High Dividend Investing Strategies for 2011

High Dividend Investing in 2011

DIY - Dividend, Income & Yield

Presented by:

Carl Ghielen, CEFA
Client Portfolio Manager

Geneva, Switzerland
December 7, 2010

For institutional use only.
Not for inspection by, distribution or quotation to, the general public.

Key Messages

• Markets supported by QE2 Fed (strong liquidity flows)
• Goals QE2: stimulating economy, stop declining inflation (expectations)
• ECB on sideline, mainly because of solidly performing (German) economy
• QE2 affects currencies: weak USD, strong EUR and Asian currencies
• Sovereign debt worries resurface due to political discussion about
succession of euro zone support facility
• Neutral equities vs. fixed income; positive for commodities and real estate
• Preference for emerging markets: high growth, low debt
• Preference for yield: dividend, high yield, EMD
• Interest rates and bond yields will remain lower for longer

2 Not for inspection by, distribution or quotation to, the general public.

TAA Summary

St r a t e g y R e co m m e n d a t i o n s
+ = -
TA A CO M M EQ
• Neutral equities vs. fixed income
R EI T FI

• (Slight) overweight commodities, real estate equities
EQ U I T Y
- Se c t o r s EN GY ST A PL S D I SC R ET • Defensive sector tilt
H L TH M A TS INDUS
IT U T IL F IN ' L
• Themes: commodities (energy), earnings momentum
T EL C O
(IT) and cheap quality (health care, telecom)
- Re g io n s G EM A SIA U SA
JP N • Overweight emerging markets, underweight
EU R developed markets
- Si z e LGE SM L
M ID

- St y l e H D IV CO RE
G RW T H V A LU E • High Dividend is our preferred style
FI X E D
- M arket s EM F X A BS IG C
EM R a t e s IF L • Modest positions
EM D H C
HY
• Overweight EMD, High Yield, Govt bonds
SB L • Underweight Investment Grade
GO V T


Bond yields remain low and risk premiums attractive

‘New’ ranges to persist

Source: Thomson Reuters Datastream, ING IM


The “search for yield” is on

Higher yielding credit obvious place to look

Source: Thomson Reuters Datastream, ING IM


Equities: three themes for 2011

• Some have it all: “Emerging” markets have emerged

• Increase in corporate spending

• The scarce asset premium:
sustainable dividend income in developed markets &
sustainable growth at reasonable prices in emerging markets


Some have it all: Emerged equity markets

• Low public and private debt levels

• High economic growth

• Superior corporate profitability

• Valuations are still relatively attractive

• Flooded by investors’ money flows. It is a crowded trade

• Prominent voice in international decision-making

• Still underrepresented in market indices relative to their GDP-weight


“Emerging / emerged” versus “Developed” markets

Net debt/Equity 12 Month earnings grow th EM versus DM

200% 80.0%

150% 60.0%

100% 40.0%

50% 20.0%
0% 0.0%
jan/95

jan/97

jan/99

jan/01

jan/03

jan/05

jan/07

jan/09

96

98

00

02

04

06

08

10
-20.0%

n/

n/

n/

n/

n/

n/

n/

n/
ja

ja

ja

ja

ja

ja

ja

ja
-40.0%
EM DM
Emerging World

Return on Equity PE premium/discount emerging markets

17. 0 0 %
1.15
16 . 0 0 %
15. 0 0 %
1.05
0.95
14 . 0 0 %
13 . 0 0 %
0.85
12 . 0 0 %
0.75
11. 0 0 %
0.65
10 . 0 0 % 0.55
9 .0 0 % 0.45
8 .0 0 % 0.35 31/01/95

