market. It may be the bursting of a bubble that is the precursor (commercial real estate in the late 80’s.1% 10.8% 4.4% Aug 79 .6% 0.3% 254. But as the U..1% 163. . The 2011 interruption was quite similar. with a conservative view of future growth.S.1% 6. Remember the internet in 1999? But eventually.8% -22. value was poised for a strong rebound. It is usually during recessions where value starts to outperform. and investors start looking forward to an eventual recovery. and deep recession that lasted 18 months from late 2007 through March. As is typical. Periods of value outperformance in these cycles have been long and rewarding. The refrain “but this time it’s different” gains widespread currency.Feb 07 15.3% 45. Although each cycle is different.1% Low P/B vs. Value outperformance tends to abate as the economy is Figure 2: The Current Value Cycle Looks Very Familiar Cumulative Relative Performance of Value* vs.Jul 79 206. Although we have been buffeted by massive volatility during the last half of 2011. Bernstein & Co.9% 4.8% 25. and delivered 184% of cumulative out-performance versus the broad market (Figure 1).1% -28.To a large extent.. but it rhymes.3% 30.4% 50. deep value outperformed the broad market by a cumulative 51.7% -33. each lasting 4 ½ months.6% 176. many attractively valued opportunities exist. providing a wealth of undervalued businesses.3% Jul 73 . 2009.4% Dec 80 .tive to cyclical businesses.S. Value Cycles Repeat As Mark Twain once said. 2011. Even with these conservative assumptions. S&P 500 150% 125% 100% 75% 50% 25% 0% -25% 12 24 36 48 60 72 84 96 108 120 132 peaking and investors throw valuation to the wind to chase the momentum of “hot” areas.7% Full Cycle (Annualized) 21. The value cycle tends to peak at the end of an economic cycle. traditional forces that drive the economic cycles reappear. housing in 2007).8% per annum. and the cycle starts all over again. Pzena Analysis *Value cumulative **Capitalization weighted FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 3 .5% 10. where we detail the cycles of value investing over the last 42 years. have experienced.2% 171. as valuations become compelling when investors give up on equities. “History does not repeat itself.Nov 08 -56. with value underperforming the broad market by 7. From that point through December.6% 160. The last value cycle peaked in early 2007. S&P 500 -27. when valuations fully reﬂect recessionary expectations.2%. This ultimately triggered the global ﬁnancial crisis.Feb 07 187.8% Mar 00 . .9% Full Cycle (Annualized) 10. bank stress tests and subsequent capital raises started to stabilize the market in March 2009. value strategies suffered as the market underwent a massive re-valuation. Bernstein & Co. as cracks in the housing market appeared. as investors see impending signs of economic slowdown or recession. driven by the common denominators of economic cycles and investor behavior.Aug 95 247.2% Nov 90 . As a result.3% Dec 08 102.5% -2.4% 6.5%.3% 134. lasting six months and producing relative performance of -8.1% 113.6% # Months 53 73 126 16 93 109 26 58 84 54 84 138 457 21 37 58 Current Cycle Average of Last 4 Cycles Months From Prior Peak Source: Sanford C.Jun 73 -8.4% 4. Regardless of the trigger.S.0% 15.5% Sep 95 .9% Feb 69 .9% Sep 88 .6% 1. the macro outcomes are not knowable. presidential election in November. there is a distinct pattern.5% Full Cycle (Annualized) 14. over four entire cycles lasting a total of 38 years.Feb 00 71.” We can see this in Figure 3.Oct 90 -16. All of these periods of value outperformance. it sets the stage for a long run of outperformance. the downward re-valuation of global equities occurred mainly during the third (continued on page 16) Figure 3: Value Investing Cycles over the Last 42 Years Performance Low P/B* Feb 69 .2% 15.8%.5% S&P 500** 19. value outperformed the broad market by 4. This in fact occurred.Because these undervalued companies have the ﬁnancial strength and market position to make it through a range of economic scenarios. Since 1969 these periods lasted 7 ½ years on average. on average.Aug 88 414. however.Nov 80 17.1% -41. Pzena Analysis *Cheapest quntile price-to-book of 1000 largest U.5% -91. stocks Source: Sanford C. expectations of an economic slowdown cause investors to re-price equities downward.5% Mar 07 .2% Cycle-to-Date (Annualized) -2. as they ﬂee to safer havens. internet in the 90’s. Although this is a time where value tends to underperform the broad market.9% Full Cycle (Annualized) 16. so it is prudent to place signiﬁcant emphasis on balance sheets and competitive position.
with a particular focus on strong franchises and balance sheets. Increased penetration of key markets.g. from which it now stands to beneﬁt as it reaps the returns and builds its margins. A ﬁne example of this is the global auto manufacturer Volkswagen. etc. this leading. Overall. remains near historical highs (page 16. Compelling Valuations In Europe Today we are ﬁnding some heavily discounted opportunities for inclusion in our Global and EAFE portfolios on the European bourses. 53% of revenues. and made selective switches within some sectors. Carpets. Weak demand has seen sales and operating income depressed from their 2006 peak levels. where we have been rebuilding a position this quarter. Shin-Etsu has come through a recent heavy period of capital investment. This is exactly what would be expected of value investors at this point in the cycle . Shin-Etsu Chemical is a cyclical company that we have added to this quarter.the median valuation in our respective investment universes . and a demonstrated ability to adapt to whatever the economy has to offer. Sales or reductions to outperforming names which are now approaching our sell discipline . underway.Pzena Global Research Review Our research continues to focus on good businesses that are deeply undervalued cyclical companies left behind by investors in their ﬂight to stability. as the signiﬁcant revaluation occurred during the third quarter. ceramic tiles and laminates. a strong rally in the markets in October notwithstanding. cyclically depressed company offers excellent leverage to recovery in construction and refurbishment activity. Management has been proactive on the cost side and margin recovery is already 4 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 . more economically sensitive companies.have included J. health care. three months later it feels like not too much has changed. The Markets are Shunning Volatility – A Source of Longer Term Alpha The valuation disparity between defensive. used by its customers for the manufacture of semiconductors. In Japan. these days – have remained weak with investors fearing the consequences of the European sovereign debt crisis. Financials – also high beta. at which time we initiated a number of new positions in attractively valued cyclical businesses. Over the ensuing eight months the share price approximately doubled as the feared collapse in demand failed to materialize and the company produced several quarterly earnings reports that signiﬁcantly exceeded investors’ expectations. Its shares trade at 7. Figure 4). the latter of which is a business with signiﬁcant construction industry exposure (pipes. Mohawk Industries.5x our normal earnings estimate.). Mohawk and Shaw Industries. However. Fear has created a valuation opportunity in numerous cyclical stocks.C. the balance of sales. including the ownership of distribution channels and the low labor component in the ﬁnished item. This was how we concluded the Commentary in our September Newsletter and. utilities and consumer staples) and higher beta. it has built capacity in the widely used 300mm wafers. We originally bought VW shares in mid-2010 when they were weighed down by fears about consumption of large ticket consumer discretionary items. Although the industry remains in oversupply. the latter owned by Berkshire Hathaway. Shin-Etsu is proﬁtable at these demand levels with upside potential as the supply-demand equation moves towards equilibrium. Ceramic tiles represent a quarter of sales and here we have factored in some concerns about import competition in this more fragmented sector. strong balance sheets. is dominated by two companies in the U. thus shielding them from the threat of cheap carpet imports. internal efﬁciencies in their manufacturing processes and ongoing success with their Chinese joint ventures all coalesced to deliver Cyclical Names Remain Attractive We continued to build a position initiated during the third quarter in the world’s largest ﬂoor coverings company.S. There are several competitive advantages which give protection to the incumbents.. the emphasis in our portfolios is on companies with a global footprint that merely happen to be headquartered in Europe. reﬂecting current macroeconomic concerns for the region. portfolio turnover was lower than average this quarter.8x our normal earnings estimate. We have added to a number of economically sensitive names trading at compelling valuations. across several of our larger capitalization strategies..buying cyclical companies. We are taking advantage of deep discounts available today among cyclical stocks with sustainable business franchises. Mohawk has three principal operating divisions: carpets. generally low beta sectors of the market (e. Penney and Johnson & Johnson. In silicon wafers. In laminates. A “European discount” has opened up. the company has a strong position at the premium end of its markets with some patent protection out to 2017 on Mohawk’s glue-less installation techniques. This situation is remarkable given that corporate proﬁtability has proven to be so resilient in the face of changing economic fortunes. Selling at just 7. Its core businesses are semiconductor silicon and PVC manufacturing.
