Senate Group Conference
November 2013
Navigating equity risk in a
contradictory market

Justin Floor
Investment Analyst
Agenda

The contradictory market context
Our equity approach
Investment opportunities:

Global technology companies
Platin...
The contradictory market context
A global perspective
Zooming in on North America…
South America…
Euroland…
Asia…
And us?
South African economy looks particularly vulnerable

Source: UBS forecasts for 2013
… and the trend is negative

… risk of further sovereign credit rating downgrades
The paradox: equity market at all-time highs

Source: I-Net
Current market contradictions

Bad economic news is good news for markets
Low risk assets are now higher risk
Printing mon...
Unprecedented central bank asset purchases…

Source: Bloomberg
End result is a different form of inflation…

Foreigners
In summary

Central bank policy is masking bleak economic fundamentals
Asset price valuations are unsustainably high in ce...
Our equity approach
The value of shares is linked to profits and
profits are extracted from GDP
Value/price

Value and price through time

Intrinsic value
Market price

Time
Value/price

Why are equity prices so volatile?

Intrinsic value
Market price

Sometimes:
The environment seems terrible
C...
Value/price

Why are equity prices so volatile?

Or it’s the flows!

Intrinsic value
Market price

Other times:
The enviro...
Value/price

The main equity risks
Buying when shares are above fair value
– ie not having an idea of valuation

Intrinsic...
Value/price

The main equity risks

Investing without a clear focus on valuations
- Either as an investor yourself or from...
Value/price

A philosophy for outperformance
and risk management

Intrinsic value
Market price

Time
Value/price

A philosophy for outperformance

Intrinsic value
Market price

Buy & then hold

Sell & then avoid

Time
we have done with this approach over the
last 9.5 years (to 31 October 2013)
8000

6000

4000

2000

Kagiso Equity Alpha F...
Top unit trust fund performance

Top 15 funds since inception*
South African EQ General

1 year to
31/10/2013
A.G.R.

3 ye...
Consistent top performance equity unit trust to 31 October 2013
Relative ranking over rolling 5-year periods since incepti...
Investment opportunities
Global technology companies
Internet of things is coming

Source: Ericsson
Enabled by the rise of mobile broadband

Source: Ericsson Mobility Report, June 2013
Phones are no longer about voice

Global total data traffic in mobile networks, 2007-2013

Traffic does not include DVB-H,...
Growth in mobile devices driving data demand
Preparing for a connected world

Simplicity

Reach
Global smartphone profit pool

Profit leadership perpetuates
investment in
scale, innovation and brand

Source: Company da...
Global IT is rapidly evolving
Microsoft is more than just Windows (and less
exposed to declining PC sales than many think)
Profit contribution by divisi...
Who are the winners from these trends?

PE = 6.4x*
PE = 9.2x*

PE = 9.5x*
Apple

PE = 10.8x*

PE = 12.5x

versus
*adjusted...
Platinum over gold
Gold supply versus platinum supply

Source: GFMS

Increasing Supply

Decreasing Supply

Source: Johnson Matthey
Gold demand versus platinum demand

Fundamentally driven: price elastic

Source: GFMS

Source: Johnson Matthey

Fundamenta...
Gold investment demand: very vulnerable

Source: GFMS
Autocat demand is depressed…

China

Europe

USA

5 years of contraction
- lowest level in 17 years
Running well below nat...
Pick n Pay over Shoprite
Pick n Pay vs Shoprite: a clear winner, so far

Source: I-Net
Valuation differentials are stark

2.7x
2.1x

Premium on Shoprite non-SA is excessive
* Kagiso Asset Management estimates
Pick n Pay sales base is significant and stable

Pick n Pay’s robust sales indicative of brand strength^
^ Sunday Times To...
Pick n Pay: multiple initiatives to reduce costs

New OUTSIDE leadership

Centralising
distribution

SAP/IT
implementation...
Pick n Pay vs Shoprite: divergent outlooks

Pick n Pay

Shoprite

SA’s leading retail brand
Significant sales base
Operati...
In summary
In summary

Market contradictions abound
On-going monetary stimulus is distorting asset prices
Our investment philosophy a...
Disclaimer
Kagiso Asset Management (Pty) Limited (‘Kagiso’) is a licensed financial services provider under the Financial ...
Unconventional thinking. Superior performance

www.kagisoam.com
Performance record
Kagiso Equity Alpha Fund – peer mean benchmark
Year

