Virtus Investment Partners, Inc. · NYSE:VRTS
Virtus Investment Partners — Sustainable Growth Advisers — Q4 2023 Earnings Presentation
44 slides from Virtus Investment Partners's earnings presentation, Feb 17, 2024
Slide 1: SGA Emerging Markets Growth Equity Q4 2023 Portfolio Review
SGA Emerging Markets Growth Equity Q4 2023 Portfolio Review
Slide 2: Firm Profile
Firm Profile Founded July 2003 Primary Portfolios Customized Portfolios • U.S. Large Cap Growth • U.S. Focused Growth Portfolios Managed • Global Growth • Global Focused Growth • International Growth • Emerging Markets Growth $26.5 Billion Firm-Wide* • $15.0 Billion U.S. Growth Assets Under Care • $
Slide 3: Sustainable Growth Advisers Distinguishing Characteristics
Sustainable Growth Advisers Distinguishing Characteristics Established Time-Tested Alignment to Stability & Performance Process Clients Continuity Pattern Outperformed in Team-based Broad equity Multi-generational volatile markets to approach and time- participation, co- team with very low provide f
Slide 4: Philosophy
Philosophy Identify those few Perform deep Wield valuation as Focus on a Invest with differentiated company an essential longer-term time conviction based global businesses research with element of horizon to take solely on that offer coverage by growth stock advantage of opportunity and predictable
Slide 5: SGA Emerging Markets Growth
SGA Emerging Markets Growth SGA vs MSCI EM SGA vs MSCI EM Gross Margin 38% 36% EPS Growth 15.1% -0.6% Cash Flow/Earnings 88% 66% Revenue Growth 12.9% -0.9% Net Debt/EBITDA 0.8x 0.3x Earnings Variability 8.1% 26.6% Quality Pricing Power Recurring Revenues Growth Growth Opportunity Over 2x Earnings an
Slide 6: Higher Growth with Lower Variability
Higher Growth with Lower Variability SGA Portfolio Companies have historically grown their earnings at 2x the rate of the index with significantly less variability Annual Earnings Growth 61% SGA Emerging Markets vs. MSCI EM 25% 26% 26% 24% 19% 20% 14% 16% 16% 18% 16% 15% 15% 10% 13% 9% 9% 9% 2% -13%
Slide 7: Lower Risk By Most Measures – Emerging Markets
Lower Risk By Most Measures – Emerging Markets Downside Sharpe Sortino Capture Ratio Ratio 0 25 50 75 100 13th Percentile 10th Percentile 9th Percentile 82% 0.21 0.45 Data is from 8/1/2014 to 9/30/2023. Please see performance slide included in these materials for the full performance presentation. S
Slide 8: Downside Capture – 2021 An Anomaly
Downside Capture – 2021 An Anomaly To compound long-term wealth, protect capital from losses Down-Market Years Upside & Downside Capture SGA EM WRAP (Gross) SGA EM WRAP (Net) MSCI EM Gross Net 92% 85% -1.4% -3.0% -2.5% -2.6% -5.9% -9.6% -11.0% -12.4% -14.9% -13.7% -14.4% -14.6% -15.0% -16.9% -20.1%
Slide 9: Investment Team
Investment Team Tucker Brown Julian Cochran George Fraise HK Gupta Analyst, PM Analyst Co-Founder Analyst, PM SGA Since 2006 SGA Since 2019 SGA Since 2003 SGA Since 2014 Alexandra James Li, CFA Peter Madej, CMT Courtney Owens Lee, MD Davidson Analyst, PM Analyst Analyst Analyst SGA Since 2004 SGA Si
Slide 10: Four Flagship Portfolios, One Qualified Company List
Four Flagship Portfolios One Qualified Company List US Global EM Intl. Growth Growth Growth Growth Since 2003 Since 2011 Since 2014 Since 2015 Focused version Focused version available available 10
Slide 11: Investment Approach
Investment Approach Structured to manage risk across three pillars Lower Lower Lower Business Risk Human Risk Price Risk Selectivity in Team-based Discipline in company approach valuation identification 11
Slide 12: Company Identification
Company Identification 1000+ ≈200 Universe of Thousands Research ≈110 Coverage List Qualified Company List Analysts seek the best Actively monitor ≈200 Continuous due diligence companies worldwide: companies that potentially (including valuation) of ≈110 conferences, trade shows, meet SGA criteria a
Slide 13: Research Process
