Prudential november 2012

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Prudential november 2012

  1. 1. Senate GroupHamilton van Breda November 2012Head of Retail Sales
  2. 2. TAA Philosophy, Processand People
  3. 3. Our Investment philosophyWe are prudent value investorsValuation based approach to pricing of assets • Use known facts (historical and current data), rather than trying to forecast the future • Use long run anchors of where assets should be priced and buy when the current valuation is below the fair value.Construct portfolios on risk conscious basisConsistent philosophy & unemotional application of process will lead toconsistent performance
  4. 4. Asset Allocation in practiceFirst step – establish a long run fair value for each asset class 4
  5. 5. Long Run Equilibrium Assumptions for South African Assets Term Inflation Default Property risk Equity risk premium premium premium premium premium 9.00 8.00 8.00 6.75 7.00 Increasing Real Returns 6.00 5.00 5.00 4.00 3.50 2.75 3.00 2.50 2.00 1.00 0.00 Cash Index-linked Government Corporate Property Equity Bonds Bonds Bonds (A) Increasing riskSource: Prudential Portfolio Managers 5
  6. 6. Asset Allocation in practiceFirst step – establish a long run fair value for each asset classSecond step – compare the current valuation to these long run anchors • Looking for significant relative mis-pricing of assets • Identifying situations where: • perceptions of risk temporarily shift • price moves exaggerate fundamental developments • fundamental expectations themselves subject to biases 6
  7. 7. Current SA returns vs. equilibrium Increasing Real returns Increasing riskSource: Prudential Portfolio Managers – 05.11.2012
  8. 8. Investment Process OverviewThe local Asset Allocation team, in conjunction with Prudential’s global teams, decides onexposure to individual markets, asset allocation, government vs corporate bonds and currencies Bi-weekly Asset Quarterly GMF Allocation Asset Allocation Team meetings in meetings Marc Beckenstrater London David KneeAd-hoc discussions Intra-quarterly Michael Moyle teleconferences in response tomarket movements Albert Arntz with London and Singapore Grace Debeila
  9. 9. Global Asset Allocation Specialists Global Tactical Asset Allocation Team South African Team London Team Asian Team John Betteridge Kelvin Blacklock David Knee Director of Portfolio Management CIO, GAA Head of Fixed Income Group Head of TAA Joanna Ong Dave Fishwick Investment Director Head of Global Macro Team Marc Beckenstrater Riki Frindos Chief Investment Officer Tony Gaughan Managing Director Investment Director Head of Global Macro Team Michael Moyle Nicholas Ferres Head of Real Return Eric Lonergan Investment Director Macro Team Member Albert Arntz Rajagopal Raman Portfolio Manager Jenny Rodgers Quantitative Analyst Global Equity Analysis Grace Debeila Amod Shah Juan Nevado TAA Analyst Director of Strategy and Economics Junior Portfolio Manager Tony Finding Florence Yap Analyst Product Manager
  10. 10. Market Valuations
  11. 11. Investors paying very high price for supposed risk free assets UK Earnings Yield versus Real Required Rate of Return on 10Y Government Bond 16.0% UK EY1 UK 10yr Real Bond Yield 14.0% 12.0% 10.0% 8.0% Real Yield % 6.0% 4.0% 2.0% 0.0% -2.0% 31-Jan-90 31-Jan-91 31-Jan-92 31-Jan-93 31-Jan-94 31-Jan-95 31-Jan-96 31-Jan-97 31-Jan-98 31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 31-Jan-04 31-Jan-05 31-Jan-06 31-Jan-07 31-Jan-08 31-Jan-09 31-Jan-10 31-Jan-11 31-Jan-12Source: Datastream , Factset and Bloomberg – 30.09.2012 Growth pessimism at multi-decade high