Exploiting the Opportunities Our portfolios today trade at very attractive valuations.to 5-year) projects. which in part explains the 50% drop in the company’s share price from its mid-year high. we have rebalanced some positions this quarter. There is plenty of unrealized excess return potential in our deeply undervalued positions without the need to materially increase the exposure.9x our normal earnings estimate. We trimmed several holdings where valuation improved. the dominant operator of animal hospital and diagnostic laboratories in the U. but generally maintained our overall level of exposure. and Hewlett Packard. This area has recently been a source of disappointment to some of its competitors. Its shares are unlikely to prove immune from the prevailing short-term headwinds for the sector. we have bought into the animal health care business VCA Antech. We think both are temporary issues. we completed our sale of the Brazilian steel equipment and pipe maker Confab Industrial as it had run up after becoming subject of a takeover offer from fellow steel maker Tenaris. which reacted poorly this quarter to a disappointing earnings report.S. a high proportion of their business is either ongoing. In our Small Cap Value strategy. Molson Coors. but its shares trade attractively at 6x our normal earnings estimate.S. We began to exit our position as the share price reﬂected this success after an unusually short period of ownership. Within the information technology sector we added to Computer Sciences Corporation. and it also lost share in the third quarter due to a failed sales representative recruitment campaign. Oriﬂame has a substantial business in Russia. (see page 9). which seems to have started to gain some equilibrium under new CEO Meg Whitman. Capgemini has a very ﬂexible cost structure which it manages proactively. Some Portfolio Changes in Emerging Markets In our Emerging Markets Value strategy. but believe this has enabled us to construct portfolios which are populated with companies that represent leading franchises with outstanding ﬁnancial characteristics at very attractive valuations. strategies on improved valuations. We acknowledge that this is a painful phase in the value investing cycle. Ford Otosan. Intra-Sector Activity Within ﬁnancials. We review the issues and opportunities for Molson Coors on page 10. Even Beer Sales Are Impacted………Cats And Dogs Too Consumer staples companies have generally not been screening in the cheapest quintile of value in the current. We have rebuilt exposure in our Global. VW shares have weakened again on macro concerns. Capgemini. Microsoft and Capgemini have been added to while Dell. a robust franchise which is growing as outsourcing increases. At 5. the shares are attractively valued. In recent months. including the Turkish manufacturer/ assembler of Ford cars and commercial vehicles. Ingram Micro and Avnet have been pared in certain U. and a strong balance sheet. where consumer spending has been weak. near the lowest in our entire 16-year history as a manager. IT consulting is perceived to be notoriously cyclical.better than expected results. EAFE and European strategies at 7. We added to Oriﬂame Cosmetics whose shares fell sharply on a disappointing earnings announcement during the quarter. However. An exception is the leading brewer. which makes for some uncertainty in the current ﬁscal environment. but it sources around 20% of billings from the U. is a French-based IT consultancy.4x our normal earnings estimates. Europe dominates its business. risk-averse environment. outsourced IT work or long-tail (3. and we have been building up positions in portfolios.S. The public sector accounts for more than a quarter of revenues. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 5 .
Inc.9% -5. materials. Our largest holdings continue to be companies we believe have an ability to adapt to adverse macro environments based on business ﬂexibility and sound balance sheets. Meanwhile.6% Russell 1000® Value 13. Sector weights adjusted for cash .7x 1.5% 37 *Large Cap Universe Median * Pzena Large Cap Value Composite.4% 11. J.8% 3. Franklin Resources Inc.6 $71... Pzena Analysis Sector Weights Russell 1000® Value 11. Goldman Sachs Group Inc. Many of these investments are expected to have long and stable production lives. Molson Coors Brewing Co.Gross Large Cap . Royal Dutch Shell plc Staples Inc. the company as a whole is earning an attractive return on equity and pays a dividend yield of just under 5%. We continue to ﬁnd value in a number of cyclical sectors such as consumer discretionary.5% 4.7 $54.C. as we view our current holdings as superior to any of the new opportunities that we investigated.7% 3. and together they position the company to have one the highest rates of growth in production and free cash ﬂow among the majors over the next few years.5x 10. MetLife Inc.3% (Representative Portfolio . Penney Co..8% 0. see Performance/Portfolio notes on page 18 Hewlett-Packard Co. Additionally.1% All returns through December 31. Exxon Mobil Corp.may appear higher than actual Quarterly Portfolio Notes We did not add any new positions to the portfolio this quarter. Abbott Laboratories 4.2% 4..1x $13. and technology.C. trading at just under 7x our estimate of normalized earnings. the company’s reﬁning assets currently are under-earning.6% 0. Bank of America Corp.7% -6. Inc.3% 15.4 0. Northrop Grumman Corp. SALES/TRIMS: Beam Inc. Quarterly Performance Drivers CONTRIBUTORS: Masco.3x* 11.6% 3. the company has invested heavily in a number of projects (several of which are quite large). Penney Co. J.1% -5..6% Ten Year 3.4 1.. 6 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 . BP plc Entergy Corp. 2011 Top 10 Holdings Since Inception 10/1/00 3. Notable Portfolio Actions PURCHASES/ADDITIONS: Staples Inc.3% -5.4x $4. 2011. ﬁnancials.9% 3.0 20.4% YTD 2011 -5.6% 3.8% 14.1% 656 Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities 0% 10% 20% 30% 40% Pzena Large Russell Cap Value* 1000® Value 14% 3% 12% 33% 3% 7% 7% 17% 4% 10% 8% 12% 25% 13% 3% 9% 7% 13% 6.See Portfolio Notes on page 18) 4Q 2011 Large Cap .4% 2.97 25. Allstate Corp.3% 3. Edison International. Highlighted Holding Royal Dutch Shell plc is a leading global integrated oil and gas company.4% One Year Three Year Five Year -5. Over the last half decade.PORTFOLIO STRATEGIES Pzena Large Cap Value Performance Summary Annualized as of December 31. representing the potential for a rebound.1% 3.3% Portfolio Characteristics Pzena Large Cap Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell 1000® Value) Standard Deviation (5-Year) Number of Stocks (model portfolio) Source: Russell 1000® Value. that are just now starting to ramp up.2% 3. We view Royal Dutch as attractively valued.1% -2. DETRACTORS: Computer Sciences Corp. The company is ﬁnancially sound with net debt representing less than 10% of total operating capital.9% 4.9% 3.5% 12. Hewlett-Packard Co.1x 1.Net 12.
6% 3.6 0.Net 13. Sherwin-Williams Co. a rare opportunity in consumer staples.2% 3. Penney Co. Staples Inc.4x 1.7% -4. we believe the stock is very attractive.3% 8. Bank of America Corp. Inc. and added to Molson Coors. Quarterly Performance Drivers CONTRIBUTORS: Mohawk Industries Inc.7x* 11.2% (Representative Portfolio . Molson Coors Brewing Co.8% 3. and also strong positions in Japan.2% -5. Notable Portfolio Actions PURCHASES/ADDITIONS: MetLife Inc. We added to existing housing-related exposure (Fortune Brands Home & Security).4% One Year -3. initiated a new position in MetLife.3% 3.See Portfolio Notes on page 18) 4Q 2011 Value . Avnet Inc.4x our estimate of normalized earnings and 0.7% YTD 2011 -3. 4. 2011. see Performance/Portfolio notes on page 18 Hewlett-Packard Co.. Avnet Inc. Royal Dutch Shell plc Northrop Grumman Corp. 2011 Top 10 Holdings Since Ten Inception Year 1/1/96 9.9% 11.9% 13.97 25.1% 4. Pzena Analysis Sector Weights Russell 1000® Value 11. At 5.7% 15.7% -4. The stock has fallen on overblown concerns regarding the macro economy and declining interest rates.6x book value.5 $51. The company is very well capitalized and should be able to increase its proﬁtability as it deploys excess capital and integrates its acquisition of ALICO (formerly AIG’s international life insurance operations).4 1. and is better positioned for growth.8% 4. MetLife has interest rate hedges to help mitigate against lower investment income.0% -5.5% 7.. SALES/TRIMS: ACE Ltd. Sector weights adjusted for cash . MetLife’s investment exposure to peripheral Europe is very limited.6% -2.6 $71.PORTFOLIO STRATEGIES Pzena Value Performance Summary Annualized as of December 31.1% 656 Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities 0% 10% 20% 30% 40% Pzena Value* 18% 2% 9% 31% 3% 6% 7% 21% 3% Russell 1000® Value 10% 8% 12% 25% 13% 3% 9% 7% 13% 6.may appear higher than actual Quarterly Portfolio Notes The portfolio continues to have signiﬁcant exposure to cyclical businesses with sound balance sheets and solid business franchises which are among the cheapest in our investment universe.2x $13. Latin America.7% 4. consumer discretionary and insurance names.4% 0.0 20.4% 0. Exxon Mobil Corp..4% 3..9% Russell 1000® Value 13.1% 3. DETRACTORS: Computer Sciences Corp. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 7 . increasingly earns proﬁts based on mortality rather than capital markets risks. is a global life insurer with a market leading position in the U. J. Exxon Mobil Corp. Fortune Brands Home & Security.1% All returns through December 31. and while low interest rates are a drag on earnings..Gross Value .5% 3.8x 10.S. Highlighted Holding MetLife Inc. Goldman Sachs Group Inc.4% Three Year Five Year 16. and other international geographies. Our largest exposures continue to be in technology.. Abbott Laboratories Allstate Corp. After acquiring ALICO.C.6% 3. Hospitality Properties Trust RenaissanceRe Holdings Ltd.4x $4..5% 39 *Value Universe Median * Pzena Value Composite.7x 1. MetLife is now more globally diversiﬁed with more than 40% of proﬁts coming internationally.7% 3.2% Portfolio Characteristics Pzena Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell 1000® Value) Standard Deviation (5-Year) Number of Stocks (model portfolio) Source: Russell 1000® Value.
