Investors Seminar October 2012 1 Investors Seminar October
Investors’ Seminar October 2012 1
Investors’ Seminar October 2012 Historical Data; Recent Events Forecasts Recommended Investments The 4 steps needed 2
Hayden Asset Allocation Model 3
The 4 Step Process…. 1 4
FP Framework 1. Goals – realistic cashflow needs 2. Structure & Strategy Super & Pensions Tax & Centrelink Matters Drawdowns and/or Contributions 3. Super Fund Admin SMSFs vs Wholesale/Retail/Industry etc 5
The 4 Step Process…. 2 6
The Segmentation Bar Cashflow Needs Peace of Mind Confidence to let LHS focus on the longterm Trade-off for security and for long-term returns Ability to “stay the journey” 7
The 4 Step Process…. 3 8
Cash/Term Deposits Government Guarantee Security – Ratings Agencies Security – Short-term Access Return of the $, not return on the $ 9
Term deposit rates Term Deposit “Rate Specials” Forecast RBA Cash Rate SFE Cash Futures Source: RBA, Perennial. SFE as at 22 August 2012 10
The 4 Step Process…. 4 11
Investors’ Seminar October 2012 The LHS = Long-term Investing Recent Events Long-term Data and Charts Forecasts 12
How are we “starting” from here? GFC – Global Financial Crisis Sovereign Debt Crisis De-leveraging 13
The GFC Ø Debt – Western Consumers Ø Sub-Prime in US; CDOs–and inter-bank transfers Ø Fear replaced Greed in Markets Ø Banking Crisis – near collapse Ø Lower Consumer and Business Confidence Ø Negative Cycle –Profits Drop; Unemployment increases; Consumer Confidence drops etc …. then Sovereign Debt issues…………… 14
The “Euro” family Euro (mil) GDP Sovereign Debt Source: Eurostats 2010 data 15
The debt inheritance 60% of GDP = “healthy government debt levels” Source: OECD Economic Outlook May 2011 16
Long term bond yields Greece Portugal Spain Italy Germany Source: Bloomberg 17
Historical Data 18
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Crisis – What’s Biggest? Source: AMP Capital Investors
Forecasts 21
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LHS – Long-Term Investing 10 Year Investing vs 1 Year Investing “Rolling Smoothed” 10 Year Returns Hayden Investment Paradox Inflation is Crucial. Purchasing Power 23
Selecting Asset Sectors & Specific Investments The 3 Characteristics of Investments: 1. Regular Return 2. Capital Gain 3. Access to Capital 24
Selecting Asset Sectors & Specific Investments How important are these characteristics for the 2 distinct investment sections: Regular Return RHS 5/10 LHS 10*/10 Capital Gain Access to Capital n/a 10/10 10*/10 N/A *Best Total Return is the Goal 25
Selecting Asset Sectors & Specific Investments Investment Alternatives to Eliminate: • Blended portfolios (eg Balanced etc) – will smooth volatility (over short periods) but not maximise returns • Any investment that focuses on Regular Return or on Capital Gain • Structured Products • Cash will not win based on “rolling smoothed” returns • Investments favoured by Speculators & Traders • Non-productive Investments 26
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Shares vs Property vs Infrastructure Shares – Best Businesses - Industry – Barriers to Entry - Products & Services - Consumers - Management – Board and Execs Property - Land - Improvements Infrastructure – Government Intervention 29
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Investors’ Seminar October 2012 Drilling Down – Shares vs Co. vs Businesses 31
Shares/Co. /Businesses Dividends + Capital Gains Corporate Structure Products & Services; Trade; Supply & Demand 32
Shares/Co. /Businesses Shares – a right to future Earnings (Profits) - some people see them as a collectable like antiques, art etc…. a tradable piece of paper? ? Company - Shareholders appoint the Board - The Board contracts Senior Management - Big picture and Day-to-Day decisions Businesses - the ability to trade - supply and demand 33
Australian employment Source: Bloomberg, ABS 34
Australian employment Impacted by A$ Source: Bloomberg, ABS 35
