Citywire New Model Adviser ConferenceDiversification and the importance of avoiding value trapsAlastair Mundy – Portfolio ...
Target audienceThis document is only for professional investors, professional financial advisors and, attheir exclusive di...
Four routes to Cautious Managed Funds                        Fettered Fund of Funds         Unfettered Fund of Funds      ...
Investec Cautious Managed FundOutperformer and portfolio diversifier        100                                 Investec C...
Do calendar year returns provide a good measure of risk?        “I would like to point out to people that a year is the am...
Are all Cautious Funds too risky?● No, but you’re only as good as your  clients....● ALL investors need to be willing to a...
Some methods of risk management● Diversification (Diworsification?) - let’s all be like Yale● Remain heavily invested in c...
How do we define risk?● Risk is understanding what you have bought● It is the potential for PERMANENT capital loss● You ca...
Our approach to risk management● Don’t pretend to yourself you know all the answers. Neuroses and schizophrenia are  the b...
The Dinner Party Approach to risk management● Invite a good mix● But don’t include too many revellers● Make sure you leave...
Investec Cautious Managed FundRolling 5 year total return        70%        60%        50%        40%        30%        20...
How is our investment approach different?Patience                         Long waiting periods and long holding periodsVal...
Avoiding Value Traps
Bad things do happen● History supports investing in out of favour shares● However, there are many examples of falling kniv...
1. Play the averages● We are not trying to get everything right. Bad things do happen● Too much fear can result in paralys...
2. Patience● Allow shares to fall significantly before purchase● Benefits:        − This typically allows us to avoid buyi...
3. Make sure they are cheap● Buying fallen knives alone is not sufficient – valuation is a key requirementPage 17 | CONFID...
4. Scenario testing● Make sure that a number of different outcomes are tested to ensure the company’s  balance sheet is ap...
5. Establish your circles of competence● We cannot hope to be experts on everything● Some subjects are harder than othersP...
6. Watch market share moves● Industries which exhibit large moves in market shares of its competitors suggest that  compan...
7. Consider capacity● Is it easy for capacity to exit the industry? Are incumbents involved in a race to the  bottom?● Can...
8. Look for early warning signs● Analysts continue to focus on the P & L, but sometimes the greatest clues are in the  bal...
What doesn’t work for us in spotting value traps1. Meeting management● They stretch the truth well and are typically very ...
Current Thoughts
Median FTSE 350 ex IT Index Price Earnings ratio suggeststhat stocks are fair valueTrailing PE Ratio – Median Stock       ...
...especially as corporate profitability is highUS profit share of US GDP*                                                ...
Investec Cautious Managed FundRolling 10 year total return since inception    180%    160%    140%    120%    100%        ...
Investec Cautious Managed FundAsset allocation and holdings as at 30.11.11Asset allocation                                ...
Supporting Advisers
Adviser support & resources                                                        Adviser and end-investor sales aids,   ...
Investec’s funds are available via leading platforms and lifecompaniesPage 31 | CONFIDENTIAL07717
Investec Sales Team                         David Aird           Charles Wilson                         Managing Director,...
Important informationThis communication is not for general public distribution. If you are a private investor and receive ...