31/01/97

31/01/99

31/01/01

31/01/03

31/01/05

31/01/07

31/01/09
dec/95

dec/97

dec/99

dec/01

dec/03

dec/05

dec/07

dec/09

World EM
Source: Datastream, ING IM


But too much of a good thing can…

• Create over optimism

• Lead to inadequate allocation of capital => ROE declines

• Provoke international frictions
• Protectionism
• Exchange rates

• Transform a crowded trade into a bubble

We are still far from bubble territory in EM


Corporate spending: driver for developed markets

Strong Corporate Cash Flows
+
Strong balance sheets

Buy Backs Dividends M&A Capex

Low/Medium Medium/High

Corporate Confidence

We are here


There is room for companies to spend

AverageNet debt/Equity non-financials Free Cash flow / Capex

70% 400%
350%
60%
300%
50% 250%
200%
40%
150%
30% 100%

dec/93

dec/95

dec/97

dec/99

dec/01

dec/03

dec/05

dec/07

dec/09
93

95

97

99

01

03

05

07

09
c/

c/

c/

c/

c/

c/

c/

c/

c/
de

de

de

de

de

de

de

de

de

How M&A is financed
Global M&A volum e

70%
1500
60%
1250
50%
1000
40%
750
30%
500
20%
250 10%
0 0%
Cash Stock Cash & Other
01

02

03

04

05

06

07

08

09

10
rt/

rt/

rt/

rt/

rt/

rt/

rt/

rt/

rt/

rt/

Stock
m

m

m

m

m

m

m

m

m

m

Source: Datastream,
Bloomberg, ING IM


Attractive valuations

Absolute Valuation Relative Valuation
Trailing PE (US m arket) Earnings yield less real fed funds

35 12.0%

30 10.0%

25 8.0%

20 6.0%

15 4.0%
10
2.0%
5
0.0%

jan/80

jan/83

jan/86

jan/89

jan/92

jan/95

jan/98

jan/01

jan/04

jan/07

jan/10
D -81
D -83
D -85
D -87
D -89
D -91
D -93
D -95
D -97
D -99
D -01
D -03
D -05
D -07
9
-0

-2.0%
ec
ec
ec
ec
ec
ec
ec
ec
ec
ec
ec
ec
ec
ec
ec
D


Equity valuations are discounting zero earnings growth.
This seems only plausible in a double dip scenario.


Searching for sustainable dividend income in DM

European dividend yield at par with corporate
Trailing pay out ratio
bond yield

-3.5 60%

-3
-2.5 50%

-2
-1.5 40%
-1
déc.- déc.- déc.- déc.- déc.- déc.- déc.- déc.-
-0.5 02 30%
03 04 05 06 07 08 09

jan/73

jan/76

jan/79

jan/82

jan/85

jan/88

jan/91

jan/94

jan/97

jan/00

jan/03

jan/06

jan/09
0
0.5

• Dividends become an important income generator
• Dividend yield approaching or exceeding bond yields,
more specifically in developed markets
• Low pay out ratios, strong balance sheets and high profitability
support double digit dividend growth


Dividends have lagged earnings


We expect double-digit dividend growth
provided corporate confidence returns


Conclusion

• Outlook for equities is good

• Expect returns in line with earnings growth

• Focus on growth markets

• Corporate spending as the icing on the cake

• Focus on yield


ING High Dividend Strategies

The search for yield


Boutique Structure


Equity Value Boutique

Equity Value Team
Average experience 14 yrs

3 Equity Boutiques Strategy & Tactical Allocation
Nicolas Simar (Head) Euro Top-Down Research
Core/Specialties/
Emerging Markets Manu Vandenbulck Europe 12 members
Moudy El Khodr Global Average exp. 14 yrs

Herman Klein Global
Adour Sarkissian US
5 Fixed Income Boutiques
Pierre Nicolas Belgian
MM/Core/Credits/Loans/
EMD/Structured Investments

Central Trading Team Diagnostics Team Corporate Analytics Client Portfolio Manager

15 Traders 13 members Developed (19) & Emerging Carl Ghielen
13 + 2 in US Fixed Income traders: 7 (7) Markets Analysts
Exp. 20 yrs
Average exp. 13 yrs Average exp. 8 yrs Average exp. 13 yrs


Pioneer in High Dividend strategies

Stable & Consistent Process

April 1999: May 2002: March 2005: September 2007:
Euro High Dividend Off-Shore Fund Global High Dividend Global Equity Dividend International High
Dividend Equity Income
(4 Stars Superior Rating) Off-Shore Fund Closed-End Fund (IGD)
Closed-End Fund (IID)
(4 Stars)
1999 2010

