Arthur J. Gallagher & Co. · NYSE:AJG
Arthur J. Gallagher & — Q2 2015 Earnings Presentation
28 slides from Arthur J. Gallagher &'s earnings presentation, Jul 16, 2015
Slide 1: Gallagher First Glance Second Quarter 2015
Gallagher First Glance Second Quarter 2015 Eric C. Elbell, CFA, CAIA Area Vice President July 16, 2015
Slide 2: Agenda
Agenda We will answer three critical questions for investors: • What key events impacted markets during the second quarter? • How did markets perform during the quarter, and how are they positioned going forward? • What strategies should investors be considering? 1
Slide 3: Greece Crisis Intensifies
GALLAGHER FIRST GLANCE ajg.com/institutionalinvestment HEADLINES FOR FIDUCIARIES July 16, 2015 Greece Crisis Intensifies What Happened: Greece and its creditors failed to reach a resolution by July 1 regarding the country’s debt repayment/restructuring Why it Matters: Potential de-stabilizing effect
Slide 4: U.S. GDP Growth Stumbles Again in Q1
GALLAGHER FIRST GLANCE ajg.com/institutionalinvestment HEADLINES FOR FIDUCIARIES July 16, 2015 U.S. GDP Growth Stumbles Again in Q1 U.S. Real GDP Growth What Happened: U.S. gross domestic product Seasonally-adjusted annual rate 6% 6% declined at a rate of -0.2% in Q1 2015 5.00% 5% 4.50% 4.60% 5% 4%
Slide 5: Interest Rates Spike
GALLAGHER FIRST GLANCE ajg.com/institutionalinvestment HEADLINES FOR FIDUCIARIES July 16, 2015 Interest Rates Spike Global 10yr Treasury Yields 3.5% What Happened: Interest rates rose rapidly in major 3.0% global economies, including the U.S., Germany and the U.K. 2.5% USA: 2.29 UK: 2.02 2.0% Why it
Slide 6: U.S. Economy 2Q: More fits and starts
U.S. Economy 2Q: More fits and starts Strengths Weaknesses • Employment reports • Continued weakness in capital goods and • Housing industry data industrial production indicators • 2Q sales and earnings expected to decline Opportunities Threats • Consumer spending pick-up • Impending Fed interest ra
Slide 7: 2Q 2015 Index Returns
2Q 2015 Index 1 Mo 3 Mo As of 6/30/2015 YTD 1 Yr 3 Yr 5 Yr 10 Yr Global Equity MSCI All-Country World ($, net) -2.4% 0.3% 2.7% 0.7% 13.0% 11.9% 6.4% U.S. Equity S&P 500 -1.9% 0.3% 1.2% 7.4% 17.3% 17.3% 7.9% Russell 3000 -1.7% 0.1% 1.9% 7.3% 17.7% 17.5% 8.2% Russell 1000 -1.9% 0.1% 1.7% 7.4% 17.7% 17
Slide 8: U.S. Equities
U.S. Equities The S&P 500 Index eked out a marginal gain for the quarter S&P 500 Index • The S&P 500 produced a +0.3% return, 30-Jun-2014 to 30-Jun-2015 2,150 leaving its year-to-date return at a 2,100 modest +1.2% 2,050 2,000 1,950 • Advances in April and May were offset 1,900 by a 1.9% decline in
Slide 9: U.S. Equities
U.S. Equities Returns were muted across all styles and market caps and most sectors • No clear trend among styles and market caps in 2Q • Growth has surpassed value by a meaningful margin over the trailing 12-month period • Healthcare was the best sector in 2Q and over the trailing 12-month period;
Slide 10: U.S. Equities
U.S. Equities The U.S. market’s valuation continues to look extended, while earnings growth has stagnated • Despite modest returns for the S&P 500 year-to-date in 2015, its price-to-earnings ratio remains above its 10-year average • S&P 500 company earnings are projected to decline 4.5% year-over-ye
Slide 11: U.S. Equities
U.S. Equities U.S. stocks remain reasonably priced relative to U.S. bonds, suggesting neutral portfolio positioning • The yield spread between U.S. stocks and U.S. Treasuries remains close to its historical average Stocks vs Gov't Bonds 8% S&P 500 earnings y ield - 10y r Treasury y ield 7% 6% 5% 4%
Slide 12: International Equities
International Equities International market returns were also subdued in the second quarter • Returns were comparable across developed markets and emerging markets • Asian markets outperformed European markets in 2Q and over the last twelve months • After a strong April, emerging markets declined in
Slide 13: International Equities
International Equities Returns were less impacted by foreign currency trends compared to prior quarters • A slight depreciation of the U.S. Index Returns 2Q 2015 One Year dollar added 2.4% to developed market returns for U.S.-based Developed Markets – USD +0.6% -4.2% investors in the second quarter
Slide 14: International Equities
International Equities Valuation ratios are above average in developed markets, average in emerging • The P/E ratio of developed markets is above the long-term average • Emerging markets stocks are trading around their long-term average P/E ratio MSCI EAFE Index - Historical Valuation MSCI Emerging
