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PSG Fund Management

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  • 1. Current Challenges In Structuring Domestic Portfolios1 CONSISTENT CONSERVATIVE CONTRARIAN
  • 2. Money Market Outflows Q2 2012 R8.8bn Unit TrustInflows Q2 2012 242bn
  • 3. Why?
  • 4. 24.00% SA Prime19.00%14.00%9.00%4.00%
  • 5. SA Prime
  • 6. Please sir…Can I have some more…?
  • 7. Who were thewinners? Prudential Prudential Variable (Variable Equity Equity) Prudential (Low Equity) Fixed Interest (Variable Specialist)
  • 8. Why are the Balanced Funds Ruling?
  • 9. Structural Reasons Relative Reasons Winning Team Diversification Flexibility
  • 10. The Team
  • 11. Equity team Adrian Jan Neels Shaun Greg Henno Paul Philipp Clayton Mouton Van Schaik Le Roux Hopkins Vermaak Bosman Wörz B. Acc (Stell) B.Com B.Soc Sc. (Cum Laude), B. Com (Hons) (UNISA),(UCT), PDM B.Com (Econ) B.Com (UCT), B.Com (UCT), B.Com (Hons) CA (SA), (Stell),CFA, B.Com (Hons)(UCT), MBL (Stell), CFA CA (SA), CFA CA (SA), CFA (Stell), CFA M. Phil FFA (Stell), (UNISA) (Cambridge) CFA 17 Years 10 Years 14 Years 15 Years 15 Years 4 Years 8 Years 5 YearsInvestment Investment Investment Investment Investment Investment Investment InvestmentExperience Experience Experience Experience Experience Experience Experience Experience 11 CONSISTENT CONSERVATIVE CONTRARIAN
  • 12. PSG Asset Management: Core funds Risk Fund Type Fund Name High Equity PSG Equity Fund PSG Global Equity Fund & High Equity PSG Global Equity Feeder Fund Moderate to Flexible PSG Flexible Fund High Moderate Prudential PSG Balanced Fund Moderate to Stable* PSG Stable Fund* Low Low Income* PSG Income Fund* Negligible Money Market PSG Money Market Fund * Launched 1 September 201112 CONSISTENT CONSERVATIVE CONTRARIAN
  • 13. PSG Asset Management: Core funds PSG Equity PSG Flexible PSG Balanced PSG Global PSG Stable EquityReturns PSG Income PSG Money Market Average Risk 13 CONSISTENT CONSERVATIVE CONTRARIAN
  • 14. Philosophy
  • 15. PSG Asset Management: Philosophy Consistent - Consistently applied investment process Conservative - Companies with a margin of safety Contrarian - Out of favour assets15 CONSISTENT CONSERVATIVE CONTRARIAN
  • 16. PSG Balanced Fund: ManagersAdrian Clayton Neels van Schaik16 CONSISTENT CONSERVATIVE CONTRARIAN
  • 17. PSG Balanced Fund: 13 years, one manager 3 years 9 out of 58 14.96% Inception (June 1999) 3 out of 10 11.04%17 CONSISTENT CONSERVATIVE CONTRARIAN
  • 18. Portfolio Construction
  • 19. Process
  • 20. PSGAM: Equity research process Philosophy Moat, Management & Margin of Safety Investment Local AND Global Companies Universe Proprietary screens, company results to find Idea Generation potential opportunities Fundamental Detailed analysis on potential opportunities in Analysis terms of our investment philosophy Buy Investment Committee determines domestic & List offshore Buy List by means of majority vote Fund managers can exercise own discretion, but Portfolio use the Buy Lists as their main tool for portfolio Construction construction. Fund managers take responsibility for their fund’s performance20 CONSISTENT CONSERVATIVE CONTRARIAN
  • 21. PSGAM: Equity selection process Moat Some form of sustainable competitive advantage Clear and understandable business model Positive free cash flow, which is distributed to shareholders in the form of dividends Management Managed by individuals with proven track records Honest and transparent financial reporting Margin of safety Buy shares in exceptional businesses at low valuations21 CONSISTENT CONSERVATIVE CONTRARIAN
  • 22. Moat example: Sasol Clear and understandable business model OPPORTUNITY Sasol owns technology used to convert coal and natural gas into liquids22 CONSISTENT CONSERVATIVE CONTRARIAN
  • 23. Moat example: Microsoft Some form of sustainable competitive advantage Market shares (Windows) Stable market shares with a dominant leader = strong historical moat High switching costs is like a hook into customer23 CONSISTENT CONSERVATIVE CONTRARIAN
  • 24. Management example: BerkshireManaged by individuals with proven track records Long term value created for shareholders: • SP: +21% p.a. • NAV: +20% p.a. $1,000 invested in 1965 is worth more than $8m today 24 CONSISTENT CONSERVATIVE CONTRARIAN
  • 25. Margin of Safety100 90 The lower the 80 price relative to 70 the value of the assets/cash 60 flow, the cheaper the 50 business 40 30 20 10 0 Value of Assets - net of debt Price Can you buy R1 of value for 60 cents?