Feb 2000: December 2004: March 2005: May 2007: June 2007:
Global Dividend Aandelen Europe High Dividend U.S. High Dividend Asia Pacific ex-Japan International Equity
Mutual Fund (4 Stars) Off-Shore Fund Off-Shore Fund High Dividend Dividend SMA/MF
(3 Stars) (5 Stars) Off-Shore Fund
June 2007:
Global Equity
Dividend SMA/MF

High dividend investing since 1999

Fund ratings as of 30 September 2010

19

Key Benefits High Dividend Strategies

Attractive and consistent risk/return profile offering low
Product volatility and clear defensive characteristics
Actively managed with a contrarian bias

Disciplined, repeatable and systematic investment process
Process Risk control and portfolio positioning to ensure strategic
diversification

People Clear responsibilities and accountability
Strong, stable and experienced investment team

Performance Since 1999
Strong long-term track record


Identifying the best dividend yielding stocks

Outperform the equity market in the long run (through the cycle)
Objectives Offer a lower volatility (downside protection, upside participation)
Offer a higher dividend yield (>100bp versus market)

Active portfolio management (high active share)
Beliefs Alpha generation from bottom-up stock selection
Conviction portfolios : select the names that offer value
Fundamental, valuation driven investment style

Aim to achieve attractive risk adjusted returns through the cycle


Dividends are the primary source of total return…

True across the world


Universe reduction

Process combines quantitative screening and fundamental analysis to identify
attractively priced stocks with high and sustainable dividend yields

Universe identification
60 000 names

Liquidity screen (Market Cap > Eur 1 bln & ADV > Eur 300 mln)
600 – 1 200 names

Dividend screen (Yield & Stability) Dividend Yield minimum:
Global, Euro, Europe: 2.5%
300 - 500 names
US: 2.0%

Fundamental analysis & New ideas
150 - 200 names

Portfolio construction
100 - 120 names

Example: Global Universe
For illustration purpose only. The above investment process may undergo changes depositing on the investment style and the market condition.


Investment Process - Overview

Quantitative Risk
1 Filter 2 Fundamental
Analysis 3 Portfolio
Construction 4 Management

Identify opportunities Back top picks Build high conviction Achieve consistency
portfolio

Quantitative screening Dividend sustainability Active management Risk Control
Historical data Attractive valuation Stock driven Sell discipline
Conviction based Contrarian bias
weighting

Attractive yields Sustainable yields Diversified portfolio Consistent Risk Profile

Active management within a disciplined framework


Sell discipline & rebalancing

Dividend Yield below 2% (1.5% for US) = liquidation
Sell Stock price goes up (= dividend yield goes down) = profit taking / sell
Dividend is reduced or cut = liquidation

Reinvestment in less performing stocks (contrarian philosophy) or
news ideas

Rebalancing to original weight
Rebalancing Profit taking on outperforming stocks
Reinvestment in less performing stocks

Disciplined & Contrarian

ING Investment Management 25

Performances


Global High Dividend

Since
Oct YTD 3 years 5 years
1 year inception
2010 2010 (ann.) (ann.)
(May02) (ann.)
ING (L) Invest Global High
+1.23% +10.06% +19.45% -7.75% -0.14% +1.16%
Dividend

MSCI World (net return) +1.89% +9.84% +19.68% -6.85% -0.46% -0.05%

MSCI World High Dividend
+1.54% +8.51% +17.87% -8.26% -0.61% +0.27%
Yield (net return)
Relative performance
-0.66% +0.22% -0.23% -0.90% +0.32% +1.22%
vs MSCI World
Gross performance ING (L) Invest Global High Dividend fund in EUR, Benchmark: MSCI World Net return Index, as of 31 October 2010
Past performance may or may not be sustained in future and it does not indicate to the future returns in any manner.

• Strong relative performance over the summer months, evaporated in the Sep/Oct rally

• Outperformance year to date, more so versus high dividend style indices

• Clear style tailwind in the US and strong style headwind in Europe


Global Style Returns YTD - Regions

20%

Style working, but
15%
not in Europe!

