Allianz Global Investors Why invest in small caps – and how to invest successfully? September 2013 Allianz Global Small Cap Equity Ultra-low nominal interest rates and negative real interest rates have led many investors in developed countries to shift their money into equities, which still offer an attractive potential for real return. Andrew Neville Fund manager When investing in equity markets, most investors tend to prefer stocks of large companies (“large caps”, “blue chips”), mostly for liquidity reasons. Hence, large caps have been more popular. This has resulted in new historical highs for major equity indices such as the S&P 500 – which peaked in August 2013 at a level of 1,709.67. What has largely gone unnoticed, however, is the equally strong performance shown by smaller companies (“small caps”). Indeed, small caps have historically tended to perform better than large caps, particularly in times of economic recovery. Indeed, while large caps tend to be driven by global macroeconomic trends, the performance of small caps is more heavily dependent on company-specific fundamentals and local economic factors. Therefore, partly replacing large caps exposure with an allocation to global small caps may improve the risk-return profile of a portfolio significantly. Local knowledge is key Global small caps are thus blessed with the twin prospects of high absolute returns as well as attractive risk-adjusted returns. However, successfully investing in this market segment requires specialized and scarce capabilities. As the small cap universe is particularly large and companies often have strong ties to domestic markets, dedicated research resources as well as a local presence are indispensable. Diversification taken one step further Global diversification has played an increasingly important role as part of investors’ strategic asset allocation, in particular with regard to the management of portfolio risk factors. But as many investors tend to have a large cap bias in their portfolios, global diversification alone is not enough. FOR FUND DISTRIBUTORS AND PROFESSIONAL INVESTORS ONLY Understand. Act. Allianz Global Small Cap Equity Blake Burdine San Diego Bjoern Mehrmann Frankfurt Andrew Neville London Frank Hansen Frankfurt John McCraw San Diego Dennis Lai Hong Kong Robert Marren San Diego Amanda Su Hong Kong Matthew Axline San Diego important part of our investment process. This is reflected by the more than 2,000 company meetings p.a. undertaken by our small cap experts. Using this local expertise allows us to gain a structural information advantage. Allianz Global Small Cap Equity combines the best ideas from our dedicated and stand-alone regional portfolios in the US, Europe, Japan and Asia-Pacific (ex Japan). Thus, we are able to offer investors a global portfolio consisting of those companies where our regional fund managers have the highest conviction. Koji Nakatsuka Tokyo Stephen Lyford San Diego Michael Schopf Frankfurt Matthew Hall London Peter Kraus Frankfurt Exploiting information inefficiencies Analyst coverage of small caps is much lower than that of blue chips. Of the overall 16,000 listed smaller companies in the world, 5,000 are not covered by a single broker and almost 6,000 are covered by less than 5 brokers. This compares with an average of 30 analysts covering each stock in the German large cap index DAX. Hence, the small cap segment is underresearched and characterized by lower information efficiency. In addition, small cap companies often have strong ties to local culture, local business practices and local trends, which results in even higher information barriers in particular for outsiders. Why is local presence important ? We strongly believe that local expertise is the key to identifying the best small companies around the globe. To deeply understand an investment candidate’s business model, its potential and real value, it is indispensable to be familiar with the local markets and to understand their commercial environment. Local analysts and managers can directly meet with the company management, and with customers. They thus gain deeper insights into a company‘s situation, its opportunities and challenges. Our strategy: Choose locally – invest globally In the Allianz Global Small Cap Equity fund, we combine the expertise of four teams of regional small cap experts, who already successfully manage regional small cap portfolios. These regional managers are in a much better position to understand the local challenges of their investments. Consequently, in-depth company research on a local level is the most Tadano is an example of such