Research Process 1 2 3 4 5 Idea Due Qualified Valuation Client Formation Diligence Company Portfolios List Analysts Deep Investment Relative to Concentrated present idea for fundamental concept other QCL 25-35 stock analysis to IC analysis, 10Y presented to IC companies portfolios financial for incl
Slide 14: Lower Business Risk
Lower Business Risk Key Investment Criteria High degree of predictability in their business Repeat Revenues Able to consistently Long duration of price profitably sustainable growth Pricing Growth Power Opportunity Management Financial Execute responsibly and Strength Strength High returns on capita
Slide 15: Reducing Business Risk
Reducing Business Risk Common SGA Business Models What We Seek Subscriptions Contractually reoccurring, essential services Companies possessing the Examples: software-as-a- characteristics we seek can be service, financial data products found across numerous industries Consumables Frequently u
Slide 16: Reducing Business Risk
Reducing Business Risk What We Avoid Lacking Pricing Power Commodity Producers (E&Ps, Miners) Given the selective nature of our Regulated Utilities approach, there are certain companies that typically do not Lacking Reliable Revenues or “Deep Cyclical” Manufacturers meet our requirements Trans
Slide 17: Alignment to Client Outcomes
Alignment to Client Outcomes Lower Human Risk Broadly-held equity Over 50% of employees own equity; no one individual holds >5% Co-Investment Across the team into SGA Funds Rewards tied to client outcomes Equity, performance shares and career opportunities determined by contribution to client perfor
Slide 18: Lower Human Risk – Cultural Values
Lower Human Risk – Cultural Values Embedded to manage behavior finance risks Maximizes process discipline Three Portfolio Managers Perpetuates deep Ensures rigorous research-first culture debate Analysts Dual Analyst First Coverage Equity Global Institutionalizes dissent Compensation Generalists Dri
Slide 19: Lower Price Risk
Lower Price Risk Earnings are easily manipulated Cash is What would you pay today for this future stream of predictable King cash-flows? All valuation models are proprietary; no use of sell-side estimates Valuations Volatility = Matter Opportunity Price volatility provides opportunities to increase
Slide 20: Intrinsic Value
Valuations 10-year DCF Current CFATS using 1 of 5 risk ÷ rates Market Capitalization Intrinsic Value INTERMEDIATE TERM Analyst Price Targets 2-3y price targets using multiples Cash Flow Available to Operating Sustaining Unfunded CAPEX Shareholders (CFATS) Cash Flows Acquisitions Obligations 20
Slide 21: Portfolio Construction
Portfolio Construction Stock Level Benchmark Consideration Extensive, first-hand research We never own a neutral conviction stock for diversification or active risk objectives Selective criteria Team vetting Bottom-up process with top-down review >110 Qualified Company List 25-35 Portf
Slide 22: Sell Discipline
Sell Discipline Fundamental Valuation Deterioration/ Forced Attrition Consideration Mistake Structural decline of a company’s We will trim or remove a position When a current holding becomes pricing power, competitive from the portfolio if it appears less attractive relative to another advantage, lo
Slide 23: Portfolio Holdings
Portfolio Holdings Communication Services 2.6% Financials 24.5% Tencent China 2.6% HDFC Bank India 7.2% XP Brazil 5.4% Consumer Discretionary 22.2% Bank of Central Asia Indonesia 4.7% Fast Retailing Japan 5.9% AIA Group Hong Kong 4.1% Yum China China 4.6% Sanlam South Africa 3.1% MercadoLibre Urugua
Slide 24: Performance – SGA Composite
Performance – SGA Composite Annualized Returns Q4 Since Trailing Returns 2023 1-Year 3-Year 5-Year Inception SGA Emerging Markets Growth (Gross) 7.1% 7.2% -7.0% 6.7% 5.4% SGA Emerging Markets Growth (Net) 6.3% 4.1% -9.8% 3.6% 2.3% MSCI EM (Net TR) 7.9% 9.8% -5.1% 3.7% 2.0% MSCI EM Growth (Net TR) 7.
