Download Presentation Title Here

A Time for High Quality
0
For Advisor/Institutional Use Only.
Not for Distribution to the Public
High Quality over the Long Term.
Returns
(1985 - 2015)
Volatility
(1985 - 2015)
15.14%
9.98%
8.13%
14.91%
High-Quality
Broad market
High-Quality
184 bps premium
Broad market
23 bps less volatility
Source: Facstset. High-quality returns and volatility based on MSCI USA quality index and broad market based on MSCI USA Index from 1/1/85 through
12/31/15. Annualized returns. Volatility measure based on annualized standard deviation.
For Advisor/Institutional Use Only. Not for Distribution to the Public
1
What’s behind the recent shift to High Quality?
Low quality rally: June 2012 – June 2014
High quality rally: June 2014 – Oct. 2015
80%
15%
70%
10%
60%
5%
50%
0%
40%
30%
20%
-5%
-10%
10%
-15%
0%
-20%
Source: BofAML as of 10/31/15, cumulative returns. Stock ratings are provided by Standard & Poor’s and Bank of America Merrill Lynch US Quantitative
Strategy. Stock rankings are assigned to all US equity securities which have the required 10 years of earnings and dividend history as required by Standard &
Poor’s.
For Advisor/Institutional Use Only. Not for Distribution to the Public
2
4 Reasons for High Quality Today
 Earnings Recession
 Earnings Deterioration
 Shrinking Operating Margins
 Widening Credit Spreads
High Quality vs. Low Quality
High quality stocks, generally,….
• Are less reliant on debt financing
• Have more ways to influence growth
• Have more stable sources of revenue
• Have higher earnings visibility
• Have solid balance sheets
• Are more resilient in bear markets
For Advisor/Institutional Use Only. Not for Distribution to the Public
3
Decelerating Earnings Growth.
When EPS growth decelerates, as is the case today, high quality has outperformed.
Average Performance by Quality When the Profits Cycle Decelerated
(Last Four Cycles, 1986-2014)
YoY Growth in S&P 500 EPS, 2007 – 2015 Actual, 1Q 2016 estimate
80%
40%
60%
37%
35%
29%
30%
40%
30%
25%
27%
25%
20%
20%
15%
15%
0%
9%
10%
-20%
5%
0%
12/01/15
06/01/15
12/01/14
06/01/14
12/01/13
06/01/13
12/01/12
06/01/12
12/01/11
06/01/11
12/01/10
06/01/10
12/01/09
06/01/09
12/01/08
06/01/08
12/01/07
-40%
A+
A
A-
B+
B
B-
C&D
High Quality S&P Stocks
Source: Factset, S&P EPS LTM from 2007 – 2015, 1Q 2016 estimate as of week ending 3/24/16; ML RIC Report Oct 13 2015, BofAML US Equity and Quantitative Strategy, S&P
quality ranks
For Advisor/Institutional Use Only. Not for Distribution to the Public
4
Earnings driven by Financial Engineering, not Revenue
Percent of S&P 500 Companies
Beating Earnings Estimates by Quarter
Average
69%
75%
67%
65%
55%
45%
'02
'04
'06
'08
'10
'12
'14
Percent of S&P 500 Companies
Beating Revenue Estimates by Quarter
80%
Average
60%
70%
60%
47%
50%
40%
30%
'02
'04
'06
'08
'10
'12
'14
Source: Strategas 2002 - 2015
For Advisor/Institutional Use Only. Not for Distribution to the Public
5
Operating Margin Contraction.
The potential for shrinking margins makes quality an attractive option.
Profit margins sideways since all time high in 2014
Quality has outperformed when margins contract
S&P Net Margins (12/31/99 through 3/31/16)
Excess performance of quality given change in net margins
6%
11.00
Net margin contract
5%
10.00
4.75%
Net margin expand
4%
9.00
2.81%
3%
8.00
2%
1.13%
7.00
1%
1.48%
0.63%
6.00
0%
5.00
-1%
Source: Factset
07/15
08/14
09/13
10/12
11/11
12/10
01/10
02/09
03/08
04/07
05/06
06/05
07/04
08/03
09/02
10/01
11/00
12/99
4.00
-0.26%
-0.41%
-0.43%
-0.76%
-1.05%
-2%
1 month
2 month
3 month
6 month
12 month
Source: MSCI USA and MSCI USA Quality indexes from 1/1/2000 to 1/31/2016
For Advisor/Institutional Use Only. Not for Distribution to the Public
6
Credit Spreads Widening.