MI Developments Inc.1% 23.2% 528 Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities 0% 10% 20% 30% 40% Pzena Russell Mid Cap Value* Mid Cap® Value 22% 3% 0% 32% 0% 7% 17% 13% 6% 12% 7% 6% 32% 6% 5% 10% 6% 16% 8.6% 3.0 0.2% All returns through December 31. Delphi Financial Group.6%. Avnet also has strong downside protection through a counter-cyclical balance sheet that generates cash from working capital when revenue falls. Based on these assumptions.3% 3.5x 12. defense and aerospace.9% 3. making it one of the cheapest stocks in the portfolio.1x 1. Pzena Analysis Sector Weights Russell Midcap® Value 12. computer hardware. see Performance/Portfolio notes on page 18 Avnet Inc.97 26...0% 4.7x our estimate of normalized earnings.7% -1.See Portfolio Notes on page 18) 4Q 2011 Mid Cap Value . Avon Products Inc.1% 0. 2011 Top 10 Holdings Since Ten Inception Year 9/1/98 7.4% 3.7 $7.6% 4.4% 18. We assume revenues will grow a modest 2. and sold our position in Rent-A-Center (rent-to-own) as it reached fair value.3% 0.8% 7.8% (Representative Portfolio . Entergy Corp.3% 22. SALES/TRIMS: Rent-A-Center.3x $3.1% 3. Protective Life Corp.7% 8. Avnet is currently trading at 5. 4. Quarterly Performance Drivers CONTRIBUTORS: Delphi Financial Group Inc.9% 37 *Midcap Universe Median * Pzena Mid Cap Value Composite.PORTFOLIO STRATEGIES Pzena Mid Cap Value Performance Summary Annualized as of December 31. producer durables and technology and small weights in utilities and energy.7% 3. Our largest exposures are in ﬁnancials. Staples Inc. 8 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 .3% -1.1% Portfolio Characteristics Pzena Mid Cap Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell Midcap® Value) Standard Deviation (5-Year) Number of Stocks (model portfolio) Source: Russell Midcap® Value. as we maintained our positioning in cyclical businesses. Allstate Corp. consumer discretionary.7% 3.2x 1. 2011.2x $4.5% per annum. Primerica. Beam Inc.Gross Mid Cap Value .5% 7. medical. Avnet is facing cyclical pressures due to weakness in the semiconductor industry. DETRACTORS: Computer Sciences Corp.3 $6.8% 11.Net Russell Midcap® Value 20.8 1.0 23..4% YTD 2011 4.. Omnicom Group Hospitality Properties Trust Mohawk Industries Inc.0% 10. L-3 Communications Curtiss-Wright Corp.4% One Year Three Year Five Year 1.may appear higher than actual Quarterly Portfolio Notes There was not a signiﬁcant shift among sectors during the quarter. Notable Portfolio Actions PURCHASES/ADDITIONS: Fortune Brands. We continue to see opportunities in good businesses exposed to the economic cycle trading at attractive valuations. Sector weights adjusted for cash . Mohawk Industries Inc.2% 13. Staples Inc.4% 20.4% 3. We added positions in life insurance and housing products. Brady Corp. and margins will normalize at their long-term historical levels of 3.9x* 13.5% 3. but we believe long term Avnet will remain a leading company in an industry that will continue to consolidate and deploy capital efﬁciently (the company recently announced its ﬁrst stock buyback ever). Highlighted Holding Avnet is the world’s largest distributor of electronic components and value added reseller of enterprise computer and storage products with annual revenue of $26 billion. The company sells semiconductors and electronic components to customers in a wide variety of industries including: automotive. communications.0% 3.
we added to Skechers USA.3% 17.6% 19. volumes declined over the last decade.7% 21..4 $1.2x $0.See Portfolio Notes on page 18) 4Q 2011 Small Cap Value .1 $1. In the hospital business.4% -1.may appear higher than actual Quarterly Portfolio Notes We continue to ﬁnd cheap and interesting opportunities in the small cap universe and established several new positions in home building and industrial batteries. Webster Financial Corp. veterinary hospital visits now mostly result in medical procedures. As a result. Skechers USA Inc.1% 3. MTS Systems Corp. Con-Way Inc.0x $1. VCA Antech operates in two businesses.. Notable Portfolio Actions PURCHASES/ADDITIONS: Aspen Insurance Holdings Ltd. Huntington Ingalls Industrie 4.7% -9. with increasing volumes. Although the stock has increased in price from the $14 where we initiated our position.2 0.1 1.3x* 14.1% 1. Diodes Inc..9% 2..0% 2. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 9 .4x 12.Net Russell 2000® Value 17.5% 11.5% 12. Plantronics Inc. The laboratory business operates in a duopoly with large barriers to entry due to scale and distribution density. BBCN Bancorp Inc.0 24. Interline Brands Inc. it is still reasonably priced at 9x our estimate of normalized earnings. Primerica Inc. Sector weights adjusted for cash .9% 6. Brady Corp.0% YTD 2011 -8. National Penn Bancshares Inc.. which have appreciated close to fair value.0% 16. we also continue to ﬁnd stocks with more unique characteristics.7% 7. JAKKS Paciﬁc Inc.7% -5.8% 3.9% Portfolio Characteristics Pzena Small Cap Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell 2000® Value) Standard Deviation (5-Year) Number of Stocks (model portfolio) 7.4% 8. as some ﬂea and other medications that were traditionally sold by hospitals now can be purchased through pet and other retail stores. PHH Corp.2% 3..1% 3.25. ConMed Corp.0x 1.7% 3. Pzena Analysis *Small Cap Universe Median * Pzena Small Cap Value Composite.9% 2.PORTFOLIO STRATEGIES Pzena Small Cap Value Performance Summary Annualized as of December 31.5% One Year -8.3% 43 Russell 2000® Value 12. With an eventual return to normal volumes we project normal earnings of $2.. Highlighted Holding Besides the cyclical opportunities that abound in the market today.3% 3.9% -9.Gross Small Cap Value .96 29.0x 1. DETRACTORS: PHH Corp. We funded our buys from Delphi Financial Group (buyout offer by Tokyo Marine at a 70% premium) as well as ConMed Corp.9% 0.. SALES/TRIMS: Delphi Financial Group Inc.8% All returns through December 31.7% 8. Argo Group International BBCN Bancorp Inc. PHH Corp. The volume declines accelerated in the current weak environment as pet owners deferred treatment for their pets. similar to human medicine.6% -5. Con-way Inc. and. 2011. veterinary hospitals and laboratory testing for domestic animals (dogs and cats). see Performance/Portfolio notes on page 18 Harte-Hanks Inc. 2011 Top 10 Holdings Since Three Five Ten Inception Year Year Year 1/1/96 (Representative Portfolio . Protective Life Corp.9% 1354 Sector Weights Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities 0% 10% 20% 30% 40% Pzena Small Cap Value* 23% 0% 2% 36% 2% 5% 22% 6% 4% Russell 2000® Value 12% 3% 4% 37% 5% 7% 14% 10% 8% Source: Russell 2000® Value.. and MTS Systems Corp. Quarterly Performance Drivers CONTRIBUTORS: Delphi Financial Group Inc.5% 12. In addition. and TCF Financial on weakness...
