58
Senate Group Conference November 2013
| Date post: | 14-May-2015 |
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Economy & Finance |
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Senate Group Conference
November 2013
Navigating equity risk in a
contradictory market
Justin FloorInvestment Analyst
Agenda
The contradictory market context
Our equity approach
Investment opportunities: Global technology companies
Platinum over gold
Pick n Pay over Shoprite
The contradictory market context
A global perspective
Zooming in on North America…
South America…
Euroland…
Asia…
And us?
South African economy looks particularly vulnerable
Source: UBS forecasts for 2013
… and the trend is negative
… risk of further sovereign credit rating downgrades
The paradox: equity market at all-time highs
Source: I-Net
Current market contradictions
Bad economic news is good news for markets
Low risk assets are now higher risk
Printing money causes no inflation
SA equities vastly more expensive than developed market champions
Despite low economic growth, SA assets most foreign-owned ever
Despite interest rates at record lows, SA consumer spend is weak
…excessive global monetary stimulus is to blame
Unprecedented central bank asset purchases…
Source: Bloomberg
End result is a different form of inflation…
Foreigners
In summary
Central bank policy is masking bleak economic fundamentals
Asset price valuations are unsustainably high in certain sectors
Risk of capital loss is higher than average
Equity risk is elevated!
Our equity approach
The value of shares is linked to profits and profits are extracted from GDP
Time
Va
lue
/pri
ceValue and price through time
Market price
Intrinsic value
Time
Va
lue
/pri
ceWhy are equity prices so volatile?
Market price
Intrinsic value
Sometimes:
The environment seems terrible
Company results may be poor
People are overly pessimistic
Time
Va
lue
/pri
ceWhy are equity prices so volatile?
Market price
Intrinsic value
Other times:
The environment seems fantastic
Company results are great
People are overly optimistic
Sometimes: it’s just that alternatives seem worse!
Or it’s the flows!
Time
Va
lue
/pri
ceThe main equity risks
Market price
Intrinsic value
Buying when shares are above fair value
– ie not having an idea of valuation
Having to sell, when prices are below fair value
– ie short-term cash need
Time
Va
lue
/pri
ceThe main equity risks
Investing without a clear focus on valuations
- Either as an investor yourself or from the
manager who manages your money
Investing in equities when you
have a short-term time horizon
Time
Va
lue
/pri
ceA philosophy for outperformance and risk management
Market price
Intrinsic value
Buy & then hold Sell & then avoid
Market price
Intrinsic value
A philosophy for outperformance
Time
Va
lue
/pri
ce
we have done with this approach over the last 9.5 years (to 31 October 2013)
Source: Morningstar & Kagiso Asset Management
*Inception: 26 April 2004
May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 130
2000
4000
6000
8000
Kagiso Equity Alpha Fund
Upper quartile fund to date
Median fund to date
Lower quartile fund to date
FTSE/JSE SWIX Index
Top unit trust fund performance
Top 15 funds since inception*1 year to
31/10/20133 years to
31/10/20135 years to
31/10/2013
Since inception to
31/10/2013South African EQ General A.G.R. Rank A.G.R. Rank A.G.R. Rank A.G.R. Rank
Coronation Top 20 A 31.6 6 20.9 9 23.6 2 24.2 1
Prudential Equity A 30.7 8 19.9 12 20.8 11 23.1 2
Kagiso Equity Alpha 28.2 26 16.3 40 19.7 18 22.9 3
Foord Equity R 33.2 5 23.5 2 24.1 1 22.8 4
Prudential Dividend Maximiser A 28.5 24 18.3 20 19.7 20 22.6 5
Coronation Equity R 35.2 3 20.8 10 22.9 4 22.4 6
ABSA Select Equity 19.6 91 15.4 53 20.0 17 22.0 7
SIM Value R 24.7 50 16.2 42 20.5 13 21.8 8
SIM General Equity R 28.6 21 19.3 15 21.7 7 20.9 9
PSG Equity A 36.8 2 21.3 7 23.2 3 20.6 10
Nedgroup Inv Value R 18.5 97 15.0 56 20.8 10 20.6 11
Allan Gray Equity A 24.5 53 17.7 27 18.4 35 20.6 12
Nedgroup Inv Growth R 27.3 30 14.7 58 18.7 33 19.9 13
ABSA General R 25.3 44 17.2 37 19.1 26 19.6 14
Marriott Dividend Growth R 20.2 87 18.1 21 21.0 8 19.6 15
Mean/Count 23.4 114 15.8 91 17.8 84 19.0 48
Source: MorningstarBased on lump sum, income re-invested, NAV-NAV*Inception: 26 April 2004