Quality outperforms when credit is under pressure.
U.S. BAA Corporate Spreads vs. S&P High Quality Relative to Low Quality
130
BAA Spreads (Investment Grade)
600
120
BAA Spreads
550
High vs. Low Quality
110
500
100
450
400
90
350
80
300
70
250
60
200
150
2007
High Quality less Low Quality Performance
650
50
2008
2009
2010
2011
2012
2013
2014
2015
Source: Strategas, 2/4/2016
For Advisor/Institutional Use Only. Not for Distribution to the Public
7
Increased Market Volatility.
High Quality outperforms during times of stress. Increased volatility may benefit high
quality.
Correlation of Relative Performance vs VIX 12 mo Change
A+
S&P Quality Rankings
A
AB+
B
BC&D
-0.5
-0.4
-0.3
-0.2
-0.1
0
Correlations
0.1
0.2
0.3
0.4
Source: BofAML US Equity & Quantitative Strategy,12 month performance correlation to 12 month
change in VIX (1986-present), ML RIC Report Oct 13 2015
For Advisor/Institutional Use Only. Not for Distribution to the Public
8
Dimensions of Quality.
While there is no uniform industry definition, “quality” companies generally have sustainable
and growing earnings and cash flow accompanied with solid balance sheets
Geneva
S&P
• Healthy historical and projected
revenue and earnings growth
• Strong financials and low
leverage
MSCI
• ROE – Trailing 12 month
• ROE - High trailing 12 month
• Accruals Ratio
• Debt to Equity - Low fiscal year
Total Debt to Book Value
• Financial Leverage Ratio
• High ROE/ROA
• High margins/margin expansion
For Advisor/Institutional Use Only. Not for Distribution to the Public
• Earnings Variability – Low
standard deviation of year-overyear EPS growth over the past
five fiscal years
9
Geneva Capital Management – Specializing in High Quality.
High Quality Growth – Since Geneva’s inception in 1987,
they’ve focused on finding high quality companies with
superior management teams, conservative balance sheets
and high, consistent growth rates.
Experienced team – 11 dedicated investment professionals
with over 200 years of combined experience.
Experienced
team
Pioneers in mid and small caps – Geneva was started with
the mission of finding mid cap companies which were in
the sweet spot of their lifecycle. After tremendous success
in mid caps, the same philosophy and process was utilized
in Geneva’s small cap strategy in 1999.
High Quality
Growth
Repeatable
and timetested
Pioneers in
mid and
small caps
Repeatable and time-tested – Geneva’s focus on bottom-up,
fundamental investing has allowed them to identify high
quality companies early in their lifecycle. This process has
yielded consistent results with a predictable pattern of
performance.
For Advisor/Institutional Use Only. Not for Distribution to the Public
10
Nationwide Geneva Small Cap Growth Fund
Risk Stats (5 Yr)
Performance
15
10
5
Standard Dev
13.83
Alpha
3.78
Beta
0.75
Sharpe
0.72
Tracking Error
6.67
Information Ratio
0.35
R-Squared
89.47
Overall Morning Rating as of 3/31/2016, IS
share. An investment’s overall Morningstar
Rating, based on its risk-adjusted return, is a
weighted avg. of its 3-, 5-, and 10-year rating.
See disclosure page for details.
Lipper Ranking
2nd Percentile
Lipper rating as of 3/31/2016, ranks 2 out of
554 Funds, IS share.
0
Characteristics
-5
-10
-15
YTD
1Yr
NW Geneva Small Cap
5Yr
10Yr
Russell 2000 Growth
Small Cap Growth Cat. Avg.
NW Small Cap Growth
Russell 2000 Growth
Historical EPS – 3 Yr.
18.9%
19.3%
Operating Margin
18.3%
10.2%
Debt to Capital
31.4%
40.7%
ROE
17.8%
9.5%
Forecast P/E
23.9
18.9
PEG Ratio
2.16
1.75
Wtd. avg market cap
$3.2B
$2.0B
56
1,181
60%
22%
Number of Issues
Source: Performance, Risk Stats and Characteristics based on IS share
class as of 3/31/16.
