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Netwealth portfolio construction series - How to find undervalued investment opportunities in the market

Roger Montgomery from Montgomery Investment Management presented to an audience on 17th August 2016 on the "value investing" approach and what it means for investors.

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Netwealth portfolio construction series - How to find undervalued investment opportunities in the market

  1. 1. Netwealth educational webinar series August 2016 Value Investing 101 How, what & when
  2. 2. Housekeeping • This webinar is being recorded Slides will be sent to you after the webinar. • Enter your questions in the question box We will get to them during at the end of the webinar. • Posting to social? Make sure to use #netwealthinvest or tweet @netwealthInvest.
  3. 3. Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.
  4. 4. Meet today’s speaker Roger Montgomery Chief Investment Officer Montgomery Investment Management
  5. 5. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 5 August 2016 Roger Montgomery Chief Investment Officer Value Investing 101 How, What & When
  6. 6. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 6 What matters most? #1 Returns
  7. 7. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 7 What matters most? #2 The Profile of Returns
  8. 8. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 8 Agenda With Montgomery • An investing framework • How businesses create & destroy wealth • Dangers of chasing yield • Where are we now? • Examples of quality businesses.
  9. 9. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 9 Businesses not stocks. Value not price. Companies within a Montgomery portfolio should display The Three P’s: Premium quality economics, bright Prospects, and be available at a Price below our estimate of its intrinsic value. If few opportunities are available, move to the safety of cash. Investment Philosophy The Framework
  10. 10. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 10 Are you gambling on up or down, or investing in a business?
  11. 11. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 11 - The best business to own; - employ large amounts of incremental capital at very high rates of return, over an extended period. - High returns typically result from; - competitive advantages - To understand future returns; - understand what drives competitive advantage and how long it might last - The most valuable competitive advantage; - ability to raise prices even in the face of excess capacity Good versus Bad Fill your portfolio with these
  12. 12. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 12 • An investing framework • How businesses create & destroy wealth • Dangers of chasing yield • Where are we now? • Examples of quality businesses. Agenda With Montgomery
  13. 13. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 13 “Growth benefits the investor only when each dollar used to finance the growth creates over a dollar of long term market value.” Warren Buffett 1982 Good versus Bad growth Is there such a thing as bad growth?
  14. 14. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 14 Good growth A dollar retained and converted
  15. 15. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 15 Bad growth A dollar retained and NOT converted
  16. 16. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 16 No growth Value destroyed
  17. 17. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 17 Correlation Price always follows value in the long run
  18. 18. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 18 • An investing framework • How businesses create & destroy wealth • Dangers of chasing yield • Where are we now? • Examples of quality businesses. Agenda With Montgomery
  19. 19. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 19 Low interest rates have made millionaires feel poor… & Chasing yield is their mistake
  20. 20. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 20 Growing Income versus Yield How to put yourself in danger
  21. 21. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 21 Thrown basic investing in the bin… so missing out on…
  22. 22. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 22 Growing income In the real world
  23. 23. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 23 Growing income In the real world
  24. 24. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 24 Growing income In the real world
  25. 25. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 25 NOT growing income In the real world
  26. 26. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 26 • An investing framework • How businesses create & destroy wealth • Dangers of chasing yield • Where are we now? • Examples of quality businesses. Agenda With Montgomery
  27. 27. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 27 THE WORLD HAS CHANGED Last 30 years Next 30 years Implications for investors • Interest rates fall from high to low. 10 Yr UST from 15% in 1981 to 1.36% 2016 • Corporate profit margins increased from all-time lows to all-time highs; • Developed-market private and public debt increased; • Culminated in credit-fuelled emerging-market miracle (particularly in China); and • Productivity gains from internet, mobile et.al. • Global demographics favourable, thanks to baby- boomer generation. • Interest rates to move sideways (at best) or upwards (more likely); • Corporate profit margins to be competed/cycled away, consistent with history; • Period of developed-market deleveraging; • Emerging market growth to continue slowing (at best), with high risk of financial crisis; and • Demographics tailwind turning to headwind in US, Europe, China & Australia. • Average future equity returns likely lower than in the past; • Generated “alpha” to become relatively larger share of total return; • Active management required to capture alpha; • Downside protection more important given heightened financial risks and volatility.
  28. 28. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 28 Downside Protection with good Upside Capture
  29. 29. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 29 1) Lower interest rates ahead 2) Credit fuelled growth ahead 3) Productivity improvements ahead from internet, automation, telecomms. 4) P/E 7x …1981 was a brilliant time to invest 1) Higher interest rates ahead 2) LT Credit cycle ended 3) Productivity declining 4) US economy at full employment 5) (3) + (4) = weaker margins 6) P/E 18x … how can the opposite picture in 2016 also be a brilliant time to invest? 1981 2016 So how can it be? 1981 v 2016
  30. 30. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 30 • An investing framework • How businesses create & destroy wealth • Dangers of chasing yield • Where are we now? • Examples of quality businesses. Agenda With Montgomery
  31. 31. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 31 Think Quality & Long-Term Grow your wealth
  32. 32. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 32 Growth and income.
  33. 33. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 33 Growth and income. 1) REA Group commenced uploading ads under the new All Premiere product range in May and June 2015. subscribers for the All Premiere package receive a significant discount off the normal Premiere advertisement price, the revenue impact of growth in Premiere ad volumes is less than the raw volume numbers suggest. 2) 1 August depth listings were 10% higher than the same week a year ago. Highlight listings were slightly above the same time last year. More expensive Premiere listings were 38% higher than the same week last year. 3) REA depth ad prices increased by 10-15% from July 1. REA Asia subsidiary IPP rolled out major price increases over the past two months. Had no impact on ad volumes, with volumes staging the typical post-Ramadan comeback over the past three weeks. 4) Total domestic for sale listings remain at low levels. Average weekly for sale listings remain well below long term historic norms.
  34. 34. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 34 Weekly Depth Ad volumes.
  35. 35. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 35 Growth and income.
  36. 36. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 36 1) VTG generates circa $1b of sales for TLS on an annual basis 2) virtually all profits from commissions on phone/internet plans & credit, bonus payments for targets/sales rankings relative to other, Telstra stores and bonus for customer satisfaction (NPS scores). 3) Originally, expected stores to generate EBITDA of $250kp.a at maturity. Mngmnt now expect most stores to be earning $1m-$2m EBITDA p.a. Growth and income.
  37. 37. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 37 ROIC’s exceeding cost of capital via incremental improvements as TLS stores became an increasingly larger part of the asset/earnings base. FY13 FY14 FY15 Revenue LFL's 9% 5% 26% EBITDA LFL's 25% 23% 37% So what’s driving this? TLS stores = higher sales per dollar of assets and stronger marginsAcquiring stores @2xEBITDA helps but LFL also increasing! Growth and income.
  38. 38. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 38 Welcome from the Montgomery Team.
  39. 39. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 39 Communication and Education
  40. 40. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 40 PAGE 40© M O N T G O M E R Y I N V E S T M E N T M A N A G E M E N T P T Y L T D 2 0 1 6 . A L L R I G H T S R E S E R V E D . Thank You and to Learn More
  41. 41. © Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 41 August 2016 Roger Montgomery Chief Investment Officer Thank You How, What & When
  42. 42. Questions & Answers
  43. 43. Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

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