Published on June 27, 2014
® Why Motley Fool Champion Shares PRO? New-Member Prospectus Summer 2014
2 Motley Fool Champion Shares PRO Champion Shares PRO “Your quest for high-probability returns begins here – join us as we take stock-tipping to the next level…” Nathan Parmelee, Portfolio Manager
Motley Fool Champion Shares PRO 3 Why Go PRO? Evenwhenmarketsareup,thereareasmanylosersaswinners Conventional wisdom is that when the market is up, stocks go up. However, that’s not exactly the case. In the past two years the FTSE All-Share index is up 42%, but half (51%) of the stocks underperformed... and 3 in 20 had negative returns!1 This is not uncommon. A study in the USA from 1983-2006 showed that 41.5% of shares underperformed the market.2 Webeginbytryingtoeliminatepotentiallosers Companies can be losing investments because of poor management, too much competition, secular changes in their industry, or simply because they’re overvalued and already fully appreciated by investors. We look to avoid companies that possess any of these warning signs. Greedandfearcostinvestorsbillionseachyear Investors are hit with a barrage of headlines sending them on an emotional roller coaster that can lead to buying high and selling low. We look to use swings in market sentiment to our advantage and have the experience to know when it can make sense to ride out a period of bad news and also when to sell companies entering long-term, secular declines. Expectmoreofthesame Economic dislocation, tax uncertainty, and unprecedented monetary and fiscal stimulus make for a fragile market prone to extreme swings — one ideally suited to a value-oriented, business-focused strategy like the one at PRO. 1. Source: S&P Capital IQ. Based on the performance of the FTSE All-Share Index from 31/05/2012 to 31/05/2014. 2. Source: http://www.scribd.com/doc/78304462/The-Capitalism-Distribution
4 Motley Fool Champion Shares PRO The “PRO Difference” pt.1 • When you join us as a Champion Shares PRO member, not only can you can expect to receive a stream of our highest- conviction stock recommendations, but we’ll also show you how to put them to work together as part of a live, real- money portfolio. • That’s just one of the unique aspects of the “PRO approach” – portfolio manager Nathan Parmelee and his team are tasked with investing (and growing) £100,000 of The Motley Fool’s own money1 to showcase how to actively manage a portfolio of shares. • Every stock recommendation that Nathan and his team make is purchased in cold, hard cash and then tracked on the PRO portfolio scorecard – not only does this demonstrate our conviction in the companies we’re recommending to you, but it can also help you determine how big a position to take yourself. • And whether you decide to mirror all of our trades exactly, or to just cherry-pick from our recommendations à la carte – PRO’s real-money portfolio provides a constant reference point that’s there to help you make smart investment choices. 1. The Motley Fool Champion Shares PRO real-money portfolio started with a lump sum of £50,000 at inception – 26/10/2009. A further £50,000 of Motley Fool money is being added to PRO’s real-money portfolio in monthly installments, covering the period from April 2014 through to March 2015.
Motley Fool Champion Shares PRO 5 The “PRO Difference” pt.2 • What also sets PRO apart from traditional newsletter services, is that our analysts’ buy, hold and sell alerts are issued to members in ‘real-time’. That means there’s no fixed monthly schedule. Put simply, when the best new investment opportunities present themselves, or if the investment thesis of a company we’ve recommended has started to unravel, you’ll hear from us right away about the action you need to take. • It all adds up to a service with an investment approach that’s not constrained by conventions such as company size, market capitalisation, geographical borders, or business style. • Instead, PRO’s analysts strive to apply a ‘business-focused’ investing philosophy – with the goal of buying shares in great companies at prices that they believe do not reflect their greatness. Our analysts must always be able to explain the reasons for the pricing discrepancy they’re seeing when recommending a company to members as a BUY. • Champion Shares PRO aims to beat the FTSE All-Share index by at least 3% on a rolling three year basis and will on occasion reduce positions to lock in gains and to defend against risk.
6 Motley Fool Champion Shares PRO Meet Your PRO Team... NathanParmelee Portfolio Manager, Champion Shares PRO • You might already know Nathan from our Motley Fool Share Advisor newsletter service, where he’s been a co-advisor since February 2012. • The most senior member of the Fool’s global equities research team, Nathan has written for The Motley Fool since 2004. • Before joining the Fool, Nathan worked for a well-regarded industrial and financial services company (including a 3 year posting to Japan), where he learned the intricacies of corporate acquisitions. • Nathan’s investing interests include consumer goods, agriculture, industrial manufacturing and special situations. Nathan Parmelee.