10%

5%

0%
m

)
)

k

y

g
M
th

e
th

PE

d
e
PB
ze
l it
tu

is

ri n

lu

el
at
(6
2m

w
bi
R
en

Si

Va

Yi
R

ea

ro
ita
m

e
(1
om

G
th

G

iv
sit
tu

e
of

D
m

w

sit
e
en

po

e
M

Pr

ro
tu

sit
sit

po
om

om
e

G
e
en

po
-5%

po
sit

om
sit

rm
M

C
om

om
om
po

po

C
te
gs
M
om

C
om

C
in

ng
e
C

C
rn
ic

Lo
Pr

Ea

-10%

-15%

US Europe Asia Pac Source: Nomura Quantitative Solutions


Global High Dividend: Portfolio Returns vs. Benchmark

30%

20%

10%

0%
6 out of 9 years outperformance
-10%

-20%

-30%

-40%

-50%
2002 (May) 2003 2004 2005 2006 2007 2008 2009 2010 (Oct)

Portfolio Benchmark

1.6

1.4

1.2

1

Long term outperformance
0.8

0.6

0.4

0.2

Portfolio: ING (L) Invest Global High Dividend CAP 0
May-02

May-03

May-04

May-05

May-06

May-07

May-08

May-09

May-10
Aug-02
Nov-02
Feb-03

Aug-03
Nov-03
Feb-04

Aug-04
Nov-04
Feb-05

Aug-05
Nov-05
Feb-06

Aug-06
Nov-06
Feb-07

Aug-07
Nov-07
Feb-08

Aug-08
Nov-08
Feb-09

Aug-09
Nov-09
Feb-10

Aug-10
Benchmark: MSCI World (net)
Source: ING IM, Gross Returns as of 31 October 2010
Portfolio Benchmark


Global High Dividend: Up and Down analysis

4%

3%

2.70% 2.82% 25 out of 40
2% outperformance

1%

0%

(1%)

29 out of 60
(2%) outperformance

(3%)
-3.72%
-4.14%
(4%)

(5%)
Up (60 months) Down (40 months)
Global High Dividend MSCI World
Monthly return analysis as of 30 September 2010, Gross data versus MSCI World net return since inception of the ING (L) Invest Global High Dividend fund in May 2002.


US High Dividend

Since
1 year inception
2010 2010 (ann.) (ann.)
(Mar05) (ann.)
ING (L) Invest US High
+2.93% +12.18% +20.71% -2.29% +4.26% +4.34%
Dividend

S&P500 (net return) +3.77% +7.32% +15.82% -7.13% +1.09% +1.50%

MSCI US High Dividend Yield +2.83% +10.37% +19.29% -6.21% NA NA
(net return)

-0.84% +4.87% +4.90% +4.84% +3.17% +2.84%
vs S&P500
Gross performance ING (L) Invest US High Dividend fund in USD, Benchmark: S&P500 Net return Index, as of 31 October 2010

• Sep/Oct difficult months due to momentum-driven markets

• Outperformance year to date versus benchmark and high dividend style indices

• High Dividend style is working in the US in 2010


US High Dividend: Portfolio Returns vs. Benchmark

40%

30%

20%

10%

0% 5 out of 6 years outperformance
-10%

-20%

-30%

-40%

-50%
2005 (Apr) 2006 2007 2008 2009 2010 (Oct)

Portfolio Benchmark

1.6

1.4 Portfolio

Benchmark
1.2

1

Long term outperformance
0.8

0.6

0.4

0.2

0
Mar-05
May-05
Jul-05

Mar-06
May-06
Jul-06

Mar-07
May-07
Jul-07

Mar-08
May-08
Jul-08

Mar-09
May-09
Jul-09

Mar-10
May-10
Jul-10
Sep-05
Nov-05
Jan-06

Sep-06
Nov-06
Jan-07

Sep-07
Nov-07
Jan-08

Sep-08
Nov-08
Jan-09

Sep-09
Nov-09
Jan-10

Sep-10
Portfolio: ING (L) Invest US High Dividend CAP
Benchmark: S&P500 (net)
Source: ING IM Performa Global, Gross Returns as of 31 October 2010


US High Dividend: Up and Down analysis

4%

3%
3.03%
2.82% 17 out of 24
2% outperformance

1%

0%

(1%)

(2%) 17 out of 43
outperformance

(3%)

-4.03%
(4%)
-4.87%
(5%)
Up (43 months) Down (24 months)

US High Dividend S&P 500
Monthly return analysis as of 31 October 2010, Gross data versus S&P500 net return since inception of the ING (L) Invest US High Dividend fund in March 2005.