Australian employment Impacted by Fiscal Policy Source: Bloomberg, ABS 36
Australian employment Impacted by Monetary Policy Source: Bloomberg, ABS 37
A closer look at Step 3 – ICVR stock filters INDUSTRY I Industry Rating Products Supply & Demand Key Macro-economic variables Growth Rate Structure COMPANY QUALITY C Company Quality Industry positioning Barriers to entry Recurring- revenue Growth rates Margins Return on Equity VALUATION V Company Valuation R Company Risk Rating Barriers to entry Return on Capital Government intervention Sustainability Free Cash Flow Dividend history Management- experience and track record Management- incentives and stake in equity Corporate Strategy Corporate- Governance Balance sheet- strength Enterprise Value / EBITDA Stock Price / Cash EPS Market Cap. / Free Cash Flow Stock Price / Dividend PS Market Cap. / Book Value RISK RATING Key macro-economic & weathersensitivities Key customers and suppliers Government influence Level of recurring- revenue Barriers to entry Balance sheet- strength Free Cash Flow Corporate Strategy Corporate -Governance Market –Capitalisation Share liquidity Major shareholders
The gulf between best and worst stocks 39
Sub-sets of Shares Smaller (and Micro) Companies: Ability to Sell; Volatility International Shares: The $A; need extra knowledge of the business environment; need specific knowledge about the corporate structure 40
Do Small Caps Outperform? • Fama and French (US) 1964 Small Caps vs S&P 500* Total Returns from 1926 to 2011 Average Annual Return Growth of $10, 000 S&P 500 US Small Caps 9. 5% 11. 3% $23. 4 million $100. 4 million 41 Source: CRSP. Small Caps = bottom 4 deciles of stocks.
Deconstructing International Equities Performance • International underperformance comprised two elements, market valuation + currency. The following charts deconstruct this underperformance: 42
Specialist Stock-picker AS IS P TD Cash XYZ Manager 43
Specialist Stock-picker What are we buying? 1. A designated portfolio of shares 2. A contract to manage the portfolio and instigate changes to ensure best forecast (prognostic) returns How do we ensure a high quality result 1. Analyse the portfolio of shares 2. Analyse the skill-set and the expectations of both parties 44
Specialist Stock-picker The Top 10 Holdings: 1. Are the portfolios of shares consistent with our stated goals 2. Industry – is it an Industry conducive to good longterm returns 3. Management – is the Board and Senior Management able to act promptly and professionally? Can Expenditure be varied when Revenue changes? 45
What Could go Wrong? The Risks? Volatility? The Flight Path – it’s the Flight Path that kills you. . J M Keynes: “The markets can be irrational for longer than an Investor can be solvent” However – we are not forced to sell. The LHS maintains a 10 year focus. True long-term investing. We have clearly defined goals – the LHS expects and accepts volatility 46
What Could go Wrong? The Risks? Volatility – it’s not a risk; it’s a certainty Risk Capacity Risk Attitude Longevity Risk Inflation Risk Liquidity Risk Credit Risk; Diversification Risk; Market Risk Market Timing Risk 47
Developments at Hayden. FS The Book - The Rational Investor The Fund – Patient Capital Fund The Websites – RI & FPF A positive for Hayden. FS Investors – the long-term commitment; mutual agreement 48
The 4 Step Process…. 1 49
The 4 Step Process…. 2 50
The 4 Step Process…. 3 51
The 4 Step Process…. 4 52
Peace-of-mind for Investors 1. Part-own a lot of great businesses. We have a portfolio of businesses that is well diversified across locations, industries and size. 2. Employing (contracting) some very wise people to monitor and change our portfolio of investee businesses when necessary. 53
The Boxes to Tick Realistic Goals Structure/Strategy (Tax etc) Super Fund Admin Asset Mix 1 -Cash/Term. Deposits Asset Mix 2–Growth Section (LHS) Stock-Picker Selection 54
- Slides: 54