long term value investing - jse 2015... · •value investing = buying assets at less than their...

Long term value investing

- favourably loading our dice

November 2015

Agenda

• Perspectives - active asset management and

the SA market

• Value investing

• Why value investing and why long term

• Statistical support

• Anecdotal support - successful asset managers

• Quality

• SPW investment philosophy

• Conclusion and performance

• Facts • Everybody attempts to outperform a benchmark, hence they believe in

market inefficiency

• By definition only 50% of actively managed assets can outperform

pre costs

• Post costs less than 50% of actively managed asses outperform

• Bulk of the assets are run by highly professional, qualified, incentivised

and hard working teams.

• Top 5 asset managers manage >50% of private institutional and

retail assets

• Crowded trade: 246 general equity unit trusts investing in 370 listed

shares

Active asset management

Industry AUM breakdown – total R5.9t

50%

17%

20%

4%

9%

Institutional Retail PIC Private Client - discretionary Private Client - non discretionary

Private institutional and retail asset managers

12%

12%

10%

9%

9%9%

4%

4%

3%

3%

25%OMIG

CORONATION

ALLAN GRAY

INVESTEC

SIM

STANLIB

MOMENTUM AM

PRUDENTIAL

FUTUREGROWTH

FOORD

OTHER

Institutional mandate breakdown

5%

29%

3%

4%

25%

11%

12%

3%4%

4%

Balanced - SA

Balanced - Global

Balanced - AR (SA)

Balanced - AR (Global)

Equity

Fixed interest

Money market

Property

International

Other

• Value investing = buying assets at less than their intrinsic value

• Not simply a matter of low absolute valuations, rather low

normalised valuations relative to justified valuations

• Justified valuations a function of a companies future growth

prospects, which in turn is a function of a companies ROE

generation and ability to reinvest at similar return levels.

• Theoretically: growth = ROE * retention rate

• Opportunities arise when the market underestimates the future

growth prospects of a company

Value investing

• Market is largely efficient / rational

• However the participants in the market (humans) are affected by

emotions and irrational behavioural traits that lead to deviations from

fair values

• Heuristic driven biases – representativeness, overconfidence, anchoring

and adjustment

• Frame dependence – Loss aversion, regret minimisation, money illusion

• Fear and greed – well quoted & amplify volatility

• Behavioural sources of chronic inefficiencies – overemphasising recent

performance, herding, rigid views, price target revisions, correlating

emotions with the market

• Emotions and behavioural traits drive short termism

• market extrapolates ST operating conditions for company/industry

Why do shares deviate from fair

value?

Extrapolation of ST operating

environment

2

3

4

5

6

7

8

9

10

0

2000

4000

6000

8000

10000

12000

20

00

20

00

20

01

20

01

20

02

20

02

20

02

20

03

20

03

20

04

20

04

20

04

20

05

20

05

20

06

20

06

20

07

20

07

20

07

20

08

20

08

20

09

20

09

20

09

20

10

20

10

20

11

20

11

20

12

20

12

20

12

20

13

20

13

20

14

20

14

20

14

Murray and Roberts

Consensus target price Price Operating profit margin


environment

0

2

4

6

8

10

12

14

16

18

0

5000

10000

15000

20000

25000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Astral

Consensus target price Price Operating profit margin


environment

2

2.5

3

3.5

4

4.5

5

0

1

2

3

4

5

6

7

8

9

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Imperial

Operating profit margin Consensus stock rating


environment

-50

150

350

550

750

950

1150

20

03

20

03

20

03

20

04

20

04

20

05

20

05

20

05

20

06

20

06

20

07

20

07

20

08

20

08

20

08

20

09

20

09

20

10

20

10

20

10

20

11

20

11

20

12

20

12

20

13

20

13

20

13

20

14

20

14

Backtest: Analyst rating

Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Universe

Why value

Fair value

Pri

ce

Time

Share price

Why long term

Fair value

Pri

ce

Time

Share Price

• Theory suggests that a company’s value is the sum of it’s discounted cash

flows/dividends/residual incomes etc.