Euro High Dividend

Since
1 year inception
2010 2010 (ann.) (ann.)
(Apr99) (ann.)
ING (L) Invest Euro High
+3.60% +1.29% +9.22% -7.16% +2.06% +4.56%
Dividend

MSCI EMU (net return) +3.70% +2.24% +9.76% -11.61% +0.39% +0.65%

MSCI EMU High Div (net return) +5.30% -1.64% +5.96% -12.97% -1.55% +1.90%

-0.10% -0.95% -0.54% +4.46% +1.68% +3.91%
vs MSCI EMU
Gross performance ING (L) Invest Euro High Dividend in EUR, Benchmark: MSCI EMU Net return Index, as at 31 October 2010

• Strong relative performance over the summer months, evaporated in the Sep/Oct
momentum-driven rally

• High Dividend style clearly not working YTD in Euro-zone

• Portfolio tilted towards undervalued, laggard names


European Style Returns

YTD Returns
15.0%
Sector Neutral

10.0%

5.0%

0.0%

‐5.0%

‐10.0%

‐15.0%
Momentum

Momentum

Momentum

ROE

PE
PB
Size

Growth Rate
Composite

Composite

Composite

Composite
Net Gearing
Earnings
changes

Div Yield
Composite

Profitability
Composite

Long term

Gearing
Vol of
(12mth)

Growth
Earnings

Value
Price

(6M)

Risk

Source: Nomura Quantitative Solutions

Style not working in Europe this year!


Euro High Dividend: Portfolio Returns vs. Benchmark

40%

30%

20%

10%

0%
7 out of 10 years outperformance
-10%

-20%

-30%

-40%

-50%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (Sep)

Portfolio Benchmark

3

Portfolio
2.5
Benchmark

2

Long term outperformance 1.5

1

0.5

0
Apr-99
Aug-99

Aug-00

Aug-01
Dec-99
Apr-00

Dec-00
Apr-01

Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08

Aug-09

Aug-10
Dec-08
Apr-09

Dec-09
Apr-10
Portfolio: ING (L) Invest Euro High Dividend CAP
Benchmark: MSCI EMU (net)
Source: ING IM Performa Global, Gross Returns as of 31 October 2010


Europe High Dividend

Since
1 year inception
2010 2010 (ann.) (ann.)
(Dec04) (ann.)
ING (L) Invest Europe High
+2.91% +5.51% +12.93% -8.18% +1.28% +3.41%
Dividend

MSCI Europe (net return) +2.48% +7.06% +15.00% -9.26% +0.83% +3.61%

MSCI Europe High Div (net) +4.05% +2.63% +10.99% -11.96% -1.09% +2.05%

+0.43% -1.55% -2.07% +1.08% +0.45% -0.20%
vs MSCI Europe
Gross performance ING (L) Invest Europe High Dividend in EUR, Benchmark: MSCI Europe Net return Index, as at 31 October 2010


• Strong relative performance over the summer months, evaporated in the September rally

• High Dividend style clearly not working YTD in Europe

• Portfolio tilted towards undervalued, laggard names

37

Carl Ghielen – Client Portfolio Manager
Investment experience: 20 years

Carl is Client Portfolio Manager for Equity strategies. He is responsible for maximizing the commercial success of the
boutique through attracting and retaining clients in partnership with sales, marketing and product. Carl has been working
with ING Investment Management for 10 years as Senior Investment Manager, responsible for several equity strategies.
Carl started his career in 1990 as Investment Advisor at General Investment Management in Eindhoven, an independent
boutique asset manager. Prior to joining ING Investment Management, Carl worked from 1994 to 2000 for Mn Services
(one of the largest pension funds in the Netherlands) as Senior Portfolio Manager European Equities. Carl holds a
Master’s degree in Economics (focus: Business Economics) from Tilburg University. Carl holds a CEFA degree, a
European equivalent to CFA.

38

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High Dividend Investing Strategies for 2011

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