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Investec final 1 citywire nma conference jan 12

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Investec final 1 citywire nma conference jan 12

  1. 1. Citywire New Model Adviser ConferenceDiversification and the importance of avoiding value trapsAlastair Mundy – Portfolio ManagerInvestec Cautious Managed Fund12-13 January 2012
  2. 2. Target audienceThis document is only for professional investors, professional financial advisors and, attheir exclusive discretion, their clients. No other person should rely on the informationcontained in this document.If you plan to show this to your clients, please ensure that you comply with any applicablelocal marketing regulations.This document is not to be generally distributed to the public.Page 2 | CONFIDENTIAL07717
  3. 3. Four routes to Cautious Managed Funds Fettered Fund of Funds Unfettered Fund of Funds Cautious Managed Funds ETCs Fixed Income Cash ETFs Overseas Equities Trackers UK Equities Fund of Passives Directly InvestedPage 3 | CONFIDENTIAL07717
  4. 4. Investec Cautious Managed FundOutperformer and portfolio diversifier 100 Investec Cautious Managed A Acc IMA Cautious Managed FTSE All Share Sector Period ranking 80 78.6 1 year 31/165 58.9 3 years 3/125 60 5 years 15/81 40 37.7 10 years 3/22 20 -20 -40 Nov 02 Nov 04 Nov 06 Nov 08 Nov 10 Nov 01 Nov 03 Nov 05 Nov 07 Nov 09 Nov 11 Mar 02 Mar 04 Mar 06 Mar 08 Mar 10 Mar 03 Jul 03 Mar 05 Jul 05 Mar 07 Jul 07 Mar 09 Jul 09 Mar 11 Jul 11 Jul 02 Jul 04 Jul 06 Jul 08 Jul 10Past performance should not be taken as a guide to the future and there is no guarantee that this investment will make profits;losses can be made.Source: Lipper, dates to 30.11.11, NAV based, (inclusive of all annual management fees but excluding any initial charges), net of UK basicrate tax, in sterling. Performance would be lower had initial charges been included and will vary between different share classes dependantupon their applicable charges. Returns to individual investors will vary in accordance with their personal tax status and tax domicile.Sector rankings based on IMA Cautious Managed.Page 4 | CONFIDENTIAL07717
  5. 5. Do calendar year returns provide a good measure of risk? “I would like to point out to people that a year is the amount of time it takes the earth to go around the sun. It is nothing to do with the investment or business cycle. You should really measure a fund manager over a full business cycle. ” Terry SmithPage 5 | CONFIDENTIAL07717
  6. 6. Are all Cautious Funds too risky?● No, but you’re only as good as your clients....● ALL investors need to be willing to accept volatility (i.e. temporary medium-term loss) to achieve returns● Investors need to be willing to invest for AT LEAST 5 years (and probably 10 years)● Investors must be in a position where they are NEVER forced sellersPage 6 | CONFIDENTIAL07717
  7. 7. Some methods of risk management● Diversification (Diworsification?) - let’s all be like Yale● Remain heavily invested in cash at all times● Short stocks, Pairs trades etc.● None are foolproof, BUT, EVEN WORSE, some provide false comfort and encourage overbettingPage 7 | CONFIDENTIAL07717
  8. 8. How do we define risk?● Risk is understanding what you have bought● It is the potential for PERMANENT capital loss● You cannot sensibly control risk, markets doPage 8 | CONFIDENTIAL07717
  9. 9. Our approach to risk management● Don’t pretend to yourself you know all the answers. Neuroses and schizophrenia are the best bedfellows● Don’t wish for all your investments to rise simultaneously ...if they do, they will probably fall simultaneously● Search for complementary assets...but don’t expect too much of them● Pay a great deal of attention to valuations – buying something which is cheap is a great way to reduce risk● Make sure you understand the worst-case scenario for each investment. If you can’t think of one, then you don’t understand what you are buyingPage 9 | CONFIDENTIAL07717
  10. 10. The Dinner Party Approach to risk management● Invite a good mix● But don’t include too many revellers● Make sure you leave early and while you are still enjoying yourself● Focus on creating a series of good dinner parties and not about creating the best dinner party everPage 10 | CONFIDENTIAL07717