Slide 25: Quality Factors Mixed In The Last Twelve Months
Quality Factors Mixed In The Last Twelve Months 120 115 110 105 100 95 90 85 80 75 70 12/22 03/23 06/23 09/23 12/23 Gross Margin (High minus Low) Sales Stability (High minus Low) Debt/Equity (Low minus High) 3-5YR Est. Growth (High minus Low) Data as of 12/31/2023. Source: FactSet, MSCI. Graph depic
Slide 26: SGA Performance Through Earnings Cycles
SGA Performance Through Earnings Cycles MSCI Emerging Markets EPS % Change 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Periods of slowing growth expectations EPS Change SGA EM Inception Annualized Returns Sep 14
Slide 27: Portfolio Positioning Summary
Portfolio Positioning Summary Market Value SGA MSCI EM Diff. 3Y EPS Growth Rate 5-10% 10-15% 15-20% 20%+ $50 Billion + 56.8% 38.1% +18.7% Allocation 27% 42% 14% 17% $25 – 50 Billion 10.8% 15.7% -4.9% C/E* 93% 83% 101% 88% $15 – 25 Billion 13.0% 12.0% +1.0% EY* 5.1% 3.8% 4.3% 2.3% $5 – 15 Billion 17.
Slide 28: SGA Emerging Markets Growth – China Exposure
SGA Emerging Markets Growth – China Exposure The portfolio's China exposure has been trending down since 2021 and its exposure ranks in the 74th percentile amongst peers*. SGA EM China Exposure (%) China Exposure: Peer Ranks 45 0 Peer Rank (1=Highest, 100=Lowest) 40 35 25 30 25 50 20 15 10 75 5 0 10
Slide 29: Portfolio Characteristics
Portfolio Characteristics Annualized Earnings Growth Quality SGA MSCI EM SGA Emerging Markets vs MSCI EM (p.a.) Gross Margin 38% 36% Cash/Earnings Ratio 88% 66% SGA EM MSCI EM 24% 21.8% Net Debt/EBITDA 0.8x 0.3x Earnings Variability 8.1% 26.6% 19% 16.2% 15.1% 14.5% Characteristics SGA MSCI EM 14% 10
Slide 30: Revenue Growth
Revenue Growth Historical Revenue Growth 3Y Estimates 500 450 400 SGA EM 350 10.5% p.a. 300 SGA EM 250 12.9% p.a. 200 150 MSCI EM -0.9% p.a. 100 MSCI EM 50 7.8% p.a. 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2026E Data as of 12/31/2023. Source: SGA Earnings and Revenues E
Slide 31: Sustainability
Sustainability Enhancing the predictability of our companies and reducing portfolio risk Naturally ESG Integrated External ESG Client Preferences Compatible Process Research Focus on business Proprietary ESG ranking A supplement to our Tailored investment quality and risk system proprietary
Slide 32: Portfolio Valuation – Enterprise Yield
Portfolio Valuation – Enterprise Yield Enterprise Yield = (Op Cash Flow – Cap X – Acquisitions – Unfunded Obligations ) / Market Capitalization 7 6 5 4 3 2 1 0 2007 2017 2004 2003 2005 2006 2008 2009 2014 2010 2011 2012 2013 2015 2016 2018 2019 2020 2021 2022 2023 Current Enterprise Yield SGA U.S. L
Slide 33: Earnings Growth Expectations
Earnings Growth Expectations Despite increasing pressures, market expectations remain high Consensus estimates for MSCI EM EPS indicate strong growth in 2024-2025 MSCI EM EPS Growth Progression 25% 2024 Growth: 18% 20% 2025 Growth: 15% 15% Estimated EPS Growth 10% 5% 0% -5% -10% 2023 Growth: -11% -1
Slide 34: Next Decade Unlikely to Look Like the Last
Next Decade Unlikely to Look Like the Last Key Tailwinds of Economic and Corporate Profit Growth Over the Past Decade Being Replaced by Headwinds The Past: The Future: Globalization Deglobalization and greater supply chain control Peace dividend Geopolitical conflicts rising in multipolar wo
Slide 35: Slowing Growth Ahead for World Economies
