2CG European Income Fund

May 2010
STRATEGY
May worked in our favour. We moved up the league tables by being very underweight banks and the
great Euro
E crisis
i i passes us while
hil we fell
f ll by
b much
h less
l than
h the
h market.
k W admit
We d i that
h there
h are
serious tensions in the Euro and the Germans are not helping by (correctly) stating that by buying up
Greek government debt the ECB is merely bailing out (largely French and to a lesser extent German)
European banks.

It will take some time for the Euro to sort itself out and we are not bulls on the PIIGS economies.
However, we are reassured that the nasty medicine of spending cuts is being taken and assuming there
is not a wave of civil unrest we think that the media hype will gradually die down. What will we be left
with? A German export orientated economy – was ever thus - and a subdued periphery which we are
treating with caution but not ignoring and we have just bought two stocks in this region, as detailed Charles Glasse
below. As an aside, Viscofan in Spain has actually been one of our best shares.
BBVA
Some of our best stocks at 2CG have been bought a
bit early. Banks are tricky at the best of times and
never more than now.

Most of the research we have seen on BBVA has

focused on the poor state of the Spanish economy,
which is true. First of all, Spain and Portugal is only
34% of BBVA’s revenues, with the rest being in
either Mexico at 26%, South America at 18% and
the southern USA at 12%. The balance is capital
markets.

Source: BBVA Presentation We believe that they will avoid the biggest disasters
in Spain
S as its asset quality is better due to
intentional market share loss during the credit boom
years. Overall we have never seen the shares
looking so cheap.

LOTTOMATICA

This is one of the global lottery operators. The lottery market is split between the leader Lottomatica (Italy), Intralot (Greece),
andd other
h smallll players
l i Canada
in C d for
f example. l M
Many off the
h national
i l lotteries
l i are run domestically
d i ll on a one off ff basis.
b i
Lottomatica bought the US leader GTech some years ago but thanks to heavy competition, particularly from Intralot, the market
value of Lottomatica is now less than the acquired value of GTech. At a meeting in Milan in late May the CEO of Lottomatica
indicated that the overly heavy competition for renewed licences in the US may be over. Given the 6% yield, the room for
margins to expand over the coming years and the more pressing need for governments and states to raise money from
lotteries, life may well get better for the operators.

AND JUST TO FINISH

We are not alone in thinking that the market is cheap. We note with interest that Crispin Odey thinks that shares look cheap
against bonds and property. He continues that at a recent conference in Milan less than 10 per cent of attendees had more
than 20 per cent of their money in shares. Presumably he was not attending a bond conference!

Also ratings have been crunched. The FTSE Europe ex UK is trading

at around 10 times next year’s level, well below its 30 year average of
around 14.5 times. This would not be the first time European markets
would
ld have
h sold
ld off
ff only
l to
t rally
ll sharply
h l later.
l t E i
Earnings are generally
ll
OK, as the chart on the right shows.

In our humble opinion this is not the time to buy absolute return funds
but we will allow you to buy a bit of Asia, if you must.
 Performance Figures to 31/5/2010 1 Month % 6 months % 1 Year % 3 Years % Inception %
Income Reinvested From 1/11/05
INCOME Fund (Retail in £) ‐6.4 ‐2.5 +12.9 ‐16.6 +19.1
FTSE Europe ex UK Index in £ (total return) ‐8.1 ‐5.8 +14.4 ‐14.7 +26.1
Vs. other UK based Income Funds ( at 28th May) 1 of 10 5 of 10 2 of 9 2 of 4 1 of 1
(Jupiter, Newton, IP, SWIP, Ignis, Allianz, Neptune, Stand life, Royal)

Quartile 1 2 1 2 1
Discrete Year Performance (in %) 2010 to 2009 2008 2007 2006 2005 (2 Nov
date – 31 Dec)
INCOME Fund (Institutional B in £) ‐6.1 +18.0 ‐23.1 11.0 19.4 9.8
FTSE Europe ex UK in £ ‐8.2 +20.1 ‐24.0 15.7 20.1 8.7
FUND INFORMATION

Sedol Code ISIN Code TOP 10 Holdings % TOP 10 Active %

Inst A B0N17S6 IE00B0N17S69
Nestle 5.4 ZFS 3.5
Inst B B0N17T7 IE00B0N17T76
Roche 4.5 Viscofan 3.5
Retail B0N17Q4 IE00B0N17Q46 ZFS 4.3 Sodexo 3.3
Bayer 3.6 Portucel 3.3
Charges Viscofan 3.5 Reed Elsevier 3.2
Institutional A 0.75% annually Reed Elsevier 3.4 SES 3.1
Retail 1.25% annually, of which 0.5% is Sodexo 3.4 Deutsche Boerse 2.9
trail, charges are taken to capital Portucel 3.3 Symrise 2.8
SES 3.3 Gas Nat 2.8
Dividend Dates (inc) Prices Deutsche Boerse 3.2 Thales 2.8
13/08/09 – IA 2.85p Inst A – £1.081
IB 3.15p Inst B ‐ £1.084
R 3.22p R ‐ £1.056 Sector Weightings Fund Index Country Weightings %
%
FINANCIALS 20.4 24.4 GERMANY 21
1/02/10 – IA 0.3p CONSUMER SERVICES 19.8 5.7 FRANCE 20
IB 0.35p BASIC MATERIALS 9.8 7.7 SWITZERLAND 21
R 0.3p CONSUMER GOODS 10 15 NETHERLANDS 8
INDUSTRIALS 8.6 13.9 ITALY 3
Fund Size £26.7m UTILITIES 9.9 6.7 SPAIN 6
Yield 3.3% gross (based on last 2 divs R) HEALTHCARE 6.4 9.8 PORTUGAL 10
(no tax is deducted on distribution) TECHNOLOGY 2.2 4.2 OTHER 8
Estimated current portfolio yield 3.8% TELECOMMUNICATION 2.4 5.9 CASH 5
OIL & GAS 6.0 6.7
Administrator
CASH 4.5
HSBC Securities Services (Ireland) Limited
(1 Grand canal Sq, Grand Canal Harbour, Dublin2,
tel 0035316356000 fax 003536497525)
Performance monitored by; Hindsight, Bloomberg, Trustnet, Factset, Lipper
Structure S&P Fund Research – www.funds‐sp.com under Europe ex UK.
UCITS III OEIC with segregated liability Published Prices: www.2CG.com Our Funds ‐ Fund Details
(FSA recognised) with single pricing
Distributor status
Enquiries to:
Benchmark Carrie Gregory‐ Hood
FTSE Europe
p Ex UK in £,, dealingg dailyy in £ 2CG Limited
Limited, 1 Pudding Lane,
Lane London EC3R 8AB
Tel 0207 6238551 E‐mail Carrie@2cg.com www.2CG.com
TER Institutional A – 1.23% (2009)
This document is issued by 2CG Limited, which is authorized and regulated by the Financial Services Authority in its conduct of investment business. Past
performance is not necessarily a guide to future performance as market conditions constantly change. Changes in exchange rates will affect the value of OEIC
overseas investments. The price of units and income from them can go down as well as up and investors may not get back the amount originally invested.
Stock market investments should be considered as medium to long term, that is, over five years. 2CG Limited does not offer investment advice or make any
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Pudding Lane, London, EC3R 8AB