PSG investment philosophy and equity selection process


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These are the slides for a talk that I gave based on our investment approach. If you have any questions email me:

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PSG investment philosophy and equity selection process

  2. 2. Keith Hodgskiss Bsc (Hons), RE5, RPE Jnr Equity Trader / Portfolio Manager Nearly 5 years investment experience
  3. 3. PSG’s Philosophy Put risk (the probability of losing money) first and look for investments with – a sufficient margin of safety an asymmetrical payoff range – little downside and sufficient upside A long term view when assessing asymmetry and constructing our portfolios with a bottom up approach Investing at below intrinsic value – High quality compounding return type companies preferably Mean reverting companies with margin of safety
  4. 4. Quality vs Price Overvalued and overbought Trading below fair value
  5. 5. WE INVEST IN COMPANIES THAT: Have a competent and aligned management team Have a sustainable competitive advantage Can grow faster than the market for a sustainable period Trade significantly below our estimate of fair value OR Are not overpriced Compounders Mean reverters
  6. 6. The PSG equity selection process Moat ManagementMargin of Safety QUALITY PRICE
  7. 7. Moat In terms of quantifying the moat, the most important metrics would be market share, profit margins, returns on capital and free cash flows Industries with sustainable competitive advantages tends to see stable market shares (over many years) and quite often a small number of large players Industries where new players enter and old players exit suggests that the barriers to entry is not really large Which factors do we look for? A Supply or cost advantage – (weak moat) A Government intervention advantage (tariffs, licenses (e.g. broadcast rights), patents, regulation) – (semi-strong moat but not always enduring) A demand advantage (through customer captivity) – (strong moat) Economies of scale and a demand advantage – (the strongest moat)
  8. 8. Moat Attractive industries quite often deliver high return on capital and have the ability to sustain high returns over long periods A company with a moat should be able to extract economic benefits in excess of their competitors Free cash flow is the final measure Finally, quantitative evidence is combined with our qualitative understanding (clear and understandable business model) of the moat to make a final assessment
  9. 9. Moat example: Sasol Clear and understandable business model Sasol owns technology used to convert coal and natural gas into liquids
  10. 10. Management We would score management by looking at their historic ability to deliver value to shareholders as well as their incentive schemes. Some of the measures include: Historic total return Improvements in margins, capital returns and free cash flow over time The proportion of long term incentives in total management compensation The metrics used to reward management (as an example, we prefer long term ROIC targets to short term sales growth targets) We also like to see an alignment of management with shareholders through direct share ownership as having management share in long term dividend flows is more important than annual bonuses.
  11. 11. Management example: Berkshire Managed 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
  12. 12. Margin of safety Here we are looking for evidence that the business is trading below our estimate of fair value. We utilise a wide range of valuation methods including the following: Sum of the parts valuations Discounted cash flows Valuation metrics (PE ratio, dividend yield, price to book, price to tangible book, FCF yields etc) We look for asymmetrical pay-offs in our margins of safety calculations: Ideally, little downside and significant upside from current prices. Underlying business is growing but share price is staying flat
  13. 13. Margin of safety example: J.P. Morgan Chase & Co. Few years mired in controversy leading to a suppressed stock price. PERFECT COMPOUNDING MEAN REVERTER? 1) Its consistent, above-average returns 2) the leading market positions across its four business lines 3) a time-tested management 4) track record of double-digit tangible book-value growth, before, during and after the crisis 5) solid trends in investment banking fees 6) resolution of its legacy mortgage and litigation issues and 7) continued asset-quality improvement 8) low valuations
  14. 14. The best performing asset class Long term capital growth Dividend income with lower tax Investment diversification Delayed taxation
  15. 15. PSG Paarl Stockbrokers Direct online trading Non - discretionary Accounts Manage your own stock portfolio with a stockbroker . You also get access to the PSG Online web site at no additional costs. Discretionary Account Your portfolio is managed by a qualified stockbroker who will make informed investment decisions on your behalf. Foreign Equity Account By utilising an Asset Swop or Offshore Allowance Gain exposure to international stocks and hedge against currency depreciation
  16. 16. PSG Paarl Stockbrokers Personal Share Portfolio (PSP) within an RA, LA.... Local and foreign portfolio advantages Investors have more control in the management of their retirement money Tax efficient Customers will get access to : Trading in unlisted shares such as KWV, Agri, Channel Life and PSG Konsult A watchlist and stock research Notifications via SMS / email Market Information / JSE prices Corporate Calendar Technical analysis program
  17. 17. PSG Online view
  18. 18. PSG Online view
  19. 19. Paarl Stockbrokers A team with more than 18 years collective experience Max vd Wath B.Econ CFP RPE, RE5 Principal Snr Portfolio Manager HW de Jager BComm (Hons) Financial Analysis RPE, RE5 Snr Portfolio Manager Kris Swart BComm (Hons) Financial Analysis Jnr Portfolio Manager Stefan du Toit MComm Cum Laude Jnr Portfolio Manager Keith Hodgskiss Bsc (Hons) RPE, RE5 Jnr Portfolio Manager
  20. 20. Paarl/Wellington Dick During Joan du PlessisEmile Jv Rensburg Wynie BothaNico Swart Saretha FoucheAdri HorstmannLeon Jordaan
  21. 21. Questions?
  23. 23. 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 Limited. 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 Konsult Ltd is an authorised financial services provider.
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