Value in theory

20%

36%

49%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Cu

mu

lati

ve p

erc

en

tage

of

tota

l val

ue

Years

Cumulative percentage of total value

• Statistical studies performed on the All Share since 1960

• Important findings

• Value matters – negative correlation btw valuation and

prospective returns

• Time horizon matters. Correlation and R2 are more

significant when longer term prospective returns

considered

• Perspective matters. Correlation and R2 are more

significant when valuations normalised for cyclicality

• Strong correlation btw cyclically adjusted (normalised)

valuations and LT prospective returns

Statistical support

• Correlation (relationship btw PE’s and prospective returns)

• Regression (strength of relationship)

Correlation and regression

1 year 3 years 5 years 10 years

Current PE's 0.21- 0.41- 0.48- 0.20-

Normalised PE's 0.31- 0.47- 0.46- 0.63-

prospective returns

1 year 3 years 5 years 10 years

Current PE's 0.05 0.17 0.23 0.23

Normalised PE's 0.10 0.23 0.21 0.39

prospective returns

Regression line: Current PE and 1 year prospective

returns

y = -0.0129x + 0.2619R² = 0.0451

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0An

nu

al 1

0 y

ear

pro

spe

ctiv

e r

eal

to

tal r

etu

rn

Current PE

ALSI regression btw 1 year prospetive real returns and current PE's

Regression line: Normalised PE and 10 year prospective

returns

y = -0.0111x + 0.1967R² = 0.3911

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0

An

nu

al 1

0 y

ear

pro

spe

ctiv

e r

eal

to

tal r

etu

rn

Normalised PE

ALSI regression btw 10 year prospetive real returns and normalised PE's

PE’s and prospective returns

0

20

40

60

80

100

120

140

160

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

<5 5-7.5 7.5-10 10-12.5 12.5-15 15-17.5 >17.5

Su

bs

eq

ue

nt

5yr

pri

ce r

etu

rn p

.a.

P/E range

Min 5yr return p.a.

Max 5yr return p.a.

Median 5 yr return p.a.

Observations (months)

Anecdotal support - successful asset

managers – SA (1)

• Commonality across top managers

1. Value approach

2. LT time horizon

Buy at the right price, take a long term view and be patient. To

outperform the herd you need to be different from the herd.

Managing investments using a long-established prudent value approach.

We strive to outperform our clients’ investment objectives steadily over

time, because consistency is the key to successful investing.

Successful asset managers – SA (2)

All our funds are managed according to a long-term, valuation-

based investment philosophy, which we call the Coronation DNA.

Our equity investment process is primarily bottom-up stock picking and

valuation focused.

The investment philosophy combines the best aspects of value investing

with superior sustainable earnings growth, primary trend analysis and

measured market timing.


Our philosophy is very simply to buy companies whose share price is less

than their intrinsic value. Their slogan is: long term investing

All SIM’s investment decisions are firmly rooted in our pragmatic value

philosophy, which enables our fund managers to make rational – not

emotional – decisions that are based on in depth research conducted.

High quality investments that are trading at discounts to their inherent

intrinsic values.


We make investment decisions based on mispricing we observe in the

market. We buy investments that are priced well below their intrinsic

values and avoid those that we believe are overpriced


• Market fixation with ‘quality companies’

• What is a quality company?

• recent price performance – statistically poor strategy

• sustainable deliverance of high returns on capital

• Quality often undervalued

• Theoretically undervalued in DCF terminal value

• Boring

Defining quality

http://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://tve.co.za/quality&ei=fe3tVOXSGJLA7AaAxoCYAw&bvm=bv.86956481,d.ZGU&psig=AFQjCNFHFgyGvGNPkVgMkPLUcPr0482-qA&ust=1424965296595276

http://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://pixabay.com/de/x-rot-marke-falsch-30465/&ei=y-7tVKr_Fo6X7Qaj3IBA&bvm=bv.86956481,d.ZGU&psig=AFQjCNE1F6d6vTTi22nxzYfQgcJRhNeVhg&ust=1424965667999709

https://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=https://www.iconfinder.com/icons/17871/apply_check_clean_clear_correct_ok_ready_valid_yes_icon&ei=dO_tVJ_0O7CX7QaS0ICgCQ&bvm=bv.86956481,d.ZGU&psig=AFQjCNELlfsfq1ujck-2-fvGTYdzPNAOEw&ust=1424965777635843