May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 130
25
50
75
100Relative ranking over rolling 5-year periods since inception*
Top quartile
Bottom quartile
Below average
Above average
Consistent top performance -equity unit trust to 31 October 2013
Source: Morningstar
*Inception: 26 April 2004
Investment opportunities
Global technology companies
Internet of things is coming
Source: Ericsson
Enabled by the rise of mobile broadband
Source: Ericsson Mobility Report, June 2013
Phones are no longer about voice
1 Traffic does not include DVB-H, WiFi, or Mobile WiMax. Voice does not include VoIP, M2M traffic is not included.Source: Ericsson Mobility Report, June 2013
Global total data traffic in mobile networks, 2007-2013
Growth in mobile devices driving data demand
Preparing for a connected world
Simplicity Reach
Global smartphone profit pool
Source: Company data, Barclays Research estimates, value as of 2012 year-end
Profit leadership perpetuates investment in scale,
innovation and brand
Global IT is rapidly evolving
Microsoft is more than just Windows (and less exposed to declining PC sales than many think)
Windows Division28%
Server and Tools23%
Microsoft Business Division
46%
Entertainment and Devices Di-vision2%
Profit contribution by division
Who are the winners from these trends?
PE = 9.2x*
PE = 9.5x*
PE = 12.5x
PE = 19.8x
*adjusted for net cash and after accounting for tax
PE = 6.4x*
PE = 10.8x*Apple
versus
Platinum over gold
Gold supply versus platinum supply
Source: GFMS Source: Johnson MattheyIncreasing Supply Decreasing Supply
Gold demand versus platinum demand
Fundamentally driven: price elastic
Fundamentally driven: price inelastic
Source: GFMS Source: Johnson Matthey
Gold investment demand: very vulnerable
Source: GFMS
Europe
Autocat demand is depressed…
China
USA 5 years of contraction - lowest level in 17 yearsRunning well below natural replacement demand level Does not need economic recovery for vehicle sales to return to replacement demand
Pick n Pay over Shoprite
Pick n Pay vs Shoprite: a clear winner, so far
Source: I-Net
Valuation differentials are stark
2.1x2.7x
Premium on Shoprite non-SA is excessive * Kagiso Asset Management estimates
Pick n Pay sales base is significant and stable
Pick n Pay’s robust sales indicative of brand strength^ ^ Sunday Times Top Brands category winner
Pick n Pay: multiple initiatives to reduce costs
Centralising distribution
SAP/IT implementation
Centralisedbuying
Reviewing employee cost
Consolidating regions
Loyalty program
New OUTSIDE leadership
Pick n Pay vs Shoprite: divergent outlooks
Pick n Pay Shoprite
SA’s leading retail brand Significant sales base
Operational recovery within its controlRecent decisions a sign of change
Priced to perfectionPeak margins in SA
Excessive premium on Africa
In summary
In summary
Market contradictions abound
On-going monetary stimulus is distorting asset prices
Our investment philosophy aims to outperform while managing risk
- by focusing on valuations
Disclaimer
Kagiso Asset Management (Pty) Limited (‘Kagiso’) is a licensed financial services provider under the Financial Advisory and Intermediary Services Act No. 37 of 2002 (‘FAIS’) (FSP No. 784) and is approved by the Registrar of Financial Services Providers (www.fsb.co.za), Reg No. 1998/015218/07. Kagiso is a member of the Association of Savings and Investments SA (ASISA). ‘The Firm’ refers to Kagiso Asset Management, which is a subsidiary of Kagiso Tiso Holdings. This comprises all discretionary portfolios managed by Kagiso. For the periods from 2002 through 2004, as well as for the calendar year ended 2008, Kagiso Asset Management has been GIPS verified by KPMG. A copy of the verification report is available upon request. The availability of a complete list and description of all of the firm’s composites is available upon request. Internal dispersion is calculated using the equal –weighted standard deviation of all portfolios that were included in the composite for the entire year. Additional information regarding policies for calculating and reporting returns is available upon request. Kagiso has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS).