  11. 11. Investec Cautious Managed FundRolling 5 year total return 70% 60% 50% 40% 30% 20% 10% 0% Apr-07 Oct-08 Oct-11 Oct-07 Apr-08 Oct-09 Oct-10 Apr-11 Feb-08 Feb-09 Feb-10 Feb-11 Jul-10 Jul-11 Jul-09 May-09 May-10 May-07 May-08 Jun-08 Jan-10 Jan-07 Jun-07 Jan-08 Jan-09 Jun-09 Jun-10 Jun-11 Dec-06 Dec-07 Nov-10 Nov-06 Nov-08 Nov-09 Dec-10 Nov-11 Aug-07 Sep-09 Sep-07 Aug-08 Sep-08 Sep-10 Aug-11 Mar-11 Mar-07 Mar-09 Mar-10Past performance should not be taken as a guide to the future and there is no guarantee that this investment will makeprofits; losses can be made.Source: Lipper, 30.11.06 to 30.11.11, NAV based, (inclusive of all annual management fees but excluding any initial charges), net ofUK basic rate tax, in sterling.Performance would be lower had initial charges been included and will vary between different share classes dependant upon theirapplicable charges. Returns to individual investors will vary in accordance with their personal tax status and tax domicile.Page 11 | CONFIDENTIAL07717
  12. 12. How is our investment approach different?Patience Long waiting periods and long holding periodsValue Committed value investors….we will not chase new paradigmsContrarian A focus solely on out of favour companies for our buy ideasBottom-up We are stock pickers with strong risk controlsMarket agnostic Our portfolio is constructed without reference to equity market levelsDownside aware We spend as much time worrying about what might go wrong as about what might go rightFocus on long term performance We are comfortable to struggle in the short-term and explain ourselves in the search for superior long term performanceEvolution and improvement A continual programme of navel-gazingPage 12 | CONFIDENTIAL07717
  13. 13. Avoiding Value Traps
  14. 14. Bad things do happen● History supports investing in out of favour shares● However, there are many examples of falling knives not recovering● What strategies do we employ to reduce our chances of catching these falling knives?Page 14 | CONFIDENTIAL07717
  15. 15. 1. Play the averages● We are not trying to get everything right. Bad things do happen● Too much fear can result in paralysisPage 15 | CONFIDENTIAL07717
  16. 16. 2. Patience● Allow shares to fall significantly before purchase● Benefits: − This typically allows us to avoid buying in favour momentum stocks before they collapse... − ...and also ensures that we can be more aware of the negatives when we are analysing the stocksPage 16 | CONFIDENTIAL07717
  17. 17. 3. Make sure they are cheap● Buying fallen knives alone is not sufficient – valuation is a key requirementPage 17 | CONFIDENTIAL07717
  18. 18. 4. Scenario testing● Make sure that a number of different outcomes are tested to ensure the company’s balance sheet is appropriatePage 18 | CONFIDENTIAL07717
  19. 19. 5. Establish your circles of competence● We cannot hope to be experts on everything● Some subjects are harder than othersPage 19 | CONFIDENTIAL07717
  20. 20. 6. Watch market share moves● Industries which exhibit large moves in market shares of its competitors suggest that companies are more likely to implodePage 20 | CONFIDENTIAL07717
  21. 21. 7. Consider capacity● Is it easy for capacity to exit the industry? Are incumbents involved in a race to the bottom?● Can capacity enter the industry easily and put a lid on returns?Page 21 | CONFIDENTIAL07717
  22. 22. 8. Look for early warning signs● Analysts continue to focus on the P & L, but sometimes the greatest clues are in the balance sheetPage 22 | CONFIDENTIAL07717
  23. 23. What doesn’t work for us in spotting value traps1. Meeting management● They stretch the truth well and are typically very plausible● They cannot provide inside information● They really do believe conditions will improve...but belief is not always enough2. Forecasting the future● Forecasting the future is very difficult and can lead to the risk of over-confidence and the refusal to consider other alternatives3. Buy all falling knives● Might work...but will provide many sleepless nightsPage 23 | CONFIDENTIAL07717
  24. 24. Current Thoughts
  25. 25. Median FTSE 350 ex IT Index Price Earnings ratio suggeststhat stocks are fair valueTrailing PE Ratio – Median Stock The median stock 25 FTSE350 ex-Investment Trusts Index looks far less Equities attractive... expensive 20 15 10 ...and assumes the current level Equities 5 of profitability is cheap sustainable Dec-87 Nov-90 Dec-94 Nov-97 Dec-01 Nov-04 Dec-08 Nov-11 Aug-85 Sep-96 Aug-99 Sep-03 Aug-06 Sep-10 Sep-89 Aug-92 Oct-86 Apr-90 Oct-93 Apr-97 Oct-00 Apr-04 Oct-07 Apr-11 Mar-86 Feb-89 Mar-93 Feb-96 Mar-00 Feb-03 Mar-07 Feb-10 Jul-88 Jul-02 Jul-09 Jul-95 May-87 May-94 May-01 May-08 Jan-85 Jun-91 Jan-92 Jun-98 Jan-99 Jun-05 Jan-06Source: Morgan Stanley, 30.11.11Page 25 | CONFIDENTIAL07717