a high conviction idea: This company is the largest manufacturer of cranes and aerial work platforms worldwide. Tadano has a significant market share of 50 % in the Japanese market and 25 % market share globally. It benefits from the ongoing reconstruction work in Japan follow ing the devastating 2011 earthquake and tsunami. Growing infrastr ucture projects in emerging countries should further drive its global expansion. Another interesting investment idea is the French health care company Sartorius Stedim Biotech. The company is one of the world‘s leading providers of laboratory and process technologies and equipment, with a focus on the bio-pharma market. It has a strong basis in all growth regions with a share of 20 % of total sales in Asia. IDEA GENERATION IDEA GENERATION IDEA GENERATION IDEA GENERATION FUNDAMENTAL RESEARCH FUNDAMENTAL RESEARCH FUNDAMENTAL RESEARCH FUNDAMENTAL RESEARCH PORTFOLIO STRUCTURING PORTFOLIO STRUCTURING PORTFOLIO STRUCTURING PORTFOLIO STRUCTURING SUB PORTFOLIO CONSTRUCTION SUB PORTFOLIO CONSTRUCTION SUB PORTFOLIO CONSTRUCTION SUB PORTFOLIO CONSTRUCTION USA Sub Portfolio 80 – 100 stocks European Sub Portfolio 40 – 45 stocks Asia Pacific ex Japan Sub Portfolio 15 – 20 stocks Global Small Cap Portfolio 155 – 190 stocks Japanese Sub Portfolio 20 – 25 stocks Allianz Global Small Cap Equity Portfolio construction: Combining the best picks of our local experts into one fund The Allianz Global Small Cap Equity fund is not a reflection of the ability of any one person or any team – it is a reflection of the combined abilities of our regional small cap teams who implement their highest conviction ideas within a risk-controlled portfolio framework. Lead manager Andrew Neville constructs the portfolio and monitors overall risk. He acts as the sparring partner of the regional management teams, and an efficient information flow on investment ideas, portfolio positioning as well as risk exposures is constantly ensured. Key information ISIN / German security no. LU0885397702 / A1KCHF Benchmark MSCI World Small Cap Total Return (Net) Umbrella Allianz Global Investors Fund Management company Allianz Global Investors, Luxembourg S.A. Custodian bank State Street Bank Luxembourg S.A. Launch date 18 / 06 / 2013 Fund manager Andrew Neville Fund currency USD Financial year end 30 / 09 First financial year until 30 / 09 / 2013 Distribution accumulation Registered for sale in AT, DE, NL, LU, FI, FR, ES, SE, IT, NO, GB Front-end load (%) 1 0.00 (max. 2.00) Management fee (% p.a.) 1 currently 0.88 (max. 1.00) Administration fee (% p.a.) 2 currently 0.20 (max. 0.50) TER in % 3 n.a. ny front-end load charged at the acquisition of the fund units may accrue in full to the sales partner. The exact amount shall be mentioned by the sales part ner during A the investment advice talks. This also applies to any trail fees paid by the Management Company to the sales partner from the management fee. The administration fee applies a flat rate to certain fund expenses that have so far been charged separately to the Fund’s assets and which are included in the TER. 3 TER (Total Expense Ratio): Total cost (except transaction costs) charged to the fund during the last financial year. Will only be available after the first business year. 1 2 A performance of the strategy is not guaranteed and losses remain possible. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Allianz Global Small Cap Equity is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable share capital organised under the laws of Luxembourg. The volatility of the fund unit prices may be strongly increased. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and /or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and /or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. Contact the management company Allianz Global Investors Luxembourg SA in the fund’s country of domicile Luxembourg or the issuer electronically or via mail at the address indicated below for a free copy of the sales prospectus, the incorporation documents, the latest annual and semi-annual financial reports and the key investor information document in English. Please read these documents - which are solely binding - carefully before investing. This is a marketing communication. Issued by Allianz Global Investors Europe GmbH (www.allianzgi-regulatory.eu), a limited liability company incorporated under the laws of Germany with its registered office at Bockenheimer Landstrasse 42 – 4 4, D-60323 Frankfurt / Main, authorized by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted. Source: Allianz Global I nvestors; data as at 31 / 08 / 2013