Kagiso takes no responsibility for any information contained herein or attached hereto unless such information is issued under the signature of a FSB-approved representative or key individual (as these terms are defined in FAIS) and is strictly related to the business of Kagiso. Such information is not intended to nor does it constitute financial, tax, legal, investment or other advice, including but not limited to ‘advice’ as that term is defined in FAIS. Kagiso does not guarantee the suitability or potential value of any information found in this communication. The user of this communication should consult with a qualified financial advisor before relying on any information found herein and before making any decision or taking any action in reliance thereon. The user of any of this information should be aware that market fluctuations and changes in rates of exchange may have an effect on the value, price or income of investments. As the performance of financial markets fluctuates, an investor may not retain the full amount invested. Past performance is not necessarily a guide to future investment performance. Investments into a collective investment scheme are generally a medium- to long-term investment. This communication contains proprietary and confidential information, some or all of which may be legally privileged. It is for the intended recipient only. If an error of any kind has misdirected this communication, please notify the author by replying to this communication and then deleting the same. If you are not the intended recipient you must not use, disclose, distribute, copy, print or rely on this communication. Kagiso is not liable for any variation effected to this communication or any attachment hereto unless such variation has been approved in writing by a FSB-approved representative or key individual of Kagiso.
Kagiso Asset Management (Pty) Ltd, Fifth Floor, MontClare Place, Cnr Campground and Main Roads, Claremont 7708, PO Box 1016 Cape Town 8000, Tel +27 21 673 6300, Fax +27 86 675 8501, E-mail: [email protected], www.kagisoam.com.
Unconventional thinking. Superior performance
www.kagisoam.com
Performance record
Kagiso Equity Alpha Fund – peer mean benchmark
YearGross of
fees return1
Benchmark return1, 2
Standard deviation3Number of portfolios
Internal dispersio
n
Total composite assets (ZAR)
Total firm assets (ZAR)
Fund Benchmark
2003 R601,315,574
2004 R1,910,903,589
2005 37.3% 36.3% 1 - R21,174,365 R4,607,698,321
2006 39.9% 34.5% 1 - R26,858,449 R5,055,977,879
2007 26.1% 15.5% 1 - R52,397,394 R11,044,952,842
2008 -22.4% -21.8% 1 - R6,860,772 R8,880,253,313
2009 36.2% 26.0% 1 - R17,280,450 R17,724,883,532
2010 22.4% 18.3% 1 - R271,868,341 R28,182,015,250
2011 4.9% 3.2% 14.1% 13.5% 1 - R520,973,605 R34,476,214,389
2012 16.1% 21.2% 9.2% 10.3% 1 - R737,508,679 R46,579,313,698
1 Annualised; Inception date: 26 April 2004; 2 Average performance in South African Equity General unit trust universe; 3 Standard deviation annualised over previous 3 years; Performance is expressed in South African rand
Figures to 31 December 2012 net of management fees, net of all applicable withholding taxes, trading expenses and custodial fees and gross of SA capital gains taxes
The retail management fee is: flat fee of 1.25% pa
Prepared and presented in compliance with the Global Investment Performance Standards (GIPS), independently verified
Source: Kagiso Asset Management
Our fund range
Low risk Medium - high
Stable
Protector
Balanced
Equity Alpha
Low - medium Medium
High equityPrudential constraintsMedium equity
CPI + 5%Capital protectionLower volatilityLow equity
High incomeHigh capital protection
Pure equityUnconstrained
Fund descriptions
Fund Description
Kagiso Equity Alpha Fund This is an unconstrained equity fund that aims to provide strong capital growth over the long term and a total portfolio return that is in the top quartile for general equity funds.
Kagiso Balanced Fund This fund is a Regulation 28 balanced fund and aims to provide investors with high, long-term capital growth. The fund invests in equities, bonds and cash, both locally and internationally.
Kagiso Stable Fund A low equity fund that aims to provide total returns that are above inflation over the medium term. It seeks to provide a high level of capital stability and to minimise loss over any one-year period, within the constraints of Regulation 28.
Kagiso Protector Fund This fund aims to provide steady capital growth and returns that are better than equity market returns on a risk-adjusted basis over the medium to longer term. The fund is Regulation 28 compliant.