Slide 15: International Equities
International Equities Opportunities remain in emerging markets relative to developed markets • Domestic stocks are slightly more expensive relative to developed, non-U.S. stocks • Emerging markets continue to trade at a discount to developed markets • Central bank stimulus measures favor internatio
Slide 16: Fixed Income
Fixed Income 2Q: Interest rates rose in the U.S. • Reversing a year-long trend, interest rates spiked higher in 2Q; the 10-year Treasury yield rose from 1.94% to 2.35% over the course of the quarter • Rates rose along all maturities of the yield curve US 10Y Treasury Yield United States Treasury Yie
Slide 17: Fixed Income
Fixed Income 2Q: Almost all bond sectors finished in the red • The Barclays U.S. Aggregate Index declined 1.7% during 2Q; high yield bonds fared best, with a flat return, while corporates were the worst-performing sector, at -3.2% • Long duration bonds suffered the worst effects of rising interest r
Slide 18: Fixed Income
Fixed Income Global yields remain low by historical standards • Interest rates rose across major countries in 2Q, but remain at low levels by historical standards, presenting challenges for bond investors worldwide Global 10yr Treasury Y ie lds 6.0% 5.0% 4.0% 3.0% USA: 2.38 UK: 2.01 2.0% 1.0% GY: 0.
Slide 19: Fixed Income
Fixed Income 2Q: Credit spreads remain below-average Barclays Capital - Investment Grade Corporate Option Adjusted Spread Barclay Capital - High Yield Corporate Option Adjusted Spread • Credit spreads 675 600 2,000 1,800 have risen in the 525 450 1,600 1,400 last twelve 375 1,200 1,000 300 months, b
Slide 20: Real Assets
Real Assets 2Q: Commodities rebounded while REITs swooned Real Assets Returns • After suffering nine months of challenging returns, commodities gained some ground in 2Q as 4.7% Bloomberg Commodity -23.7% energy and agricultural commodities rebounded -9.1% NAREIT U.S. Equity Real Estate 4.1% • REITs
Slide 21: Real Assets
Real Assets Reported inflation measures remain muted, although wage growth pressures are building • Real assets can be beneficial to portfolios due to their link to long-term price changes (i.e. inflation); any unexpected increase in inflation could enhance the performance of real assets US Consumer
Slide 22: Investment Strategies for Consideration
Investment Strategies for Consideration Investors are expanding their horizons in search of superior risk-adjusted returns The future of traditional stock and bond returns are likely to be limited by current valuations and the outlook for the global economy Alternative investment strategies can help
Slide 23: Equity Long/Short
Equity Long/Short Long/short strategies seek market-like returns with below-market risk • Equity long/short managers rely less on broad market movements and more on the selection of individual companies to drive long-term performance; long/short managers can adjust their market exposure based on cha
Slide 24: Multi-Asset Absolute Return Strategies
Multi-Asset Absolute Return Strategies Multi-Asset Absolute Return strategies seek to return 3-6% points over a cash-like benchmark, with low correlation to traditional asset classes and less volatility than equities • Absolute Return managers typically utilize derivatives, long/short positions, and
Slide 25: Infrastructure
Infrastructure Infrastructure funds provide generally stable cash flows that are linked to inflation and have a low correlation to traditional asset classes • Invest in economic and social infrastructure: – Toll Roads – Oil and Gas Pipelines – Hospitals • Investments are generally characterized by a
Slide 26: Active Credit Strategies
Active Credit Strategies Active credit strategies apply active management to corporate bond portfolios • Offer higher yields and lower duration, thus lessening interest rate risk of fixed income portfolios in the face of rising interest rates • Allow managers to capitalize on “idiosyncratic” opportu
Slide 27: Conclusion
Conclusion Revisiting the three critical questions for investors: • What key events impacted markets during the first quarter? – The Greek debt crisis intensified, raising the specter of de-stabilizing effects on European economies and the European Union structure – 1Q U.S. GDP growth disappointed –
Slide 28: Disclosures
Disclosures • An index, such as but not limited to the S&P 500, is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly into an ind
Arthur J. Gallagher & — Q2 2015 Earnings Presentation on 6ix