Morningstar Rating
NW Small Cap Growth
% rated B+ or greater
For Advisor/Institutional Use Only. Not for Distribution to the Public
11
Nationwide Geneva Mid Cap Growth Fund
Risk Stats (5 Yr)
Performance
NW Mid Cap Growth
Standard Dev
13.42
Alpha
-0.30
Beta
0.86
8
Sharpe
0.65
6
Tracking Error
4.51
4
Information Ratio
-0.36
2
R-Squared
91.48
12
10
0
Characteristics
-2
Morningstar Rating
Overall Morning Rating as of 3/31/2016, IS
share. An investment’s overall Morningstar
Rating, based on its risk-adjusted return, is a
weighted avg. of its 3-, 5-, and 10-year rating.
See disclosure page for details.
Lipper Ranking
10th Percentile
Lipper 1 year rating as of 3/31/2016, ranks 10
out of 401 funds, IS share
NW Mid Cap Growth
Russell Midcap Growth
Forecast EPS – 3-5 Yr.
14.0%
13.1%
-4
Operating Margin
19.8%
16.6%
-6
Debt to Capital
34.2%
49.1%
-8
ROE
22.7%
24.5%
Forecast P/E
22.4
19.4
PEG Ratio
2.1
2.0
$8.5B
$12.1B
53
498
82%
54%
-10
YTD
1Yr
NW Geneva Mid Cap
5Yr
10Yr
Russell Mid Cap Growth
Mid Cap Growth Cat. Avg.
Wtd. avg market cap
Number of Issues
Source: Performance, Risk Stats and Characteristics based on IS share
class as of 3/31/2016.
% rated B+ or greater
For Advisor/Institutional Use Only. Not for Distribution to the Public
12
Disclosures
CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PAST PERFORMANCE SHOWN, WHICH DOES NOT GUARANTEE FUTURE RESULTS. Share
price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. To obtain the most recent month-end performance, go to
nationwide.com/mutualfunds or call 800-848-0920.
There is no assurance that the investment objective of any fund will be achieved. Investing in mutual funds involves risk, including the possible loss of principal.
The Funds are subject to the risks of investing in equity securities (including small and mid-sized companies). Growth funds may underperform other funds that use different
investing styles. Please refer to the most recent prospectus for a more detailed explanation of the Funds’ principal risks.
Lipper Analytical Services, Inc. (Lipper) is an industry research firm whose rankings are based on total return performance and do not reflect the effect of sales charges. Each
fund is ranked within a universe of funds similar in investment objective as determined by Lipper. The information is provided for educational purposes only and should not be
considered investment advice. Lipper rankings are not intended to predict future results, and Lipper does not guarantee the accuracy of this information.
Morningstar Ratings metrics. Morningstar Ratings are based solely on a proprietary mathematical formula based on measures of risk and performance that it recalculates
each month. The ratings formula measures the amount of variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees)
emphasizing downward variations and rewarding consistency. Ratings are subject to change every month. The top 10% of the funds in the category receive 5 stars; the next
22.5%, 4 stars; the next 35%, 3 stars; the next 22.5%, 2 stars; and the bottom 10%, 1 star.
Other share classes may have different performance characteristics. Ratings are based on each fund's (share class) performance. Current fund performance may be higher
or lower, which may change a fund's star rating. Despite high ratings, funds may have experienced negative performance during the period. The Nationwide Mid Cap Growth
fund received 2, 3 and 3 stars (A share class), 3, 3 and 4 stars (ALW share class), 3, 3, and 3 stars (C share class), 3, 4, and 4 stars (Int’l share class), 3, 4, and 4 stars (IS
share class) for the 3-, 5- and 10-year periods among 640, 574, and 428, Mid Cap Growth Morningstar category funds respectively. The Nationwide Small Cap Growth fund
received 4 and 4 stars (A share class), 5 and 5 stars (ALW share class), 5 and 5 stars (C share class), 5 and 5 stars (Int’l share class) and 5 and 5 stars (IS share class) for
the 3-, and 5-year periods among 658, 588, and 423, Small Cap Growth Morningstar category funds respectively.
© 2016 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed;
and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of
this information.
Nationwide Funds distributed by Nationwide Fund Distributors, LLC (NFD), member FINRA, King of Prussia, Pa. NFD is not affiliated with any third-party entities that provided
data for this material.
Nationwide, the Nationwide N and Eagle, and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2016
For Advisor/Institutional Use Only. Not for Distribution to the Public
13