  12. 12. Current global valuation relative to equilibriumSource: M&G Investments and Prudential Portfolio Managers – 05.11.2012
  13. 13. FTSE/JSE All Share Index Price and EarningsSource: I-Net Bridge, Bloombergs, Prudential Estimates
  14. 14. 0.0 0.5 1.0 1.5 2.0 3.0 3.5 4.0 4.5 2.5 Jan 80 Jan 81 Jan 82 Jan 83 Jan 84Source: Bloomberg 30.09.2012 Jan 85 Jan 86 Jan 87 Jan 88 SA Price to Book Jan 89 Jan 90 Jan 91 Jan 92 Jan 93 World and SA Price to Book Jan 94 Jan 95 Jan 96 Jan 97 World Price to Book Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
  15. 15. Average annual long-term (>10year) Treasury yields 14% 12% 10% 8% 6% Average: 5% 4% 2% 10/10/2012 2.6% 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000Source: BofA Merrill Lynch Global Equity Strategy; US Treasury Composite; Haver
  16. 16. SA Corporate Bond ValuationsSource: Standard Bank
  17. 17. -2.5 -1.5 -0.5 0.5 1.5 2.5 0 1 2 -1 -2 Jan 01 Apr 01Source: Bloomberg Jul 01 Oct 01 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 SA Bond Valuation Jan 04 Apr 04 SA10 less Equilibrium Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Std Dev -1 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Std Dev +1 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12
  18. 18. SA Yield Curve Slope 10Y – cash 30Y – cash 30Y – 10YSource: I-Net Bridge
  19. 19. Breakeven Inflation R208 - R197 InflationSource: I-Net Bridge
  20. 20. 0.0 0.5 1.0 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1.5 5.5 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05Source: I-Net Bridge and Prudential Portfolio Managers 30.09.2012 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Inflation Linked Bond Yields vs Equilibrium Jan 09 Inflation Linked Bond Yield Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Prudential equilbruim for Inflation Linked Bonds Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12
  21. 21. 100 200 300 400 500 600 700 800 900 0 01 Jan 25 01 Jan 28 01 Jan 31 01 Jan 34 01 Jan 37 01 Jan 40 01 Jan 43 01 Jan 46 US BBB Spreads 01 Jan 49 01 Jan 52 01 Jan 55 01 Jan 58 01 Jan 61 01 Jan 64 SA A Spreads 01 Jan 67Source: Morgan Stanley, Moody’s, The Yield Book, NBER , Bloomberg/Merrill Lynch 01 Jan 70 01 Jan 73 01 Jan 76 Global Credit Valuations Still Elevated 01 Jan 79 01 Jan 82 01 Jan 85 01 Jan 88 01 Jan 91 01 Jan 94 01 Jan 97 01 Jan 00 01 Jan 03 01 Jan 06 01 Jan 09 01 Jan 12 SA = 141 US = 245
  22. 22. Performance Source: I-Net Bridge
  23. 23. SA Listed Property Investment CasePPM Multi-Asset class funds have recently sold property and purchased downside protectionAfter these events our funds are broadly neutral weight the asset class(i.e. balanced marginally overweight and real return underweight)Negative• Absolute valuation expensive relative to historical levels• Weak office property fundamentals (high albeit stable vacancy factors)• Operating cost pressuresPositive• Property return prospects look reasonable against cash• Recovery in distribution growth expected in the coming year• Stable or improving retail and industrial property fundamentals
  24. 24. SA Property ValuationSource: INET Bridge, Prudential Estimates
  25. 25. 70 80 90 100 120 130 140 150 160 170 110 Dec 69 Dec 70 Dec 71Source: I-Net Bridge Dec 72 Dec 73 Dec 74 Dec 75 Dec 76 Dec 77 Dec 78 Dec 79 Dec 80 Dec 81 Dec 82 Dec 83 Dec 84 Dec 85 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Rand Real Effective Exchange Rate Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12