Slowing Growth Ahead for World Economies GDP Growth Forecasts 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2000-2010 2011-2021 2022-2030* World Advanced Economies EMDEs (Emerging Markets and Developing Economies) Source: World Bank, 2023/03/27. *2022-2024 for Advanced Economies and EMDEs. 35
Slide 36: Performance Tailwinds and Headwinds
Performance Tailwinds and Headwinds SGA’s approach produces a portfolio with strong growth through all phases of the business cycle. Periods when we tend to outperform: Periods when performance is likely to lag: Periods of moderating growth expectations Speculative or momentum-driven periods of
Slide 37: Analysts / Portfolio Managers
Analysts / Portfolio Managers Tucker is a Principal, Analyst and Portfolio Manager on the SGA Investment Committee. Tucker has been with the firm since 2006. He has been co-manager of SGA’s International Growth Portfolio since its inception in 2015. Additionally, Tucker has investment committee lead
Slide 38: Analysts / Portfolio Managers
Analysts / Portfolio Managers HK is a Principal, Analyst and Portfolio Manager on the SGA Investment Committee. HK has been with the firm since 2014. He has been co-manager of SGA’s Emerging Markets Growth Portfolio since its inception in 2014 and of SGA’s Global Mid-Cap Growth Portfolio since its i
Slide 39: Analysts / Portfolio Managers
Analysts / Portfolio Managers Pete is a Research Analyst and a member of the Investment Committee. He is responsible for obtaining and disseminating relevant information on companies of interest from a wide variety of sources, as well as supporting SGA’s valuation model and related investment tools.
Slide 40: Analysts / Portfolio Managers
Analysts / Portfolio Managers Rob is a co-Founding Principal, Analyst and Portfolio Manager on the SGA Investment Committee. He also sits on SGA’s Executive Committee. Since starting the firm, Rob has been co-manager of SGA’s US Large Cap Growth and Global Growth Flagship Portfolios, from their resp
Slide 41: Client Portfolio Managers
Client Portfolio Managers Peter is a Client Portfolio Manager, responsible for supporting the firm’s client service and business development efforts, with Peter a focus on the firm’s broker/dealer and platform relationships. Additionally, he assists with the development and distribution of SGA’s cli
Slide 42: Annual GIPS Report – Emerging Markets Growth WRAP
Annual GIPS Report – Emerging Markets Growth WRAP Total Return 3 Year Standard Deviation Total Assets in Total Firm MSCI EM MSCI EM MSCI EM Net TR MSCI EM Growth Number of Composite Composite at Assets at Percentage of non- Percentage of Period Before Fees After Fees SGA Composite Net TR Growth Net
Slide 43: Material and Principal Risks
Material and Principal Risks Risks of Loss. The value of the portfolio investments may decrease in value. Economic Risk. Conditions affecting the overall economy, specific industries, or companies in which the portfolio invests can be worse than expected, and portfolio investments may fail to perfor
Slide 44: Definitions And Disclosure Page
Definitions And Disclosure Page MSCI EM Index: The MSCI EM (Morgan Stanley Capital International Emerging Markets Index) is a market-capitalization-weighted index maintained by Morgan Stanley International (MSCI) and designed to measure equity market performance in global emerging markets. Indices a
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