Gross of
fees return1

Benchmark
return1, 2

Stand...
Our fund range

Pure equity
Unconstrained

Low equity
High income
High capital
protection

Medium equity
CPI + 5%
Capital ...
Fund descriptions

Fund

Description

Kagiso Equity Alpha Fund

This is an unconstrained equity fund that aims to provide ...
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  1. 1. Senate Group Conference November 2013
  2. 2. Navigating equity risk in a contradictory market Justin Floor Investment Analyst
  3. 3. Agenda The contradictory market context Our equity approach Investment opportunities: Global technology companies Platinum over gold Pick n Pay over Shoprite
  4. 4. The contradictory market context
  5. 5. A global perspective
  6. 6. Zooming in on North America…
  7. 7. South America…
  8. 8. Euroland…
  9. 9. Asia…
  10. 10. And us?
  11. 11. South African economy looks particularly vulnerable Source: UBS forecasts for 2013
  12. 12. … and the trend is negative … risk of further sovereign credit rating downgrades
  13. 13. The paradox: equity market at all-time highs Source: I-Net
  14. 14. Current market contradictions Bad economic news is good news for markets Low risk assets are now higher risk Printing money causes no inflation SA equities vastly more expensive than developed market champions Despite low economic growth, SA assets most foreign-owned ever Despite interest rates at record lows, SA consumer spend is weak …excessive global monetary stimulus is to blame
  15. 15. Unprecedented central bank asset purchases… Source: Bloomberg
  16. 16. End result is a different form of inflation… Foreigners
  17. 17. In summary Central bank policy is masking bleak economic fundamentals Asset price valuations are unsustainably high in certain sectors Risk of capital loss is higher than average Equity risk is elevated!
  18. 18. Our equity approach
  19. 19. The value of shares is linked to profits and profits are extracted from GDP
  20. 20. Value/price Value and price through time Intrinsic value Market price Time
  21. 21. Value/price Why are equity prices so volatile? Intrinsic value Market price Sometimes: The environment seems terrible Company results may be poor People are overly pessimistic Time
  22. 22. Value/price Why are equity prices so volatile? Or it’s the flows! Intrinsic value Market price Other times: The environment seems fantastic Company results are great People are overly optimistic Sometimes: it’s just that alternatives seem worse! Time
  23. 23. Value/price The main equity risks Buying when shares are above fair value – ie not having an idea of valuation Intrinsic value Market price Having to sell, when prices are below fair value – ie short-term cash need Time
  24. 24. Value/price The main equity risks Investing without a clear focus on valuations - Either as an investor yourself or from the manager who manages your money Investing in equities when you have a short-term time horizon Time
  25. 25. Value/price A philosophy for outperformance and risk management Intrinsic value Market price Time
  26. 26. Value/price A philosophy for outperformance Intrinsic value Market price Buy & then hold Sell & then avoid Time
  27. 27. we have done with this approach over the last 9.5 years (to 31 October 2013) 8000 6000 4000 2000 Kagiso Equity Alpha Fund Upper quartile fund to date Median fund to date Lower quartile fund to date FTSE/JSE SWIX Index 0 May 04 May 05 May 06 Source: Morningstar & Kagiso Asset Management *Inception: 26 April 2004 May 07 May 08 May 09 May 10 May 11 May 12 May 13
  28. 28. Top unit trust fund performance Top 15 funds since inception* South African EQ General 1 year to 31/10/2013 A.G.R. 3 years to 31/10/2013 Rank A.G.R. 5 years to 31/10/2013 Rank A.G.R. Since inception to 31/10/2013 Rank A.G.R. Rank Coronation Top 20 A 31.6 6 20.9 9 23.6 2 24.2 1 Prudential Equity A 30.7 8 19.9 12 20.8 11 23.1 2 Kagiso Equity Alpha 28.2 26 16.3 40 19.7 18 22.9 3 Foord Equity R 33.2 5 23.5 2 24.1 1 22.8 4 Prudential Dividend Maximiser A 28.5 24 18.3 20 19.7 20 22.6 5 Coronation Equity R 35.2 3 20.8 10 22.9 4 22.4 6 ABSA Select Equity 19.6 91 15.4 53 20.0 17 22.0 7 SIM Value R 24.7 50 16.2 42 20.5 13 21.8 8 SIM General Equity R 28.6 21 19.3 15 21.7 7 20.9 9 PSG Equity A 36.8 2 21.3 7 23.2 3 20.6 10 Nedgroup Inv Value R 18.5 97 15.0 56 20.8 10 20.6 11 Allan Gray Equity A 24.5 53 17.7 27 18.4 35 20.6 12 Nedgroup Inv Growth R 27.3 30 14.7 58 18.7 33 19.9 13 ABSA General R 25.3 44 17.2 37 19.1 26 19.6 14 Marriott Dividend Growth R 20.2 87 18.1 21 21.0 8 19.6 15 Mean/Count 23.4 114 15.8 91 17.8 84 19.0 48 Source: Morningstar Based on lump sum, income re-invested, NAV-NAV *Inception: 26 April 2004
