SKANDIA GLOBAL FUNDS PLC - Fidelity Investments

Skandia Global Funds plc
Annual Report and Audited Financial Statements for the year ended 31 December 2011
SKANDIA US ALL CAP VALUE FUND
INVESTMENT ADVISER’S REPORT FOR THE YEAR ENDED 31 December 2011
Skandia US All Cap Value Fund – GAMCO Asset Management, Inc.
Investment Adviser’s Commentary (continued)
The main detractors from performance in Quarter 3 included:
Sprint - is the third-largest wireless carrier in the US with 48.3mn subscribers, employing CDMA and iDEN network technologies.
GAMCO believes that Sprint could become a buyout target in the medium-to-long term for cable companies in order to stay
competitive on the multi-service bundle front in an environment where consumers increasingly look to access content on their mobile
devices. A bid from Verizon Wireless is also possible, but it seems less likely, as they will also benefit significantly (as a strong 2nd
in the market) from more rational pricing, and could use the AT&T/TMobile approval as a “cover” for smaller transactions. Verizon
will likely be more focused on trying to buy out Vodafone‟s minority interest than pursuing a challenging integration project.
Ford Motor Co- based in Dearborn, Michigan, Ford is the third largest manufacturer of light vehicles in the United States (by sales).
It currently sells vehicles globally under its Ford and Lincoln brands. Additionally, it operates Ford Motor Credit, a financial services
business that offers retail and wholesale financing of new vehicles. In 2010, Ford generated approximately $11 billion of EBITDA on
$112 billion in sales. GAMCO believes the company‟s shares are attractively valued, particularly since Ford‟s revived product
portfolio has led to gains in its share of the retail market as the North American automotive market has recovered over the past two
years. Furthermore, Ford should be a major beneficiary of the world‟s automotive growth, as global light vehicle sales are expected to
rise to approximately 88 million units in 2015 from 72 million today. GAMCO expects the company to continue its strong
performance, led by CEO Alan Mulally, whose strategic vision helped the company restructure its balance sheet and cost structure
while remaining committed to product development.
Navistar International - based in Warrenville, Illinois, it manufactures Class 4-8 trucks, buses, and defense vehicles, as well as
diesel engines and parts for the trucking industry. NFC, a wholly owned subsidiary, provides financing of products sold by the
company‟s truck segment. Navistar is currently ramping up production of its low-emission EGR engines, providing its customers with
a low maintenance alternative for trucks that must meet EPA emissions standards. As production mounts, we expect NAV to regain
market share in North America and lever fixed costs to expand margins and drive profitability over the next several years.
National Fuel Gas - is a diversified natural gas company. NFG owns a regulated gas utility serving the region around Buffalo, New
York, gas pipelines that transport gas from the Midwest and Canada to New York City and New England, as well as an oil and gas
exploration and production business. GAMCO sees significant unrecognised value in NFG‟s ownership of 800,000 acres in the
Marcellus Shale field. Advances in drilling technology have made extracting the enormous gas reserve potential from the shale
possible. GAMCO estimates that the Marcellus holding could be worth well over $4 billion, judging by recent comparable
transactions. In late 2010, the company hired an adviser to pursue joint venture opportunities. The company has increased its dividend
for forty consecutive years.
Viacom - owns a global stable of cable networks, including MTV, Nickelodeon, VH1 and BET, as well as the Paramount movie
studio. The company was spun off from former parent “old Viacom”, now known as CBS Corporation, on 31 December 2005.
Viacom‟s cable networks generate revenue from advertising sales, fixed monthly subscriber fees and ancillary revenue from toy
licensing, etc. The company has benefitted from a cyclical rebound in advertising, an improvement in its viewership, and a shift in
audience from broadcast networks to cable. Paramount has posted a series of box office successes with franchises such as Star Trek,
Iron Man, and Transformers. The company announced that it would use its substantial free cash flow generation to resume its share
repurchase programme.
Although gaining in absolute terms, the Fund underperformed the benchmark over the fourth quarter of 2011. Among the holdings
that detracted from the returns in the fourth quarter was Sprint Corp, the third-largest wireless carrier in the US. Its shares suffered
from lowered expectations for sector and company performance in 2012. Another wireless carrier, NII Holdings, focused primarily
on business customers in Latin America, suffered from the increased risk aversion that has affected emerging market stocks in the past
two quarters. NII traded at a significant discount to its private market value. The Fund‟s holding in Exelis weighed on performance in
the fourth quarter. ITT Industries completed the spinoffs of its defense (Exelis) and water (Xylem) businesses during the quarter.
Although Exelis provides surveillance and reconnaissance-related products and services to militaries, security agencies,
governments and commercial customers worldwide, the initial take up in its shares was disappointing in the uncertain market
environment. We continue to believe the spinoff should ultimately realise the underlying value of the company.
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