Past performance and future returns

0

100

200

300

400

500

600

700

800

900

1000

19

95

19

95

19

96

19

97

19

97

19

98

19

99

19

99

20

00

20

01

20

01

20

02

20

03

20

03

20

04

20

05

20

05

20

06

20

07

20

07

20

08

20

09

20

09

20

10

20

11

20

11

20

12

20

13

20

13

20

14

20

15

Backtest: Past winners over 5 years


High quality coupled with cheap valuations

-200

0

200

400

600

800

1000

1200

20

03

20

03

20

04

20

04

20

04

20

05

20

05

20

05

20

06

20

06

20

06

20

07

20

07

20

07

20

08

20

08

20

08

20

09

20

09

20

09

20

10

20

10

20

10

20

11

20

11

20

11

20

12

20

12

20

12

20

13

20

13

20

13

20

14

20

14

20

14

Backtest: high ROE, low P/B


• Good quality companies:

• Sanlam

• SAB

Quality companies – busting the myth

• Story then – rise of independent asset manager, reputational damage,

AIDS impact

Sanlam

• Story now – emerging market opportunity, ARV’s, shift to capital light

businesses

Sanlam

• Story then – old world industry = low growth, mature SA market, entry of

competitors

SAB

• Story now – emerging market exposure, global industry consolidation,,

predictable earnings, low cost of debt

SAB

• Good quality companies: Sanlam, SAB

• Poor quality companies

• Anglo

• Truworths


• Story then – well managed, broadly diversified, good assets, political

influence

Anglos

• Story now – poor capital allocators, end of commodity super cycle, over

exposured to SA, old world industry, weak management

Anglos

Truworths

• Good quality companies: Sanlam, Medi-Clinic, SAB

• Poor quality companies: Anglo, Truworths

• Cyclical companies:

• WBHO


• Price, Pattern, Perspective

• Price – reference to value

• Pattern – reference to cycles

• Perspective – in-depth industry and company

knowledge

• SPW determination of value

• Normalise profitability, don’t extrapolate

• Apply justified exit multiple to ‘normal’ earnings

• Multiple based on quality considerations

SPW philosophy from a bottom up perspective

• Relying on current environment a poor guide

• Highest probability play is to let history and sound

economic theory guide us = normalisation

Forecasting

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

20

03

20

03

20

03

20

03

20

04

20

04

20

04

20

04

20

05

20

05

20

05

20

05

20

06

20

06

20

06

20

06

20

07

20

07

20

07

20

07

20

08

20

08

20

08

20

08

20

09

20

09

20

09

20

09

20

10

20

10

20

10

20

10

20

11

20

11

20

11

20

11

20

12

20

12

20

12

20

12

20

13

20

13

20

13

20

13

20

14

20

14

20

14

20

14

20

15

Actual earnings relative to predictions made three years prior

All Share Industrial Resource Financial

cycles in theory …

?