  26. 26. Risk – Return 9% Dividend Maximiser 8% Fund SA Equity 7% Balanced Fund SA Property Annualised Real Return 6% Inflation Foreign Equity 5% Plus Fund Enhanced 4% Income Fund Foreign Bonds 3% SA Bonds SA ILBs 2% SA Cash Foreign Cash 1% 0% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% Annualised Standard DeviationSource: INet Bridge, Prudential
  27. 27. Prudential Enhanced IncomeFund
  28. 28. Enhanced Income Strategic Benchmark Strategic Asset Indicative Asset Class Allocation Ranges SA Cash 50% 0 to 100% SA ILBs 10% 0 to 100% SA Government Bonds 10% 0 to 100% SA Corporate Bonds 15% 0 to 75% SA Property 5% 0 to 25% International Fixed Income 10% 0 to 20% of which: Government Bonds 5% 0 to 20% Corporate Bonds 5% 0 to 20% International Cash 0% Equity 0% 0 to 10% Total 100%Source: Prudential Portfolio Managers
  29. 29. Enhanced Income Fund Performance (after fees) to 30 September 2012 ALBI Fund STEFI 1-3 Years 3 months 3.6% 1.7% 1.4% 6 months 6.7% 4.7% 2.8% 12 months 11.5% 9.2% 5.6% 3 years 10.6% 8.9% 6.3% Since inception 1 July 2009 (ann.) 10.7% 8.8% 6.2%Source: Prudential Portfolio Managers, Morningstar
  30. 30. Enhanced Income Fund Asset Allocation as at 30 September 2012 Fund Asset Allocation Strategic Asset Allocation 60.0% 50% 50.0% 48% 40.0% 35% 30.0% 23% FRN 20.0% 15% 12% 10% 10% 9% 10% 10.0% 5% 5% 2% 1% 0% 0% 0% 0.0% SA Cash SA ILBs SA Government SA Corporate SA Property Foreign Bonds Foreign Cash Foreign Equity Bonds BondsSource: Prudential Portfolio Managers
  31. 31. Prudential Inflation Plus Fund
  32. 32. Inflation Plus Fund ObjectivesPrime objective• Outperform inflation by 5% per annum before fees over rolling 3 year periodsSecondary objective• Aim for no capital loss over a rolling 12 month period. (Best efforts; not guaranteed)
  33. 33. 10.9% 323.4 15.1% 187.3 494.0 5.7% Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09Performance since inception to 30 September 2012 Jun-09 Inflation Mar-09 Dec-08 Sep-08 Jun-08 Mar-08 Dec-07 Objective Sep-07 Jun-07 *Objective CPI+6% until 31 July 2009, CPI+5% from 1 August 2009. Mar-07 Dec-06 Sep-06 Jun-06 Mar-06 Pru Inflation Plus Dec-05 Sep-05 Jun-05 Mar-05 Dec-04 Sep-04 Jun-04Inflation Plus Fund Mar-04 Dec-03 Sep-03 Jun-03 Mar-03 Dec-02 Sep-02 Jun-02 Mar-02 Dec-01 Sep-01 Jun-01 400 480 440 360 320 280 240 200 160 120 80 R100 Initial Investment
  34. 34. Inflation Plus Fund Quarterly Returns 20% Fund Equity Bonds Return 15.3% 16.4% 11.0% Volatility 6.0% 18.1% 6.7% 15% 10% 5% 0% Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 -5% -10% Prudential Inflation Plus Fund Equity Bonds -15% -20%Source: INet, Prudential Portfolio Managers
  35. 35. Inflation Plus Fund Asset Allocation as at 30 September 2012 Fund Asset Allocation Strategic Asset Allocation35.0% 32%30.0% Total Equity 28.9% Total Foreign 24.4% 26%25.0% 23%20.0% 18% 16%15.0% 14%15% 13%10.0% 9% 8% 8% 8% 8%5.0% 4%0.0% SA Equity Foreign Equity SA Property SA Bonds Foreign Bonds SA IL Bonds SA Cash
  36. 36. Prudential Dividend MaximiserFund
  37. 37. Investment process Stages Asset Equity Bonds Allocation1. Value Assessment Equilibrium Spreads Valuation Screens anchors Inflation2. Understanding Real return Long run ROE, Balance Sheet analysis, inflation, ROA, margins Cash Flow the Fundamentals risk premium (DDM) analysis3. Portfolio Construction Exposure to risky assets 4. Monitor and Control Unintended Bets and DriftA rigorous, consistent process across asset classes which exploits mispricing opportunities prudently.