It has strong brands such as Molson Canadian and Coors Light.Asia ex-Japan Australia / New Zealand Emerging Markets 0% 10% 20% 30% 40% Country weights adjusted for cash . technology and industrials and reduced our exposure to health care. see Performance/Portfolio notes on page 18 Hewlett-Packard Co. During the quarter.Gross Global Value . Capgemini.6% All returns through December 31.may appear higher than actual Quarterly Portfolio Notes Global stock markets recovered some of the losses suffered in the previous quarter. BP plc Travis Perkins plc Philips Electronics NV 4.4% -2. Pzena Analysis *Global Universe Median * Pzena Global Value Composite.3% -5.3% 3. Microsoft Corp. Royal Dutch Shell plc Akzo Nobel Shin-Etsu Chemical Co. Microsoft Corp..8% 3. Royal Dutch Shell plc.5% One Year -12.5% Three Year 11.2% 11. Trading at 8.7% 7. where valuation has become less attractive given relative outperformance.2% 3. Capgemini.may appear higher than actual Pzena Global Value 39% 19% 29% 8% 0% 0% 5% 50% MSCI World® Index 57% 10% 18% 9% 2% 4% 0% Quarterly Performance Drivers CONTRIBUTORS: Hewlett-Packard Co.1% Five Year -8.9% 2. we added to exposure in areas such as consumer. Overall valuations remain at very attractive levels despite the modest recovery.0x 0. 2011 Top 10 Holdings YTD 2011 -12.4% Since Inception 1/1/04 0.. it’s an attractive addition to the portfolio.1% 3..7% (Representative Portfolio . 10 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 .2x 9. Deutsche Boerse AG SALES/TRIMS: JC Penney Co.0% 10.5% 1615 Sector Weights Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities 0% 10% 20% Pzena Global Value* 10% 4% 14% 24% 3% 14% 18% 9% 2% 2% 30% MSCI World® Index 10% 11% 12% 18% 11% 11% 12% 7% 4% 4% Source: MSCI World® Index.6x $7.7% -9. Omnicom Group Inc.4x* 11.7 $52. 2011.3% -5.7 $69. Johnson & Johnson. Sector weights adjusted for cash . Raw material cost increases have been an additional drag on the proﬁtability of the industry.6% 3. Region Concentration Region Concentration North America United Kingdom Europe ex-UK Japan Dev.8% 7. BAE Systems plc Northrop Grumman Corp. and 40% in Canada.8% -13. Enel SpA Notable Portfolio Actions PURCHASES/ADDITIONS: Molson Coors Brewing Co.PORTFOLIO STRATEGIES Pzena Global Value Performance Summary Annualized as of December 31. Ltd.8x 1. DETRACTORS: MS&AD Insurance Group Holdings Inc. Abbott Laboratories.0 20.7% Portfolio Characteristics Pzena Global Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to MSCI World® Index) Standard Deviation (5-Year) Number of Stocks (model portfolio) 6.2 1. is a leading beer producer with 30% market share in the U.Net MSCI World® Index 7.1% 44 MSCI World® Index 10.S.8% -13.. Credit Agricole SA.9% 2.See Portfolio Notes on page 18) 4Q 2011 Global Value .2 0.4% 3. We believe that the company’s earnings will beneﬁt during an economic recovery.3x our estimate of normalized earnings. Beer consumption volume has been under pressure during the economic downturn as the core consumer of beer tends to be younger and more negatively impacted by the economic downturn versus the general population.1% 3.. Royal Dutch Shell plc Highlighted Holding Molson Coors Brewing Co. Inc.1% 2.9% 0.95 27.9x $25.
C. Region Concentration Region Concentration North America United Kingdom Europe ex-UK Japan Dev.may appear higher than actual Quarterly Portfolio Notes The MSCI EAFE index rose in the quarter as investor sentiment regarding global growth became less negative. Ltd.1% Three Year 13. BP plc DETRACTORS: KBC Group NV. where valuation is particularly low. LG Electronics Inc. is a French conglomerate with interests ranging from book publishing.6% 2. Sector weights adjusted for cash .7% 2.1% -14.6% 2.2% Portfolio Characteristics Pzena EAFE Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to MSCI EAFE® Index) Standard Deviation (5-Year) Number of Stocks (model portfolio) 6.A. Pzena Analysis *EAFE Universe Median * Pzena EAFE Value Composite.6 1.5 0. BP plc Highlighted Holding Lagardere S.3 $48.4% -14. Lagardere is a very attractive holding for the portfolio.4% 3. and reduced our exposure to Japan. Inchcape plc.1% -12. We added to our exposure in European companies.2% 2.2x $6.3% -12.1x 9.1x* 10. 2011.9x $13.7% -4.9% (Representative Portfolio .3% 7. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 11 .6% 2..may appear higher than actual Pzena EAFE Value 2% 33% 43% 13% 0% 0% 9% MSCI EAFE® Index 0% 23% 42% 22% 4% 9% 0% Quarterly Performance Drivers CONTRIBUTORS: Royal Dutch Shell plc.7% Since Inception 1/1/04 3. Sectors such as energy.7% Five Year -5.Gross EAFE Value . see Performance/Portfolio notes on page 18 BAE Systems plc Philips Electronics NV Azko Nobel Travis Perkins plc Cap Gemini Royal Dutch Shell plc Lagardere SCA Enel SpA Deutsche Boerse AG Shin-Etsu Chemical Co.3% 12. Lagardere SCA. Volkswagen AG SALES/TRIMS: Imperial Tobacco Group plc.6% 925 Sector Weights Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities 0% 10% 20% Pzena EAFE Value* 15% 1% 13% 22% 2% 22% 9% 9% 4% 3% 30% MSCI EAFE® Index 10% 12% 9% 21% 10% 12% 5% 10% 6% 5% Source: MSCI EAFE® Index.3% -13.0 22. 3. MS&AD Insurance Group Holdings Inc. the company is a shareholder in EADS (the parent company of Airbus) and Canal+ (TV & ﬁlm studio and distributor). 2011 Top 10 Holdings YTD 2011 One Year -13.PORTFOLIO STRATEGIES Pzena EAFE Value Performance Summary Annualized as of December 31.1% 3. While serious challenges exist for some of Lagardere’s divisions.1% All returns through December 31.. Koninklijke Philips Electronics. Lagardere’s share price declined sharply following a series of earnings warning. travel retailing to sports marketing.4% 4.7x 1. Royal Dutch Shell plc. we believe that current share price offers signiﬁcant upside potential thru a combination of corporate restructuring and earnings improvement driven by both economic recovery and operational improvement.Asia ex-Japan Australia / New Zealand Emerging Markets & Other 0% 10% 20% 30% 40% 50% Country weights adjusted for cash .6 $33. magazine printing. Trading at 5x our estimate of normalized earnings.0% 2.3% 2. Deutsche Boerse.8% 43 MSCI EAFE® Index 10.3% 2.6% 2.3% 2.See Portfolio Notes on page 18) 4Q 2011 EAFE Value . In addition.Net MSCI EAFE® Index 4. GAM Holding AG Notable Portfolio Actions PURCHASES/ADDITIONS: Total SA.95 27. where the opportunity is less compelling.0x 0.9% -6. consumer and industrial led performance while ﬁnancials and utilities detracted from performance.