cycles in theory …

we value a company at its normalised levels

• Disconnect between pricing based on ST prospects and value

based on LT cash flows

• Value investing theoretically sound and proven, however value

investing at often requires time and patience to be effective

• SPW normalises when we value companies in order to ascertain

the most likely fair value

• Very few companies consistently outperform high expectations (low

probability) – we’ll likely miss these

• SPW will endeavour to deliver LT outperformance by capitalising

on pricing inefficiencies brought on by short termism

• Not always popular but proven to work

Conclusion

SPW performance – flagship

portfolios 30-Sep-15

Portfolio 1 year 3 years 5 years 10 years

Since

inception

Inception

date

Equity portfolio 6.51% 18.48% 17.28% 18.15% 19.62% 01-Apr-01

JSE All Share Total Return Index 4.79% 15.38% 14.64% 14.75% 16.77%

Relative performance 1.72% 3.10% 2.64% 3.40% 2.85%

Balanced portfolio 8.97% 17.54% 16.06% 15.54% 17.66% 01-Dec-04

AA High Equity 6.03% 12.24% 11.40% 11.06% 12.31%


Moderate balanced portfolio 9.90% 15.37% 14.34% 13.44% 14.64% 01-Dec-04

AA Medium Equity 5.82% 11.07% 10.57% 10.30% 11.22%

Relatie performance 4.08% 4.30% 3.77% 3.14% 3.42%

Conservative balanced portfolio 9.66% 13.59% 12.14% 11.41% 12.18% 01-Dec-04

AA Low Equity 6.93% 9.49% 9.36% 9.42% 9.98%


Thank you

Appendixes

• "What the wise man does in the beginning, the fool does in the end." -Warren Buffett

• "Our job is to find a few intelligent things to do, not to keep up with every damn thing in the

world." -Charlie Munger

• "We don't have to be smarter than the rest. We have to be more disciplined than the rest." -

Warren Buffett

• "We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait

indefinitely." - Warren Buffett

• "Value investing is risk aversion." - Seth Klarman

• "Value investing is at its core the marriage of a contrarian streak and a calculator." - Seth

Klarman

• "It is better to be roughly right than precisely wrong." - John Maynard Keynes

• “Doubt is not a pleasant condition, but certainty is absurd.” –Voltaire

• “The most common cause of low prices is pessimism – sometimes pervasive, sometimes

specific to a company or industry. We want to do business in such an environment, not because

we like pessimism but because we like the prices it produces.” -Warren Buffett

• "Ain't only three things to gambling: knowing the 60-40 end of the proposition, money

management, and knowing yourself." -"Puggy" Pearson

Value investing quotes

Date

12 months (%)

(01/10/14 –

30/09/15)

3 years (%)*

(01/10/12 –

30/09/15)

5 years (%)*

(01/10/10 –

30/09/15)

7 years (%)*

(01/10/08 –

30/09/15)

10 years (%)*

(01/10/05 –

30/09/15)

Aggressive portfolio 1.83% 12.62% 13.33% 14.43% 14.76%

Equity portfolio 6.51% 18.48% 17.28% 17.42% 18.15%

Rand hedge portfolio 2.69% 17.06% 16.87% 17.46% 16.77%

JSE All Share 4.79% 15.38% 14.64% 14.52% 14.75%

Technical momentum portfolio 14.50% 20.48% 19.60% 19.56% 19.74%

JSE All Share 4.79% 15.38% 14.64% 14.52% 14.75%

Flexible portfolio 5.21% 12.32% 12.08% - -

CPI + 5% 9.93% 10.60% 10.60% - -

Value equity portfolio -1.96% 13.07% 13.81% 15.22% 15.50%

SWIX 6.07% 16.17% 15.70% 15.23% 14.71%

Dividend income portfolio 2.85% 12.32% 12.30% 15.23% -

CPI + 3% 7.93% 8.60% 8.60% 8.15% -

Shari’ah equity portfolio -2.62% 12.87% - - -

Shariah unit trust avg -11.33% 5.78% - - -

* Annualised

Track record: equity portfolios

NOT FOR EXTERNAL DISTRIBUTION

Track record: balanced portfolios

Date

12 months (%)

(01/10/14 –

30/09/15)

3 years (%)*

(01/10/12 –

30/09/15)

5 years (%)*

(01/10/10 –

30/09/15)

7 years (%)*

(01/10/08 –

30/09/15)

10 years (%)*

(01/10/05 –

30/09/15)

Balanced 8.97% 17.54% 16.06% 17.57% 15.54%

AA high equity 6.03% 12.24% 11.40% 10.93% 11.06%

Moderate

balanced 9.90% 15.37% 14.34% 14.09% 13.44%

AA medium

equity 5.82% 11.07% 10.57% 10.46% 10.30%

Conservative

balanced 9.66% 13.59% 12.14% 13.14% 11.41%

AA low equity 6.93% 9.49% 9.36% 9.29% 9.42%

* Annualised

NOT FOR EXTERNAL DISTRIBUTION

long term value investing - jse 2015... · •value investing = buying assets at less than their...

Documents