  • 26. Margin of safety example: Berkshire Buy shares in exceptional businesses at low valuations Berkshire Hathaway Share Price Intrinsic Value Adj EPS 600 550 500 OPPORTUNITY 45031 Dec 96 = 100 400 350 300 250 200 150 100 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 Underlying business is growing, but share price is flat 26 CONSISTENT CONSERVATIVE CONTRARIAN
  • 27. Current themes from our portfolios
  • 28. Core Themes from our Portfolios OFFSHORE MID-CAP DOMESTIC INDUSTRIALS DOMESTIC LARGE-CAP INDUSTRIALS LARGE-CAP DOMESTIC RESOURCES28 CONSISTENT CONSERVATIVE CONTRARIAN
  • 29. The battle of the brewers VS29 CONSISTENT CONSERVATIVE CONTRARIAN
  • 30. Offshore: Margin of Safety i.e. Heineken World’s best premium beer brand. Big market position in fastest growing markets (Africa, Latam, Asia). Buy at 12.9 times earnings (SAB 25 times).30 CONSISTENT CONSERVATIVE CONTRARIAN
  • 31. Heineken versus SAB Miller 2.5 2.0 1.52.5 1.0 0.52.0 0.0 Jan-08 Jul-05 Jul-10 Mar-07 Mar-12 Sep-04 Nov-08 Sep-09 May-06 May-111.5 Heineken ROE / SAB Miller ROE1.00.5 - Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Heineken Pbook / SAB Miller Pbook31 CONSISTENT CONSERVATIVE CONTRARIAN
  • 32. JSE: A tale of two markets0.400.350.300.250.200.150.100.050.00 Feb-91 Feb-94 Feb-97 Feb-00 Feb-03 Feb-06 Feb-09 Feb-12 Aug-92 Aug-95 Aug-98 Aug-01 Aug-04 Aug-07 Aug-10 May-08 May-90 May-93 May-96 May-99 May-02 May-05 Nov-00 Nov-91 Nov-94 Nov-97 Nov-03 Nov-06 Nov-09 Nov-12 May-11 Mr Price / Sasol relative stock price Mr Price / Sasol relative earnings Divergence between certain sectors driven by sentiment and not fundamentals 32 CONSISTENT CONSERVATIVE CONTRARIAN
  • 33. Understanding the concept of risk? Growth in Profits ( = Return on Shareholder Capital x % of Profits reinvested) + + Rating change Dividends + (Price/Earnings, Pri ce/Book)33 CONSISTENT CONSERVATIVE CONTRARIAN = Long term returns
  • 34. Understanding the concept of risk? Mar-08 Mar-12 Dividend Yield 8% 2% Return on Shareholder Capital 40% 47% % of Profits reinvested 50% 30% Long term growth rate 20% 14% Rating (P/E = years of earnings) 7 28 Assumed sustainable rating 15 15 Potential rating gain/(loss) 114% -46% Potential annual return (5yr Investment Horizon) 44.5% 4.8% 34 CONSISTENT CONSERVATIVE CONTRARIAN
  • 35. Sasol: The risk is better priced8,1924,0962,0481,024 512 256 128 64 Jan-02 Jan-87 Jan-92 Jan-97 Jan-07 Jan-12 Mar-06 Mar-91 Mar-96 Mar-01 Jul-89 Jul-94 Jul-99 Jul-04 Jul-09 Sep-88 Sep-93 Sep-98 Sep-03 Sep-08 May-90 May-95 May-00 May-05 May-10 Mar-11 Nov-87 Nov-92 Nov-97 Nov-02 Nov-07 Nov-12 Sasol Reported profits Sasol Average 5 yr Profits Investors spend most of their time worrying about things that are unpredictable35 CONSISTENT CONSERVATIVE CONTRARIAN
  • 36. - 36 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 5.0 May-90 Feb-91 Nov-91 Aug-92 May-93 Feb-94 Nov-94 Aug-95 May-96 Feb-97CONSISTENT CONSERVATIVE CONTRARIAN Nov-97 Aug-98 May-99 Feb-00 Nov-00 Sasol Cyclically Adjusted P/E Aug-01 May-02 Feb-03 Nov-03 Aug-04 May-05 Feb-06 Sasol: Rating opposite to Mr Price Nov-06 Mr Price Trailing P/E Aug-07 May-08 Feb-09 Nov-09 Aug-10 May-11 Feb-12 Nov-12