Koninklijke Philips Electronics NV DETRACTORS: KBC Group NV. and U.9x our estimate of normalized earnings and 6.A.9% Since Inception 8/1/08 -3.5 450 Sector Weights Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities 0% 10% 20% Pzena MSCI European Value* Europe® Index 8% 21% 14% 0% 13% 14% 22% 18% 1% 12% 25% 10% 8% 3% 4% 10% 2% 7% 3% 5% 30% Source: MSCI Europe® Index. ACE Ltd. Pzena Analysis *European Universe Median * Pzena European Value Composite.1% 4. Region Concentration Region Concentration United Kingdom France Germany Switzerland Emerging Markets Rest of Europe 0% 10% Country weights adjusted for cash .0 $58.2% 3.5 39 MSCI Europe® Index 8. we added to some of our existing positions where the valuations are compelling.See Portfolio Notes on page 18) European Value .7% (Representative Portfolio . we believe BAE is an attractive holding.0% 7. Trading at 6. governments accounting for the majority of its revenues.may appear higher than actual Quarterly Portfolio Notes European equities. Sector weights adjusted for cash .0% 3. The company has managed the challenge on the revenue front through aggressive cost cutting and restructuring and has maintained proﬁtability in the process.Gross European Value . 12 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 .2% Portfolio Characteristics Pzena European Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Number of Stocks (model portfolio) 5.1% free cash ﬂow yield. While we see severe challenges on the revenue front for all defense contractors. are exceptionally attractive at the moment.1% One Year -16.4% -11.K. 2011 Top 10 Holdings 4Q 2011 YTD 2011 -16.7x* 10. This is particularly true for companies that have global footprints but trade at substantial discounts to their global peers given their European domicile.4x 1.may appear higher than actual Pzena European Value 40% 16% 5% 9% 3% 27% 20% 30% 40% 50% MSCI Europe® Index 36% 14% 12% 13% 0% 25% Quarterly Performance Drivers CONTRIBUTORS: Royal Dutch Shell plc.5% 3.9 $32. Capgemini.8x $11.1x 0.3% 4. Eni SpA Highlighted Holding BAE Systems plc is a U.4x 8..8% -4.5% 11. see Performance/Portfolio notes on page 18 BAE Systems plc Akzo Nobel Teleperformance Royal Dutch Shell plc Aegis Group plc Travis Perkins plc Philips Electronics Cap Gemini Gazprom OAO Lagardere SCA 4.. Aegis Group plc.1% -16.9% 3. concerns over defense budget cuts are weighing on BAE’s share price. In the quarter.K.3x $8.S.-based defense contractor.1% Three Year 11. Teleperformance SALES/TRIMS: Imperial Tobacco Group plc.3% 3.2% -6. 2011.1% -16.5% 5.Net MSCI Europe® Index 3. being at the center of current macro anxiety.6% 3.PORTFOLIO STRATEGIES Pzena European Value Performance Summary Annualized as of December 31.6% 3.4% -11. Indra Sistemas S. we believe BAE’s share price adequately reﬂects the downside risk.7% 3. Carillion plc Notable Portfolio Actions PURCHASES/ADDITIONS: Total SA. With U.4% All returns through December 31.
Samsung Electronics Highlighted Holding Huadian Power and China Power International are mainland China-based independent power producers (IPP’s).3% -18.4% -18. The companies currently trade attractively at about 6x our estimate of normalized earnings.9 52 MSCI Emerging Markets® Index 11. Hyundai Mipo Dockyard Co. fearing the effect on China’s already high inﬂation rate..1% -5.4% All returns through December 31. Aldar Properties Notable Portfolio Actions PURCHASES/ADDITIONS: Bangkok Bank. LG Electronics Inc. as such. The authorities have been reticent to raise tariffs.. Both companies have struggled due to high priced coal feedstock and an inability to pass pricing through to power consumers as a result of regulated tariffs..may appear higher than actual Pzena MSCI Emerging Emerging® Markets Value Markets Index 11% 55% 18% 16% 0% 10% 20% 30% 40% 50% 60% 10% 59% 8% 23% Quarterly Performance Drivers CONTRIBUTORS: Samsung Electronics Co. 2011 Top 10 Holdings 4Q 2011 YTD 2011 One Year -21. as such. inﬂation has begun to slow. In addition. DETRACTORS: Turkiye Vakiﬂar Bankasi.1x 7. emerging and global markets staged a sharp rebound in October before again succumbing to renewed fears later in the quarter..0 $29. Petrobras Sasol Ltd. see Performance/Portfolio notes on page 18 Gazprom OAO China Mobile Ltd.9% 2. added to our industrial and technology exposures.1% -22. regulators are offering the IPP’s tariff relief.6x $3.Net MSCI Emerging Markets® Index 3. Ltd.Gross Emerging Markets Value .0% 2.2x* 9.9x 1.9% 2.9% 3. These two factors should lead to an improvement in returns for the IPP’s over time. HCL Technologies Ltd. 2011. LG Electronics Inc. Ltd. coal price pressure has started to abate.5% 3. Usiminas Hon Hai Precision Industry Taiwan Semiconductor Mfg. Sector weights adjusted for cash . SALES/TRIMS: LG Electronics Inc.8% 2. Ltd. 3.9% -22.1% 18.1% -4.9% 2.PORTFOLIO STRATEGIES Pzena Emerging Markets Value Performance Summary Annualized as of December 31. Grand Korea Leisure Co. Pzena Analysis *Emerging Markets Universe Median * Pzena Emerging Markets Value Composite. We continue to see increasing opportunity in selected cyclicals. Chaoda Modern Agriculture Ltd. Ltd.See Portfolio Notes on page 18) Emerging Markets Value .. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 13 .7% Portfolio Characteristics Pzena Emerging Markets Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Number of Stocks (model portfolio) 7.0% 3. Region Concentration Region Concentration Africa / Middle East Asia/Pacific (ex Japan) Europe Latin America Country weights adjusted for cash . In addition. Oriflame Cosmetics Samsung Electronics Co. Hon Hai Precision Industry.3% 4.2% 3. Recently.8 $31. Co.may appear higher than actual Quarterly Portfolio Notes This quarter.1% Since Inception 1/1/08 -3.2% -21. and.2% (Representative Portfolio .9% 2.0x $5.4% Three Year 19.1% 20.2 820 Sector Weights Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities 0% 10% 20% Pzena Emerging MSCI Emerging Markets Value* Markets® Index 14% 3% 14% 22% 0% 9% 18% 7% 8% 5% 30% 8% 8% 14% 24% 1% 6% 13% 13% 9% 4% Source: MSCI Emerging Markets® Index.7x 1. the relative underperformance of India this year allowed us to slightly raise our weight in that market.
which could result in additional closures of marginal stores. Staples’ stock price fell by over 40% in 2011. The company has a dominant and growing market position.30 $2. is an industry leader with superior proﬁtability. giving the company ample resources to fund investment.3x As of December 31. and a free cash ﬂow yield in excess of 10% that is well positioned to beneﬁt from an eventual upturn in employment. including that of 2008-09. we see a company that is well positioned to meet its short and long term challenges. Management moved to quickly cut costs and focus on business improvements as volumes declined.HIGHLIGHTED HOLDING Staples. Staples has historically generated returns on invested capital averaging 12% versus peers in the 3-6% range. a strong balance sheet. and repurchase meaningful amounts of stock. Its operating margins declined by only 150-200 basis points in each of the last two recessions in spite of multiple years of negative same store sales growth (Figure 2). Despite these concerns. the world’s largest ofﬁce supplies company with estimated 2011 revenues of $25 billion.S. its large buying scale provides it with cheaper cost of goods sold.Superior business model over on-line retailers for its core customers. SPLS Earnings and Valuation Data Price/Earnings Price Staples.89 2010 $1. The words are familiar. and secular concerns about on-line competition and a slow decline in paper consumption. But even if the environment weakens in the near term. maintain a low level of debt. and it generates about one-third of its business through higher margin small and medium business customers. due to Staples’ numerous competitive strengths: . and .Dominant market position with a demonstrated ability to gain share. a balance sheet that has little net debt. $13.3x our estimate of normalized earnings. Strong Market Position.75 earlier in the year to $13. Inc.16 2011(E) Normal $1. further strengthening its market dominance. Further. and generates operating proﬁt of $19 per square foot versus its peers which are close to breakeven (Figure 1). Competitors also have signiﬁcant lease renewals on the horizon. from $23.0x 2011(E) Normal 10.7x 6.A highly cash generative business model. As a result.Stable. In addition. Staples has stabilized its margin structure at 6. Inc.89. Pzena Analysis nia to Maine compared to 116 stores for OfﬁceMax and Ofﬁce Depot combined. Staples has grown from a single-store outside of Boston to the dominant player in its industry. Yet investors have punished Staples for two reasons: cyclical exposure to white collar employment and business formation. Staples has increased its U. Staples’ strengths are complemented by a management team that has historically managed its margins exceptionally well in challenging economic times. and introduced new products and services to address both cyclical and secular challenges. and a free cash ﬂow yield of over 10%.. Staples. with 494 stores stretching from Pennsylva- Limited threat from On-Line Competitors As for every retail or supplies company. . providing additional rental cost reduction opportunity through lease renegotiations. and now trades for less than 11x current earnings and 6. Gaining Share Over the years. Staples is positioned to be a net beneﬁciary by gaining share from its relatively weaker competitors. we believe that Staples is well positioned for an economic upturn.” “near-term macro catalyst not visible. Inc. particularly to a value investor: “timing is uncertain. (SPLS) Staples.20 2010 12. Overall.Advantaged customer mix with scale efﬁciencies resulting in industry-leading proﬁtability. 2011 Source: Company Reports.” As a result. Scale Advantages and Superior Proﬁtability The company generates about 25-40% higher sales per square foot versus its peers.” “not enough growth. no discussion is complete without discussion of threat of online competitors like Amazon. share among ofﬁce superstores from 30% in 1997 to almost 60% today.5-7% at current revenue levels and will likely improve its margins should white collar employment strengthen.S. is an exceptional business franchise that helped invent the ofﬁce supply superstore concept over twenty ﬁve years ago. Staples has “monopolistic” presence in Northeast U. Staples generates more than 80% of its revenue and 14 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 . experienced management team that has successfully managed proﬁtability during the downturn. through both organic growth as well as acquisitions. Strong ﬁnancial performance combined with a much better balance sheet and dominant market presence allowed Staples to gain share from its competitors in the last two downturns. . the company has more than 50% of its leases coming due in the next three years. . We ﬁnd the stock a compelling investment case even under conservative assumptions.