  38. 38. We have 2 objectives in the Dividend Maximiser1. To provide our clients with a dividend yield greater than that of the market2. To grow our clients capital and dividends in-line with the market
  39. 39. Standard Bank – An example of the type of company that meets our objectives, at the right price DY = 2% DY = 3% Standard Bank Share Price DY = 4.5% Standard Bank in 1984 Dividend = R 4.50 Div Yield = 2 % = Implied Price of R225 Div Yield = 3 % = Implied Price of R150 Div Yield = 4.5% = Implied Price of R100Source: I-Net Bridge
  40. 40. JSE and Dividend Growth63000 Over long periods, reinvested dividends are the53000 major part of your return. R100 invested in 1969 in the JSE will have43000 grown to over R62 000 in 43 years, the majority of which is dividends.330002300013000 3000 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-7000Source: Prudential Portfolios Managers
  41. 41. Cumulative Performance Since inception 1200 1034 19.6% Dividend Maximiser 1100 1000 Excess Return per year = 3.8% 727 900 16.4% 800 681 15.8% JSE All Share 700 600 General Price Index Equity Unit 500 Trust Mean 400 300 Inflation 207 200 5.7% 100 0 Jul-99 Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Inflation ALSI General Equity Unit Trust Mean Prudential Dividend Maximiser ASource: Morningstar and Prudential Portfolio Managers
  42. 42. The risk benefits of a focus on dividends Domestic Equity Value Sector - 5 years to 30 September 2012 12.0% Nedgroup Inv Value R 11.0% 10.0% Prudential Dividend Annual return (%) Maximiser A 9.0% SIM Value R 8.0% 7.0% Momentum Value A Cadiz Mastermind A 6.0% MET Equity Value A Investec Value R STANLIB Value A 5.0% Sasfin Value 4.0% Old Mutual Value R 3.0% 2.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% Risk (annualised standard deviation %)Source: Morningstar
  43. 43. Sector relative performanceSource: I-Net Bridge
  44. 44. Dividend Maximiser Fund Composition – Sector as at 30 September 2012Source: Prudential Portfolio Managers
  45. 45. Top Holdings and Activesas at 30 September 2012 Top 10 Holdings Top 5 Overweight Positions METROFILEMTN GROUP LTD 8.5%SASOL LTD 7.9% OLD MUTUAL PLCBHP BILLITON PLC 6.9% ABSA GROUP LTDANGLO AMERICAN PLC 5.8% GOLDFIELDS LTDOLD MUTUAL PLC 5.1% STANDARD BANKSTANDARD BANK 4.9% Top 5 Underweight PositionsBRITISH AMERICAN TOBACCO 3.9% FIRSTRAND LTDNASPERS LTD-N 3.5% ANGLOGOLD ASHANTIABSA GROUP LTD 3.5% REMGRO LTDRICHEMONT-DR 3.3% NAMPAK LTD 53.3% STEINHOFF INTL
  46. 46. Fund Holdings Summary• Resources • Maintain preference for diversified mining companies over single commodity stocks » overweight Anglo American, BHP Billiton, Exxaro » underweight Kumba Iron Ore, ACL, ARI, ASR • Fund remains underweight platinum » holding in Lonmin • Overweight Mondi • Overweight Sasol• Financials • Fund has moved overweight domestic banks » active positions in ABSA and Standard Bank » overweight to Nedbank taken through Old Mutual • Maintain overweight positions in global financials Investec and Old Mutual
  47. 47. Fund Holdings Summary• Industrials • Core positions in cheap interest rate sensitive stocks such as Imperial, Supergroup and AVI • Expensive Shoprite, Massmart and Truworths • Overweight Richemont • Special situation: Metrofile / Adcock / Netcare • Selection of recovery stocks Sun International and selected construction stocks
  48. 48. Disclosure Statement
  49. 49. Dividend Maximiser relative to Satrix Divi PlusSource: I-Net Bridge
  50. 50. How does the Prudential Dividend Maximiser Fund differ from theDividend Plus Index?FTSE/JSE Dividend Plus Index:• FTSE/JSE launched the Dividend Plus Index in August 2006. The Dividend Plus is a yield weighted index designed to select and measure the performance of the higher yielding shares on the JSE.• The index selects the top 30 high yield instruments based on a one year forecast dividend yield.Prudential Dividend Maximiser Fund:• Considers not only the forecast dividend yield, but also the cash generating ability of a company and it’s valuation.• Position sizes in the fund are then calculated after considering these factors, and based off the General Equity Unit Trust Mean. We do NOT weight according to dividend yield.

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