  • 37. Understanding the concept of risk? Jun-08 Jun-12 Dividend Yield 2% 5% Return on Shareholder Capital 23% 20% % of Profits reinvested 65% 65% Long term growth rate 15% 13% Rating (P/E = years of earnings) 26 11 Assumed sustainable rating 14 14 Potential rating gain/(loss) -46% 27% Potential annual return (5yrs) 5% 22% 37 CONSISTENT CONSERVATIVE CONTRARIAN
  • 38. 38 0 2 -16 -14 -12 -10 -8 -4 -2 -6 May-90 Jan-91 Sep-91 May-92 Jan-93 Sep-93 May-94 Jan-95 Sep-95 May-96 Jan-97CONSISTENT CONSERVATIVE CONTRARIAN Sep-97 May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Sasol Dividend Yield minus Mr Price Earnings Yield Jan-07 Sasol: A long-term value opportunity Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12
  • 39. 10 20 30 40 50 60 0 39 Jul-90 Mar-91 Nov-91 Jul-92 Mar-93 Nov-93 Jul-94 Mar-95 Nov-95 Jul-96 Mar-97CONSISTENT CONSERVATIVE CONTRARIAN Nov-97 Jul-98 Mar-99 Nov-99 Jul-00 Mar-01 Nov-01 Jul-02 Mar-03 Nov-03 Jul-04 Impala 7yr Cyclically adjusted P/E Mar-05 Nov-05 Jul-06 Mar-07 Platinum: Now on our radar screen Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11 Jul-12
  • 40. 0 5 10 15 20 25 30 40 Mar-65 Aug-66 Jan-68 Jun-69 Nov-70 Apr-72 Sep-73 Feb-75 Jul-76 Jan-78 Jun-79 Nov-80CONSISTENT CONSERVATIVE CONTRARIAN Apr-82 Sep-83 Feb-85 Jul-86 Jan-88 SA Industrial - Earnings Yield Jun-89 Nov-90 Apr-92 Sep-93 Feb-95 Jul-96 Jan-98 Jun-99 Capital flows clearly chasing yield Nov-00 Apr-02 Prime Overdraft rate Sep-03 Feb-05 Jul-06 Jan-08 Jun-09 Nov-10 Apr-12
  • 41. Becalmed
  • 42. The yield-table has turned since 2009 Total Return from Yield at Mar-09 March 2009 Financial & Industrial Stocks 12.0% 151% Cash 9.5% 25% Property 9.0% 106% 10 yr Government Bonds 8.3% 45% Current Yield 10 yr Government Bonds 7.0% Property 6.2% Financial & Industrial Stocks 5.7% Cash 5.0% Stocks and Property had significant tailwinds from falling interest rates This tailwind has largely disappeared42 CONSISTENT CONSERVATIVE CONTRARIAN
  • 43. Fixed Income43 CONSISTENT CONSERVATIVE CONTRARIAN
  • 44. Take-Aways 1. In an ultra-low interest-rate 1. Portfolio construction is a environment, real returns process need to be found somewhere 2. We approach portfolio 2. Investors are fleeing cash and construction from a bottom-up need a home basis, focussing on relative 3. Investors are focussing on valuations return, and largely ignoring 3. A margin of safety is currently risk paramount (risk over return) 4. Balanced Funds are currently 4. If you are only choosing SA the most desired Co’s, you are restricting 5. Balanced funds: offer yourself to “the best of a bad diversification and flexibility bunch” 6. PSG Have a proven team and 5. The tailwinds of 2009 are track-record of delivery gone 6. Partner with an experienced balanced team
  • 45. Pick PSG!