order and track deliveries. As a result. we believe Staples.7 billion of debt in connection with its acquisition of Corporate Express in 2008. For example. up from an immaterial amount 5 years ago. Overall. a clear ofﬁce products catalog. this is not a new phenomenon. should be positioned to fully participate in the recovery. yet Staples has replaced these sales with other services like printing and technology services. Staples. we believe Staples can generate 11-12% return on invested capital going forward. Cash Generative and Modest Debt Staples’ business model generates substantial cash ﬂow (currently more than 10% free cash ﬂow yield). and strong cash ﬂows. and recently announced a $1. the company offers a 10% free cash ﬂow yield and. with limited growth in the market. The company bought back approximately $600 million of stock in 2011. taxes. but has managed to pay off most of it in the last two years. and single delivery of their items supported by a sales and account service team. Meanwhile. We expect that when white collar employment ultimately turns up. is well positioned to take share as its competitors continue to close marginal stores. adjusted for next day delivery promised by ofﬁce superstores. The Figure 1: Leading Operating Profit Per Square Foot of Retail Space Figure 2: Staples Superior Operating Margins $30 $25 $20 $15 $10 $5 $0 Dec-98 Oct-99 Aug-00 Staples Office Depot OfficeMax Jun-01 Apr-02 Dec-03 Oct-04 Aug-05 Jun-06 Apr-07 Dec-08 Oct-09 Aug-10 Feb-98 Feb-03 Feb-08 Apr-02 Dec-98 Aug-00 Jun-01 Dec-03 Aug-05 Jun-06 Apr-07 Oct-99 Oct-04 Dec-08 Oct-09 Source: Company Reports. Even using conservative assumptions for white collar employment recovery. Amazon is generally more expensive. which is signiﬁcant in relation to the company’s market capitalization of approximately $10 billion. janitorial and sanitary supplies generate $800 million in revenue today. we expect its capital needs for new stores will be at or below depreciation. The company has generated more than $5 billion of free cash ﬂow in last ﬁve years. company is focused on returning cash to shareholders. depreciation and amortization. ﬁts the description of a good business trading at an unusually attractive valuation. Staples is already the second largest internet retailer worldwide and should be able to effectively address that challenge. While Amazon’s prices are sometimes lower than ofﬁce supplies stores. coupled with growth in new categories. and at this time. Amazon’s business-to-consumer model relies heavily on third-party sellers that results in multiple shipments and requires effort to ﬁnd. and proven track record for identifying proﬁt-enhancing opportunities on both the product and cost sides of the business. We believe Staples will be able to sustain its margins going forward owing to its local market dominance. shipments of uncoated free sheet paper have declined about 3% per annum. since Amazon provides limited dedicated sales support infrastructure.5 billion stock buy-back program. industry-leading margins. fueled by a consistently high return on capital. currently trading at 6. should the economy struggle further. Over the last ten years.4x earnings before interest. While it is possible for an online competitor like Amazon to develop a robust business-to-business model with a sales force to service businesses. Paper Decline Manageable Although a secular decline in paper consumption is cited as a negative for Staples. further bolstering cash ﬂow.3x our estimate of normalized earnings. Summary Staples has a leading and structurally advantaged franchise in the North American ofﬁce products retail and delivery business. net debt today stands at fairly conservative 0. Businesses need one-stop ordering. The company has a history of generating high returns on capital. scale advantages.proﬁts in North America from ofﬁces and small businesses – a segment that Amazon’s business model is not geared to serve effectively. Pzena Analysis Source: Company Reports. company took on about $2. Pzena Analysis Aug-10 Feb-98 Feb-03 Feb-08 -$5 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Staples Office Depot OfficeMax FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 15 . Further.
managements learned in this latest cycle how to restore proﬁtability in a very weak demand environment. There is no shortage of evidence that these primal instincts continue to drive the markets. Investors are not rewarding the strong cash ﬂow being generated by these businesses. consensus global GDP forecasts remain a healthy 3%. as managements take a wait-and-see approach to hiring. and a demonstrated ability to adapt to a wide range of economic scenarios. they would not be coming off of a peak. proﬁtability would likely fall from current levels over the short term. as is typical heading into a recession. Treasuries and German Bunds. and if we can ﬁnd similarities in investor reaction to both fear and greed. So if faced with a deteriorating environment.8 0. Figure 5: Free Cash Flow Yields Near Peak Levels Developed Markets Nominal Free Cash Flow Yields* 1986 Through Early-January 2012 7% 6% 5% 4% 3% 2% Period Average Relative Price-to-Book Valuation to Universe 1. Investors ﬂed cyclical stocks. However.Commentary (Continued from page 3) quarter. In addition. however.6 ‘80 Low Beta High Beta Less Attractively Valued More Attractively Valued ‘83 ‘86 ‘89 ‘92 ‘95 ‘98 ‘01 ‘04 ‘07 ‘10 1% 0 ‘86 ‘88 ‘90 ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 Source: Sanford C. they will likely react quickly once again to cut costs and restructure their processes to gain efﬁciencies.S. strong balance sheets. In other words. What we ﬁnd unusual in today’s environment is that valuations reﬂect a deep sense of pessimism. A question on every investor’s mind. Many of these businesses have global footprints.2 1. yet earnings have continued to hold up well and corporate cash ﬂows are robust.4 1. If the economy enters a recession and Figure 4: Extreme Opportunity Globally for High Beta Stocks Conclusion When posed the question. the cycles of value investing appear to be ﬁrmly intact. or low beta. And in the event a downturn is avoided and growth ticks up even modestly. In addition. Bernstein & Co. and have not had the opportunity to forget those lessons quite yet. and have demonstrated their ability to restore proﬁtability quickly during the severe recession of 07-09. This has driven the valuation of cyclical (or high beta) stocks to record lows versus stable.. as well as dividend paying equities and companies with more stable earnings proﬁles. since this recovery has been relatively short.0 0. driving cash ﬂow yields to near peak levels (Figure 5). companies are generally not experiencing the robust demand that they would after a long period of economic expansion. and make a judgment as to whether economic cycles are still relevant. are industry leaders. FactSet *Capitalization-weighted data. But despite massive stock price volatility and what feels like ﬁve years of uninterrupted pain. demand weakens. we have been left with a wealth of deeply discounted. with this cycle “rhyming” with the others. mitigating the downside. Data excludes financials Source: Empirical Research Partners Analysis. cyclical businesses with sustainable business franchises. perhaps technology has aided and abetted market participants in their ability to react even more quickly to these forces. But one thing is clear: as a result of investor uncertainties. “will value ever work again?” we look to history as our guide. we are likely to experience continued strong proﬁts and cash ﬂows. stocks (Figure 4). It would not be unreasonable to see high proﬁt margins and cash ﬂow yields lasting until much later in this economic cycle. is how sustainable is the current level of proﬁtability? The honest answer is no one really knows. Solid Value Opportunities Only hindsight will allow us to make a pronouncement on the ultimate length and magnitude of the current value cycle. Pzena Analysis 16 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 . investing and making acquisitions until the prospects for sustained growth become much more visible. seeking the safe havens in the likes of U.
Companies 1500 Largest Non-U.Pzena Investment Strategies U. Companies 1500 Largest Emerging Markets Companies 750 Largest European Companies 1/2004 1/2004 1/2008 8/2008 All our strategies follow the same value investment process and philosophy.80 40 .S. 2More diversiﬁed versions also available.60 500 Largest U.S. Company Universe (Ranked 201 . Companies 2000 U. Companies 1000 Largest U. 1 While our investment process includes ongoing review of the companies in the listed universes.3000) 1000 U.S.S.40 Universe1 500 Largest U.S.40 30 .S.1200) Strategy Inception Date 10/2000 1/1996 1/1996 9/1998 Global Strategies Global Value2 EAFE Value2 Emerging Markets Value European Value 40 . Strategies Large Cap Value Value Small Cap Value Mid Cap Value Approximate Holdings 30 . the primary difference lies in the universe considered for investment. 1500 Largest Non-U.S.60 30 .40 40 . Company Universe (Ranked 1001 . our ultimate investment decisions may include companies outside of these ranges at the time of purchase.S.. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 17 .50 30 .50 40 .