Motley Fool Champion Shares PRO 7 Meet Your PRO Team pt.2 NateWeisshaar,CFA Co-advisor, Champion Shares PRO • Nate is a senior analyst on the Fool’s global equities research team. • He specialises in covering UK and European businesses and his investing interests include banks and other financial companies. • Prior to joining The Motley Fool in 2007 as a research analyst, Nate spent five years providing consulting services for small banks in the USA. • He is also a qualified Chartered Financial Analyst (CFA) and has been a co-advisor for Motley Fool Share Advisor since February 2012. Nate Weisshaar.
8 Motley Fool Champion Shares PRO Meet Your PRO Team pt.3 OwainBennallack Consultant, Champion Shares PRO • A seasoned private investor, Owain has been a member of The Motley Fool community since 2003. He first started writing for the Fool.co.uk in September 2010 before transitioning to the PRO service in 2011. • As a member of the PRO team, he features regularly in the service’s weekly memos and actively contributes to PRO’s lively online community. • His investing interests include small-cap stocks, micro-caps stocks and special situations. • Owain is frequently credited with unearthing off-the-radar small-cap opportunities and bringing them to the attention of the PRO advisory team for further scrutiny. Owain Bennallack.
Motley Fool Champion Shares PRO 9 Meet Your PRO Team pt.4 MarkRogers Analyst, Champion Shares PRO • Mark Rogers is the latest addition to the Fool’s global equities research team, specialising in small and mid-cap UK companies. • Growing up around the family firm, Mark was brought up to appreciate the hard work involved and the risks and rewards offered by long-term business ownership – and he brings the benefit of that experience with him to PRO. • Viewing stocks as long-term business commitments, Mark credits Warren Buffett and Ben Graham’s Security Analysis for his old-fashioned investment values. • Mark has a penchant for conservative, well capitalised companies with excellent track records. He has a degree in Economics, and holds the CFA Investment Management Certificate. Mark Rogers.
10 Motley Fool Champion Shares PRO PRO’s Performance OurreturnssinceNathan’steamtookcontrolofthePROportfolioinJune2011 • Thanks to an expanded investment team and the benefit of volatile markets since June 2011, PRO has been able to unearth plenty of opportunities for members over the past 3 years. • This has resulted in a solid market outperformance of 17.8%1 . 1. Since Nathan Parmelee and team took over the Champion Shares PRO portfolio at market close on 31/05/2011, the service has delivered an overall return of 47.01%. The FTSE All-Share Total Return index has delivered an overall return of 29.25%. Returns are calculated using a time-weighted rate of return (TTWR) methodology that includes dividends re- invested and trading costs. Returns are measured from 31/05/2011 to 13/06/2014. A number of portfolio transactions have been made during this period. Sources: Pricing data from IDC (end of market day values). Transaction costs from Halifax Share Dealing.
Motley Fool Champion Shares PRO 11 The Real-Money Portfolio Asof1st June2014,theChampionSharesPROreal-moneyportfolio consistedof£62,600ofTheMotleyFool’sownequitycapital • We’re currently adding fresh capital to PRO’s real-money portfolio on a monthly basis, which will raise The Motley Fool’s contribution to a total of £100,000 by 1st March 2015. • We’re partners in this – if you make money, we make money. Youmaintaincompletecontrolofyourowninvestment… • Either replicate the Motley Fool Champion Shares PRO portfolio, trade for trade, in your own share dealing account… • Or cherry-pick from our recommendations à la carte to suit your needs – it’s your call. Nogimmicks,youretaincompletecontrolofyourmoney. • All trades are communicated via real-time trade alerts, complete with full rationale and detailed portfolio guidance, at least 24 HOURS in advance of the Champion Share PRO portfolio trade. • All critical elements of the trade, including assessment of risk versus reward… exactly when to get in and when to get out… and precisely how to size your positions.