  • 46. What you can expect from PSG Consistent application of our philosophy and process Outstanding long-term performance Forgoing short-term “performance” to achieve our long-term objectives Honest and transparent communication Co-investing with our unit holders47 CONSISTENT CONSERVATIVE CONTRARIAN
  • 47. Performance
  • 48. PSG Equity Fund: 10 years, one manager 3 years 23 out of 80 19.3% Inception (March 2002) 4 out of 34 15.08%49 CONSISTENT CONSERVATIVE CONTRARIAN
  • 49. PSG Flexible Fund: 8 years, one manager 380 17.34% 355 330 3 years 5 out of 56 305 Inception (Nov 2004) 3 out of 20 280 16.4% 255 230 205 180 155 130 105 80 2004 2005 2006 2007 2008 2009 2010 2011 Inflation + 6% PSG Flexible Fund50 CONSISTENT CONSERVATIVE CONTRARIAN
  • 50. PSG Stable Fund: Brief introduction Key features Fund manager Paul Bosman Benchmark Inflation + 3% over rolling 3-year period Maximum equity exposure 40% Maximum offshore exposure 25% 51 CONSISTENT CONSERVATIVE CONTRARIAN
  • 51. PSG Balanced Fund: 13 years, one manager 3 years 9 out of 58 14.96% Inception (June 1999) 3 out of 10 11.04%52 CONSISTENT CONSERVATIVE CONTRARIAN
  • 52. Relatives
  • 53. PSG Balanced Fund: Relative Performance GLOBAL BALANCED MANDATE - BEST INVESTMENT VIEW (Reg. 28 Compliant) GROSS ANNUAL RETURNS FOR THREE YEARS ENDING 31 MARCH 2012 % Std Dev Rank MANAGER % Return (p.a.) Rank (Risk) PSG Asset Management Balanced 20.80 1 6.34 2 Coronation 20.36 2 8.12 8 Foord Asset Management 19.90 3 8.13 9 Investec Asset Management 19.74 4 8.41 10 Prudential Global Balanced 19.39 5 9.57 18 Stanlib AM 18.79 6 9.07 17 SIM Global Unique 18.63 7 8.88 16 Investment Solutions (Performer) 18.52 8 7.64 5 Investment Solutions (Spectrum) 18.36 9 7.96 7 OMIGSA Macro Strategy 17.62 10 8.87 15 OMIGSA (Profile Balanced) 17.38 11 8.53 13 Cadiz Global Balanced 17.27 12 8.52 12 SYmmETRY Paragon 17.27 13 7.82 6 Momentum Balanced 17.00 14 8.86 14 RE:CM 16.81 15 5.86 1 Oasis 16.30 16 7.56 4 Momentum AM Global Balanced 16.24 17 8.50 11 Allan Gray 15.58 18 6.83 3 Sources: Alexander Forbes Asset Consultants, PSG AM Research54 CONSISTENT CONSERVATIVE CONTRARIAN
  • 54. PSG Balanced Fund: Risk vs. Return Risk vs Return Scatterplot - Global BIV 3 Years ended 31 March 2012 21 PSG Balanced Fund Coronation Foord Investec Asset 20 Management Prudential Global 19 Investment Solutions Balanced (Performer) Stanlib AM Return (p.a.) Investment Solutions SIM Global Unique 18 (Spectrum) OMIGSA Macro SYmmETRY Strategy OMIGSA (Profile 17 Paragon Cadiz Global Balanced) RE:CM Balanced Momentum Balanced Oasis 16 Momentum AM Allan Gray Global Balanced 15 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 Risk (p.a.) (standard deviation)55 CONSISTENT CONSERVATIVE CONTRARIAN
  • 55. Partner with PSGPreserve & Grow
  • 56. Questions?57 CONSISTENT CONSERVATIVE CONTRARIAN
  • 57. Disclaimer Collective Investment Schemes in Securities (Unit Trusts) are generally medium to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not a guide to future performance. Collective Investment Schemes are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments Limited. Commissions and incentives may be paid and if so, are included in the overall costs. Forward pricing is used. PSG Collective Investments Limited is a member of the Association for Savings and Investment South Africa (ASISA). The funds may from time to time invest in another fund managed by a related party, or in shares issued by entities within the same group of companies as PSG Collective Investments. A process is in place to ensure the same selection criteria is applied when selecting the underlying funds or shares. The information contained in this presentation is of a general nature and is not intended to address the circumstances of any particular person. We do not purport to act in any way as an advisor and you should not act upon this information without appropriate professional advice. PSG Asset Management (Pty) Ltd is an authorised financial services provider.58 CONSISTENT CONSERVATIVE CONTRARIAN