00% per annum with a maximum annual fee of $70. Performance Notes Speciﬁc to Domestic Products The domestic product returns presented in this report are for our Large Cap Value. is used to indicate the investment environment existing during the time periods shown in this report. It does not constitute an offer to sell. Performance Notes PIM is a registered investment adviser that follows a classic value investment approach. October 2004 and October 2005 from a large account in the Value composite. They do not represent all of the securities purchased or sold or recommended for our client accounts during the quarter.4 million and represented 99. No leverage was employed in the accounts in any of the domestic product composites. the fees are 1. Inc. or write to PIM. tax strategies. 0. international and global value investment strategies. non-wrap fee accounts managed in the particular style represented by such composite. Mid Cap Value. The Value and Small Cap Value composites were each created on 12/31/95. the fees are 1% per annum on the ﬁrst $10 million. A substantial performance fee was deducted in each of January 2002.858. the Value composite included 18 PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011 . The current standard fee schedule for the Large Cap Value strategy is as follows: for accounts of $10 million or more. PIM has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS). accrued income. cash ﬂows. and it should not be assumed that investments in such securities were or will be proﬁtable..-traded companies at time of initial purchase. At 12/31/11. From 1996 through 2004. the annual fee payable by the founding Small Cap account was 1. Each of these benchmarks.S. for accounts under $10 million. To receive a complete list and description of PIM’s composites and/or a full presentation that adheres to the GIPS standards.5% per annum. 20th Floor. and 0. 0. to $1. Accounts enter the relevant domestic product composite at the beginning of the ﬁrst full month under management. Notable Portfolio Actions are selected from representative portfolios based on the most signiﬁcant portfolio purchases and sales.8 million and represented 100% of our assets in this style. the Russell 1000® Value Index is used as a benchmark for our Value and Large Cap Value strategies. the Mid Cap Value composite included 6 accounts with total assets of $293. the Small Cap Value composite included 45 accounts with total assets of $1.2 million and represented 97. To illustrate the compounded effect of the deduction of a 1% annual fee on a hypothetical investment of $1.3 million and represented 100% of our assets in this style. stocks. PIM managed $13. Past performance is no guarantee of future results. Mid Cap.532 after fees. or a solicitation of an offer to buy. accrued income. Inc.611 after ﬁve years before fees and $1. 0. Any such offering will be made only in accordance with the terms and conditions set forth in the respective offering memoranda for the products. Such fees generally are recorded against accounts with quarterly fee arrangements in the ﬁrst month of the applicable quarter. the fees are 0.S. the fees are 1.S. Fees for partial periods. Asset-based fees (which generally range from 0. At 12/31/11.000 in an account where the average annual return before fees was 10% for a 10-year period. Net of fees returns reﬂect deductions of all management fees paid by the accounts in the relevant domestic product composite. All fees are recorded against each account in the composite monthly or quarterly (in the ﬁrst month or quarter the account is under management) depending upon the fee schedule applicable to the account. During that same period. total return which includes all dividends. 0. with a maximum annual fee of $100.000 per annum maximum fee. The speciﬁc portfolio securities discussed in the Highlighted Holdings section of this report were held in our Large Cap. 0.. Each domestic product composite is size weighted. total return basis (i. as well as the S&P 500 Index.1200th largest U. The founding Small Cap account was opened 12/31/95.001-3.5% to 1. Each Russell Index is a registered trademark or trade name of The Frank Russell Company. The Frank Russell Company is the owner of all copyrights relating to the Russell Indexes and is the source of certain performance statistics cited herein.519 million in assets under various U.S.60% per annum on the next $50 million.000. the initial investment would have grown to $1. NY 10036 or berger@pzena. The Mid Cap Value composite was created on 9/1/02. Holdings will vary among client accounts as a result of different product strategies having been selected thereby.594 at the end of ten years before fees and $2. As a result of the change to daily unit values. Further discussion regarding our advisory fees is contained in our Form ADV. cash ﬂows of 10% or greater prompt a locking of market values on the day prior to the cash ﬂow. realized and unrealized gains or losses and are after brokerage transactions charges) which are linked.089 after fees. dollars. realized and unrealized gains or losses and are after brokerage transaction charges) and are linked monthly. Value. such as those created when an account opens or closes during the middle of a month or quarter or when signiﬁcant additional cash is added to an account. and to $2. and assuming reinvestment of all dividends and interest. Additional information is available upon request regarding policies for calculating and reporting returns. except that from inception through 4/1/2002.S. The Large Cap Value Service is a portfolio generally consisting of 30-40 stocks taken from a universe generally consisting of the 500 largest U. any products referenced herein.000 largest U. and Small Cap Value Services composites.000.5% of managed assets depending on account size) are recorded against such accounts monthly or quarterly depending on the fee arrangement applicable to the account. Top 10 holdings for our strategies have been derived from a representative portfolio that best represents the implementation of the strategy. interest. include all dividends.-traded companies at the time of initial purchase. and the past performance of any accounts or commingled funds managed by PIM should not be considered indicative of the future performance of any accounts or commingled funds managed by PIM. includes all fee-paying and non fee-paying. for accounts of $10 million or more. and highlights certain investment products that Pzena Investment Management.e. There is no assurance that any securities discussed herein remain in your portfolio at the time you receive this report or that securities sold have not been repurchased. and 0.568.40% per annum on the next $200 million of assets. Investment return and principal value of an investment will ﬂuctuate over time.” As of 12/31/11.35% thereafter.-traded companies at time of initial purchase. As of 12/31/11. returns are presented based on daily unit values (day weighted. interest. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings.100 after one year before fees and $1. The standard annual fee payable by all PIM Small Cap accounts is 1%. 82 accounts with total assets of $1. PIM is the operating company of Pzena Investment Management.com.018. From 2005 forward. At 12/31/11. New York.50% per annum thereafter. Mid Cap Value returns are also included in our Value composite. the Value Service is a portfolio generally consisting of 30-40 stocks taken from a universe generally consisting of the 1. etc. The information in this document is for informational purposes only. No accounts with any signiﬁcant client-imposed investment restrictions are included in any composite. January 2003. the need to lock values for large cash ﬂows is no longer required.75% per annum on the next $40 million. is a publicly traded company whose shares are listed on the New York Stock Exchange under the ticker symbol “PZN. The S&P 500 Index and all Russell Indexes are unmanaged and cannot be invested in directly. Quarterly Performance Drivers are selected from composite performance based on the most signiﬁcant contributors and detractors to performance.9% of our assets in this style. The current standard fee schedule for both our Value and Mid Cap Value strategies is as follows: for accounts under $10 million. the Small Cap Value Service is a portfolio generally consisting of 40-50 stocks taken from a universe generally consisting of the 1.70% per annum on the ﬁrst $25 million of assets.5%. LLC (“PIM”) offers. At 12/31/11. discretionary. The Russell 2000® Value Index is used as a benchmark for our Small Cap Value strategy. Closed accounts are included for each full month prior to closing. the Mid Cap Value Service is a portfolio generally consisting of 30-40 stocks taken from a universe generally consisting of the 201st . 120 West 45th Street. and is in U. contact Joan Berger at (212) 583-1291. Pzena Investment Management.5% of our assets in this style.000 largest U.50% per annum on the next $75 million of assets. and was the sole account managed by PIM in the Small Cap style until 5/31/2000.Portfolio / Performance Notes Portfolio Notes The speciﬁc portfolio securities discussed in the current portfolio strategy sections of this report were selected for inclusion based on their ability to help you understand our investment model for that particular product strategy.346 after fees. Highlighted Holdings are selected randomly from a rotation of our product strategies and are not selected based on performance. Small Cap accounts with assets less than $10 million are charged 1.5% per annum with a $100. All Cap and Global strategies during the fourth quarter of 2011. the returns are calculated on a time weighted. Holdings also may vary among client accounts as a result of opening dates. includes cash and cash equivalents. the Large Cap Value composite included 56 accounts with total assets of $4. creating sub-periods of performance which are then linked. Value.S. For the period 9/1/98 (inception) through 12/31/01. All domestic product returns in this report have been presented both gross and net of investment management fees.3% of the Value Service Composite was represented by non-fee paying accounts. Part 2A. are recorded in the month of occurrence. October 2003. and the Russell Midcap® Value Index is used as a benchmark for our Mid Cap Value strategy. The Large Cap Value composite was created on 10/1/2000.