12 Motley Fool Champion Shares PRO PRO’s Investment Process Initial Research and Estimate of Intrinsic Value Team Idea Review and Approval Assess Risks & Opportunities Fundamental Research Identify Potential Catalysts Refine Estimate of Intrinsic Value Determine Initial Position Size Articulate Thesis and Sell Strategy Add to Portfolio Monitor & Update Sell or Add based on Valuation and Risk/Reward Research Analysis Portfolio Management
Motley Fool Champion Shares PRO 13 How We Invest pt.1 IdentifyingHigh-QualityBusinesses Our goal is simple: capture high-probability returns. We aim to achieve this goal by investing in great businesses at good prices, uncovering exciting turnaround stories and zooming in on temporary “mispricings.” Wefavourcompanieswith… • Recurring revenues and consistent cash flows protected by durable competitive advantages over competitors. • Strong balance sheets (we avoid companies with excessive debt loads). • Shareholder-friendly management. We like to see management incentives aligned with shareholders and a track record of returning value to shareholders. Wefocusonvaluation • We target investments with a potential annual return of at least 15%. • Larger positions will typically feature potential gains of 25% or more. • We continually assess the intrinsic value of our shares and are committed to reducing or eliminating positions when they exceed our valuation estimates. We’rerigorousaboutprotectingourcapital— andyours— frompermanentloss • We reduce our exposure when markets are euphoric and add positions when pessimistic. • We resize positions when our outlook on risk/reward changes.
14 Motley Fool Champion Shares PRO How We Invest pt.2To meet our goal of capturing high probability returns we use our valuation criteria and qualitative factors to allocate capital to four strategies we believe have the best chance of providing market-beating returns. Strategy Target Allocation Description Core > 40% High quality businesses with above average returns on capital, proven management, and clear competitive advantages. Core shares often have significant dividend yields, as well. Small Cap 20% – 40% They’re sometimes overlooked and often too small for many funds to consider. We like them because their small size makes them focused and nimble, and they’re often run by founders or management with significant ownership positions. Special Situations < 20% We focus on spin-offs and turnarounds with a change in management and/or significant change in strategy. We look for companies where a new, focused strategy can lead to a step change in profitability. Emerging Growth < 15% Fast growing businesses that have an inconsistent financial performance, but that potentially show signs of an emerging dominance.
Motley Fool Champion Shares PRO 15 How We Invest pt.3 Makingtheinitialpurchase Smith & Nephew (LSE:SN) is a leading global manufacturer of medical devices used for major joint replacement and chronic wound management. In February 2011 Smith & Nephew’s CEO of four years retired to be replaced by Olivier Bohuon. While Bohuon had a strong career in the pharmaceutical industry before coming to Smith & Nephew, there is some uncertainty about his transition to the role and his stated plan for acquisitions. We’ve been looking at Smith & Nephew as a way to play the global trends of a rapidly aging population, rising wealth, and the pursuit of a higher quality of life in old age, so are interested to see how Bohuon steps into his new role. 20th September 2011 — We publish a short report adding Smith & Nephew to our Watch List with the shares at 594p. 22nd November 2011 —We publish our buy report and recommend buying shares of Smith & Nephew at prices below 575p. 24th November 2011 — PRO purchases shares at 556p. Smith & Nephew’s third quarter results disappointed the market because of weakening operating margins. While maintaining profitability is important to Smith & Nephew’s success – and our investment thesis – management had reasonable explanations for the short-term weakness. We were happy to take advantage of the market negativity to start a position in Smith & Nephew with a cautious eye on those margins and management’s acquisition strategy. While we have reduced the size of our investment in Smith & Nephew we continue to hold the company in the PRO portfolio. Olivier Bohuon has delivered on his strategic goals of cutting costs and building Smith & Nephew’s presence in emerging markets. He has even executed a couple of material acquisitions, one which has turned out very well and one which is still too early to tell. The recent merger and acquisition activity in the medical industry has pushed Smith & Nephew’s shares to heights well above our recommended buy around price but we’re holding on to our remaining shares for now and enjoying the ride and the dividend. DueDiligence DecisionToBuy CurrentStrategy Note: this example is intended as an illustration of our process, and is not necessarily a fair representation of the outcome achieved. Pricing Data from IDC.
16 Motley Fool Champion Shares PRO How We Invest pt.4 Reducingourpositionandlockingingains RWS Holdings (LSE:RWS) is a leading provider of support services for intellectual property including patent translation, search, and international filing. RWS Holdings was originally purchased at 429.7p in 11 August 2011 with a target allocation of 3% of the PRO portfolio. The combination of a market leading position, highly cash generative business model, and an attractive-if-not-screamingly- cheap valuation convinced us that it was time to take a modest investment in the company with an eye to adding more if we should get the opportunity. After a strong run, the shares were around 700p in June 2013 and RWS made up nearly 4% of our portfolio. However, the rise in the shares wasn’t accompanied by the type of growth we would have liked to see. We still consider RWS a high quality company, but the market seemed to be pricing in optimistic growth assumptions we didn’t agree with. 20 June 2013 — Sold half of our investment in RWS to reduce our exposure to what we felt was a toppy valuation of a good company. Sold at 709.4p locking in a gain of 65.1% (excluding dividends) in just under two years, beating the FTSE All-Share index by 43.6 percentage points. Looking ahead we still hold a stake in RWS because the company’s position in a niche market and strong cash flow generation give it several opportunities for growth both organically and through acquisition. While the shares still look too expensive to add to our position, the recent slide is making them more attractive. DueDiligence DecisionToReducePosition CurrentStrategy Note: this example is intended as an illustration of our process, and is not necessarily a fair representation of the outcome achieved. All returns quoted above include dealing costs but excluded dividends. Pricing Data from IDC.