  29. 29. Consistent top performance equity unit trust to 31 October 2013 Relative ranking over rolling 5-year periods since inception* 100 Top quartile 75 Above average 50 Below average 25 Bottom quartile 0 May 04 May 05 Source: Morningstar *Inception: 26 April 2004 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13
  30. 30. Investment opportunities
  31. 31. Global technology companies
  32. 32. Internet of things is coming Source: Ericsson
  33. 33. Enabled by the rise of mobile broadband Source: Ericsson Mobility Report, June 2013
  34. 34. Phones are no longer about voice Global total data traffic in mobile networks, 2007-2013 Traffic does not include DVB-H, WiFi, or Mobile WiMax. Voice does not include VoIP, M2M traffic is not included. Source: Ericsson Mobility Report, June 2013 1
  35. 35. Growth in mobile devices driving data demand
  36. 36. Preparing for a connected world Simplicity Reach
  37. 37. Global smartphone profit pool Profit leadership perpetuates investment in scale, innovation and brand Source: Company data, Barclays Research estimates, value as of 2012 year-end
  38. 38. Global IT is rapidly evolving
  39. 39. Microsoft is more than just Windows (and less exposed to declining PC sales than many think) Profit contribution by division Entertainment and Devices Division 3% Windows Division 28% Microsoft Business Division 46% Server and Tools 23%
  40. 40. Who are the winners from these trends? PE = 6.4x* PE = 9.2x* PE = 9.5x* Apple PE = 10.8x* PE = 12.5x versus *adjusted for net cash and after accounting for tax PE = 19.8x
  41. 41. Platinum over gold
  42. 42. Gold supply versus platinum supply Source: GFMS Increasing Supply Decreasing Supply Source: Johnson Matthey
  43. 43. Gold demand versus platinum demand Fundamentally driven: price elastic Source: GFMS Source: Johnson Matthey Fundamentally driven: price inelastic
  44. 44. Gold investment demand: very vulnerable Source: GFMS
  45. 45. Autocat demand is depressed… China Europe USA 5 years of contraction - lowest level in 17 years Running well below natural replacement demand level Does not need economic recovery for vehicle sales to return to replacement demand
  46. 46. Pick n Pay over Shoprite
  47. 47. Pick n Pay vs Shoprite: a clear winner, so far Source: I-Net
  48. 48. Valuation differentials are stark 2.7x 2.1x Premium on Shoprite non-SA is excessive * Kagiso Asset Management estimates
  49. 49. Pick n Pay sales base is significant and stable Pick n Pay’s robust sales indicative of brand strength^ ^ Sunday Times Top Brands category winner
  50. 50. Pick n Pay: multiple initiatives to reduce costs New OUTSIDE leadership Centralising distribution SAP/IT implementation Centralised buying Reviewing employee cost Consolidating regions Loyalty program
  51. 51. Pick n Pay vs Shoprite: divergent outlooks Pick n Pay Shoprite SA’s leading retail brand Significant sales base Operational recovery within its control Recent decisions a sign of change Priced to perfection Peak margins in SA Excessive premium on Africa
  52. 52. In summary
  53. 53. In summary Market contradictions abound On-going monetary stimulus is distorting asset prices Our investment philosophy aims to outperform while managing risk - by focusing on valuations
  54. 54. Disclaimer Kagiso Asset Management (Pty) Limited (‘Kagiso’) is a licensed financial services provider under the Financial Advisory and Intermediary Services Act No. 37 of 2002 (‘FAIS’) (FSP No. 784) and is approved by the Registrar of Financial Services Providers (www.fsb.co.za), Reg No. 1998/015218/07. Kagiso is a member of the Association of Savings and Investments SA (ASISA). ‘The Firm’ refers to Kagiso Asset Management, which is a subsidiary of Kagiso Tiso Holdings. This comprises all discretionary portfolios managed by Kagiso. For the periods from 2002 through 2004, as well as for the calendar year ended 2008, Kagiso Asset Management has been GIPS verified by KPMG. A copy of the verification report is available upon request. The availability of a complete list and description of all of the firm’s composites is available upon request. Internal dispersion is calculated using the equal –weighted standard deviation of all portfolios that were included in the composite for the entire year. Additional information regarding policies for calculating and reporting returns is available upon request. Kagiso has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS). Kagiso takes no responsibility for any information contained herein or attached hereto unless such