  26. 26. ...especially as corporate profitability is highUS profit share of US GDP* Mean reversion could come through increases in: labour Corporate costs, interest costs, tax profitability rates, capital expenditure high and raw materials Corporate profitability low*Post-Tax with IVA CCAA adjSource: BEA, Nomura Strategy research, February 2011, relates to US market and consensus estimatesPage 26 | CONFIDENTIAL07717
  27. 27. Investec Cautious Managed FundRolling 10 year total return since inception 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Oct-09 Apr-11 Oct-03 Oct-04 Apr-06 Apr-07 Oct-08 Feb-11 Feb-05 Feb-06 Feb-10 Jul-05 Jul-09 Jul-06 Jul-10 May-05 May-04 May-09 May-10 Jan-04 Jan-07 Jan-08 Jun-08 Jun-03 Jun-07 Jun-11 Sep-05 Sep-06 Aug-03 Aug-04 Aug-07 Aug-08 Sep-10 Sep-11 Nov-06 Dec-09 Nov-10 Dec-04 Dec-05 Nov-07 Dec-08 Nov-11 Mar-04 Mar-08 Mar-09Past performance should not be taken as a guide to the future and there is no guarantee that this investment will makeprofits; losses can be made.Source: Lipper, 07.06.93 to 30.11.11, NAV based, (inclusive of all annual management fees but excluding any initial charges), net ofUK basic rate tax, in sterling. Performance would be lower had initial charges been included and will vary between different shareclasses dependant upon their applicable charges. Returns to individual investors will vary in accordance with their personal taxstatus and tax domicile.Page 27 | CONFIDENTIAL07717
  28. 28. Investec Cautious Managed FundAsset allocation and holdings as at 30.11.11Asset allocation Top 10 equity holdings % of fund (excl. gold shares) Norwegian Government GlaxoSmithKline 3.4 Bonds 10.7% Signet Jewelers 3.2 Corporate Bonds Royal Dutch Shell 3.2 7.8% UK Equities HSBC Holdings 2.7 34.6% US Index-Linked Unilever 1.9 Government bonds Kingspan 1.8 9.6% Travis Perkins 1.6 UK Index-Linked Grafton Group 1.4 Government bonds UK Commercial Property Trust 1.4 3.9% US Equities AstraZeneca 1.3 Cash and short 2.9% dated European Government Equities Modified Gold Shares Japanese Bond type Bonds 1.5% 7.2% Equities Duration 12.5% 9.3% Corporate 3.92 Index-Linked 7.73The portfolio may change significantly over a short period of time. This is not a buy or sell recommendation for any particular stock.Data to 30.11.11. Source: Investec Asset Management*Index is FTSE All Share.Page 28 | CONFIDENTIAL07717
  29. 29. Supporting Advisers
  30. 30. Adviser support & resources Adviser and end-investor sales aids, manager updates and factsheetsCustomise our website to suit youVideo and webcast updates Online Fund pagesPage 30 | CONFIDENTIAL07717
  31. 31. Investec’s funds are available via leading platforms and lifecompaniesPage 31 | CONFIDENTIAL07717
  32. 32. Investec Sales Team David Aird Charles Wilson Managing Director, Sales Director UK Client GroupPage 32 | CONFIDENTIAL07717
  33. 33. Important informationThis communication is not for general public distribution. If you are a private investor and receive it as part of a general circulation, pleasecontact us at +44 (0)20 7597 1900.The value of this investment, and any income generated from it, will be affected by changes in interest rates, general market conditionsand other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. The Fund’sinvestment objective will not necessarily be achieved and investors are not certain to make profits; losses may be made. All theinformation contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated arehonestly held but are not guaranteed and should not be relied upon.This is not a buy, sell or hold recommendation for any particular security. The portfolio may change significantly over a short period oftime.This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offerfor sale. The full documentation that should be considered before making an investment, including the prospectus and simplifiedprospectus or offering memorandum, which set out the fund specific risks, is available from Investec Asset Management.This communication should not be distributed to private customers who are resident in countries where the Fund is not registered for saleor in any other circumstances where its distribution is not authorised or is unlawful. Please visitwww.investecassetmanagement.com/registrations to check registrations by country.In the USA, this communication should only be read by institutional investors, professional financial advisers and, at their exclusivediscretion, their eligible clients, but must not be distributed to US Persons. THIS INVESTMENT IS NOT FOR SALE TO US PERSONS.Telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management Ltd (IAM),January 2012. IAM is authorised and regulated by the Financial Services Authority.Page 33 | CONFIDENTIAL07717
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