Motley Fool Champion Shares PRO 17 How We Aim To Make You Money At PRO Makeasymmetricbets • We believe in allocating more capital to our best ideas. Thinklikeowners(evenifweendupbeingrenters) • We take a long-term outlook, even if our actions turn out to be short-term. Appraisevalueskillfully,notjustquantitatively • We approach each position in a manner that fits the unique circumstances of its particular business. Takeriskseriously • We will strive to avoid losses. It’s the first step to successful long-term, portfolio growth. Maintainportfolioboundaries&managerisk • We maintain sizing limits for individual positions and sectors, and manage our overall exposure to different countries. Berationallyopportunistic • We aim to be wholly rational in how we size up the market’s opportunities and risks, then act decisively. Embraceintelligentspeculation • We won’t shy away from rare, fleeting opportunities that don’t allow for comprehensive research. However, in these instances, our initial position will always be conservatively sized.
18 Motley Fool Champion Shares PRO Playing Attack & Defence MotleyFoolChampionSharesPROis… • The Motley Fool UK’s most exclusive and advanced membership service. • Professional management, focusing on investments we believe offer high probabilities of favorable outcomes while avoiding lower-quality investments that offer a poor probability of market-beating returns. • Targeted market-beating returns while defending against significant business and valuation risk — giving you the peace of mind to stay the course even in troubled markets.
Motley Fool Champion Shares PRO 19 And Most Importantly... • Motley Fool Champion Shares PRO might be right for you if you share our long-term perspective on compounding capital in a risk-averse manner. • Our goal is neither to maximize profit on every trade, nor to be excessively conservative. • We’re aiming to capture high-probability returns that allow us to beat the FTSE All-Share index on an annual basis while defending against risk.
20 Motley Fool Champion Shares PRO Doors open on Monday! If you think you have what it takes to invest like a PRO and you’re ready to commit to a long-term investment strategy... Watch your inbox on Monday, 30th June 2014 for your time-sensitive invitation to join us and more details about the limited number of “Triple Value Passes” we’re offering.
Motley Fool Champion Shares PRO 21 Risk Warning • The prices of all shares, and the income from them, can fall as well as rise. • You run an extra risk of losing money when you buy shares in certain smaller companies including “penny shares”. • There is a big difference between the buying price and the selling price of these shares. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, it may go down as well as up and you may not get back the full amount invested. It may be difficult to sell or realize the investment. • You should not speculate using money you cannot afford to lose, or rely on dividend income for non-discretionary living expenses. • Some securities may be traded in currencies other than sterling, and may also pay dividends in other currencies. Changes in rates of exchange may have an adverse effect on the value of these investments in sterling terms. You should also consult your stockbroker about any additional dealing or administrative charges. • We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in all material aspects. • Investors should seek appropriate professional advice from their stockbroker or other adviser if any points are unclear. • This newsletter gives general advice only, and the investments mentioned may not necessarily be suitable for any individual.
® ChampionSharesPROisaMotleyFoolproduct. For all queries please email ChampionSharesPRO@Fool.co.uk Alternatively you can call us on 0207 462 4300 (Mon-Fri, 9am-5pm). Authorised by The McHattie Group, St Brandon’s House, 29 Great George Street, Bristol, BS1 5QT. Tel: 01179 200 070 | Fax: 01179 200 071 | Email: firstname.lastname@example.org Details of what subscribers may and may not do with the content of the Champion Shares PRO service are stated in the Terms and Conditions. http://newsletters.fool.co.uk/46/help/terms-and-conditions.aspx The McHattie Group is authorised and regulated by the Financial Conduct Authority. ©1998-2014 The Motley Fool Limited. The Motley Fool and the Jester logo are registered trademarks of The Motley Fool Holdings, Inc.