0. Investments made by the Firm for the portfolios it manages in the Pzena Global Value Service Composite may differ from those of the MSCI World Index. LLC has presented a new composite for performance as of 6/30/08 for both the EAFE Value and Global Value Services. 0. The MSCI Emerging Markets Index is a free ﬂoat-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. there was only one portfolio for each product. The EAFE Value and Global Value Composites were created on 6/1/08.25% per annum on all assets.-traded securities and the 1. The MSCI Europe Index is a free ﬂoat-adjusted market capitalization index that is designed to measure the equity market performance of the developed markets in Europe. and is net of withholding tax on dividends from a Luxembourg tax perspective.75% per annum on assets above $300 million.089 after fees. FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS 19 .60% on the next $200 million and 0. computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof). Terminated portfolios are removed from the Composites after the last full month that the portfolio is under ﬁrm management.8 million and represented 100. Such fees generally are recorded against accounts with quarterly fee arrangements in the ﬁrst month of the applicable quarter. The Index cannot be invested in directly.80% on the next $200 million and 0. FX currency transactions were used to transact in equity securities only. includes cash and cash equivalents.55% per annum on the next €80 million. and all such parties hereby disclaim all warranties of originality. The European Value composite was created in 8/1/08. 1. Please note that PIM. The benchmark is used for comparative purposes only and generally reﬂects the risk or investment style of the investments reported on the schedule of investment performance. investment results will differ from those of the benchmark. The historical returns have also been updated to reﬂect the new.00% per annum on the ﬁrst $10 million. The Pzena Emerging Markets Value Service is a portfolio consisting of 40-80 stocks taken from a universe generally consisting of the 1500 largest companies in non-developed markets at time of initial purchase. The global value returns presented in this report are for the Pzena Global Value Service.0% of managed assets depending on account size) are recorded against such accounts monthly or quarterly depending on the fee arrangement applicable to the account. Investment results for the Composites will differ from those of the benchmark. Accordingly.1 million and represented 100% of our assets in this style. 0.45% per annum on the next €150 million. Composite returns for the European Value Service Composite are benchmarked to the MSCI Europe Index (the “Index”). Accordingly. Investments made by the Firm for the portfolios it manages in the Pzena European Value Service Composite may differ from those of the MSCI Europe Index.75% per annum on the ﬁrst €20 million.0 billion. Neither MSCI nor any other party involved in or related to compiling. interest.25% per annum on the ﬁrst $10 million. computing or creating the data have any liability for any direct.S. As of 12/31/11.00% per annum on the next $40 million.S. and 0.55% per annum on assets above $300 million. Part 2A. The Pzena EAFE Value Service is a portfolio generally consisting of 30-50 stocks taken from a universe generally consisting of the 1. These portfolios represented PIM’s original funds which consisted of ﬁrm and employee capital. and to $2. The new composite includes all portfolios within each respective product that are not mutual funds. merchantability or ﬁtness for a particular purpose with respect to any of such data. The emerging markets returns presented in this report are for the Pzena Emerging Markets Value Service. Each of PIM’s EAFE Value. non wrap fee portfolios which are managed on a fully discretionary basis by PIM. Composite returns for the Global Value Service Composite are benchmarked to the MSCI World Index (the “Index”). The Index cannot be invested in directly. For the time period of 1/1/04 to 1/31/06 the fee schedule for the EAFE Value Composite was 1. The standard fee schedule for Emerging Markets Value is currently: 1.0 billion. 0.S. accuracy. Returns are calculated in U. As of 12/31/11. special. such as those created when an account opens or closes during the middle of a month or quarter or when signiﬁcant additional cash is added to an account. The benchmark is used for comparative purposes only and generally reﬂects the risk or investment style of the investments reported on the schedule of investment performance. The benchmark is used for comparative purposes only and generally reﬂects the risk or investment style of the investments reported on the schedule of investment performance. PIM’s Global Value Service Composite included 24 accounts with total assets of $3. Global Value.1 million and represented 100% of our assets in this style. The Composites are size weighted. The MSCI EAFE Index is a free ﬂoat-adjusted market capitalization index that is designed to measure developed market equity performance. The benchmark is used for comparative purposes only and generally reﬂects the risk or investment style of the investments reported on the schedule of investment performance. All international. Eligible new portfolios are added to the Composites at the beginning of the ﬁrst full month under management. the initial investment would have grown to $1. 0. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express consent. consequential or any other damages (including lost proﬁts) even if notiﬁed of the possibility of such damages. The MSCI World Index is a free ﬂoat-adjusted market capitalization index that is designed to measure developed market equity performance.611 after ﬁve years before fees and $1. and Canada. To illustrate the compounded effect of the deduction of a 1% annual fee on a hypothetical investment of $1.70% per annum on the next $50 million.25% per annum on all assets. investment results will differ from those of the benchmark. The Pzena Global Value Service is a portfolio generally consisting of 40-60 stocks taken from a universe generally consisting of the 500 largest U. However. indirect. and is net of withholding tax on dividends from a Luxembourg tax perspective. to $1. The Emerging Markets Value composite was created in 1/1/08. For the time period of 1/1/04 to 4/30/06 the fee schedule for the Global Value Composite was 1.100 after one year before fees and $1. Further discussion regarding our advisory fees is contained in our Form ADV. The European value returns presented in this report are for the Pzena European Value Service.552. european and emerging markets returns have been presented both gross and net of investment management fees.500 largest non-U. Composite returns for the EAFE Value Service Composite are benchmarked to the MSCI EAFE Index (the “Index”). As of 12/31/11. including the U.594 at the end of ten years before fees and $2. Composites include all Pzena Global Value Service and Pzena EAFE Value Service porfolios managed according to the respective service since product inceptions of January 2004.2% of the Global Value Composite was represented by non-fee paying accounts. in no event shall MSCI.S. total return basis and includes all dividends. The Pzena European Value Service is a portfolio generally consisting of 40-60 stocks taken from a universe generally consisting of the 750 largest European companies globally at time of initial purchase. companies at time of initial purchase. Asset-based fees (which generally range from 0.4 billion. Without limiting any of the foregoing. excluding the U.80% per annum on the next $40 million. The Index cannot be invested in directly.500 largest non-U. No leverage was employed in the accounts in the composite. punitive. No accounts with any signiﬁcant client imposed investment restrictions are included. more complete composites. 0. which generally have market capitalizations around $1. global.0% of our assets in this style. completeness. 0.532 after fees. companies at time of initial purchase. Fees for partial periods. and is net of withholding tax on dividends from a Luxembourg tax perspective. The standard fee schedule for the EAFE Value and Global Value Composites is currently: 1.Performance Notes Speciﬁc to International and Global Products The international value returns presented in this report are for the Pzena EAFE Value Service. accrued income and realized and unrealized gains or losses. and the time period of 1/1/04 to 4/30/06 for the Global Value Service.000 in an account where the average annual return before fees was 10% for a 10-year period. which generally have market capitalizations above $2 billion. 0. As of 12/31/11. and is net of withholding tax on dividends from a Luxembourg tax perspective. Previously. where applicable.90% per annum on the next $50 million. includes all fee-paying and non fee paying. Investments made by the Firm for the portfolios it manages in the Pzena Emerging Markets Value Service Composite may differ from those of the MSCI Emerging Markets Index.4 million and represented 100% of our assets in this style. PIM’s European Value Service Composite included 2 accounts with total assets of $58. The standard fee schedule for European Value is currently: 0.S.5% to 1.346 after fees. The Index cannot be invested in directly. any of its afﬁliates or any third party involved in or related to compiling. which generally have market capitalizations above $1.40% on assets above €250 million. for the time period of 1/1/04 to 1/31/06 for the EAFE Value Service. PIM’s EAFE Value Service Composite included 3 accounts with total assets of $77. Composite returns for the Emerging Markets Value Service Composite are benchmarked to the MSCI Emerging Markets Index (the “Index”). European Value and Emerging Markets Value composites is calculated on a time-weighted.S. As of 12/31/11. dollars (“USD”). PIM’s Emerging Markets Value Service Composite included 3 accounts with total assets of $193. and Canada. PIM presented two separate composites for performance that had been linked. Investments made by the Firm for the portfolios it manages in the Pzena EAFE Value Service Composite may differ from those of the MSCI EAFE Index. are recorded in the month of occurrence. and assuming reinvestment of all dividends and interest. which generally have market capitalizations above $3.
PZENA INVESTMENT MANAGEMENT 120 WEST 45TH STREET | NEW YORK.COM © Pzena Investment Management. All rights reserved. . NY 10036 | TEL: (212) 355-1600 | FAX: (212) 308-0010 | WWW.PZENA. 2012.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.