information is issued under the signature of a FSB-approved representative or key individual (as these terms are defined in FAIS) and is strictly related to the business of Kagiso. Such information is not intended to nor does it constitute financial, tax, legal, investment or other advice, including but not limited to ‘advice’ as that term is defined in FAIS. Kagiso does not guarantee the suitability or potential value of any information found in this communication. The user of this communication should consult with a qualified financial advisor before relying on any information found herein and before making any decision or taking any action in reliance thereon. The user of any of this information should be aware that market fluctuations and changes in rates of exchange may have an effect on the value, price or income of investments. As the performance of financial markets fluctuates, an investor may not retain the full amount invested. Past performance is not necessarily a guide to future investment performance. Investments into a collective investment scheme are generally a medium- to long-term investment. This communication contains proprietary and confidential information, some or all of which may be legally privileged. It is for the intended recipient only. If an error of any kind has misdirected this communication, please notify the author by replying to this communication and then deleting the same. If you are not the intended recipient you must not use, disclose, distribute, copy, print or rely on this communication. Kagiso is not liable for any variation effected to this communication or any attachment hereto unless such variation has been approved in writing by a FSB-approved representative or key individual of Kagiso. Kagiso Asset Management (Pty) Ltd, Fifth Floor, MontClare Place, Cnr Campground and Main Roads, Claremont 7708, PO Box 1016 Cape Town 8000, Tel +27 21 673 6300, Fax +27 86 675 8501, E-mail: info@kagisoam.com, www.kagisoam.com.
  55. 55. Unconventional thinking. Superior performance www.kagisoam.com
  56. 56. Performance record Kagiso Equity Alpha Fund – peer mean benchmark Year Gross of fees return1 Benchmark return1, 2 Standard deviation3 Fund Benchmark Number of Internal portfolios dispersion Total composite assets (ZAR) Total firm assets (ZAR) 2003 R601,315,574 2004 R1,910,903,589 2005 37.3% 36.3% 1 - R21,174,365 R4,607,698,321 2006 39.9% 34.5% 1 - R26,858,449 R5,055,977,879 2007 26.1% 15.5% 1 - R52,397,394 R11,044,952,842 2008 -22.4% -21.8% 1 - R6,860,772 R8,880,253,313 2009 36.2% 26.0% 1 - R17,280,450 R17,724,883,532 2010 22.4% 18.3% 1 - R271,868,341 R28,182,015,250 2011 4.9% 3.2% 14.1% 13.5% 1 - R520,973,605 R34,476,214,389 2012 16.1% 21.2% 9.2% 10.3% 1 - R737,508,679 R46,579,313,698 1 Annualised; Inception date: 26 April 2004; 3 Standard deviation annualised over previous 3 years; Performance is expressed in South African rand 2 Average performance in South African Equity General unit trust universe; Figures to 31 December 2012 net of management fees, net of all applicable withholding taxes, trading expenses and custodial fees and gross of SA capital gains taxes The retail management fee is: flat fee of 1.25% pa Prepared and presented in compliance with the Global Investment Performance Standards (GIPS), independently verified Source: Kagiso Asset Management
  57. 57. Our fund range Pure equity Unconstrained Low equity High income High capital protection Medium equity CPI + 5% Capital protection Lower volatility High equity Prudential constraints Equity Alpha Balanced Protector Stable Low risk Low - medium Medium Medium - high
  58. 58. Fund descriptions Fund Description Kagiso Equity Alpha Fund This is an unconstrained equity fund that aims to provide strong capital growth over the long term and a total portfolio return that is in the top quartile for general equity funds. Kagiso Balanced Fund This fund is a Regulation 28 balanced fund and aims to provide investors with high, long-term capital growth. The fund invests in equities, bonds and cash, both locally and internationally. Kagiso Stable Fund A low equity fund that aims to provide total returns that are above inflation over the medium term. It seeks to provide a high level of capital stability and to minimise loss over any one-year period, within the constraints of Regulation 28. Kagiso Protector Fund This fund aims to provide steady capital growth and returns that are better than equity market returns on a risk-adjusted basis over the medium to longer term. The fund is Regulation 28 compliant.

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