Transcript Document

Investors’ Seminar
May 2009
Is it the “Best” or “Worst” of Times
If “Best of Times” = Significant Growth
in LHS of Bucket
If “Worst of Times” we can still achieve
Specific goals
Part-owning Specific Businesses is good
investing
Disclaimer
This is not Advice. Please see Mark before considering any changes. Mark will put any recommendations in writing
The information contained in this presentation has been prepared for general use only and does not take into account your personal
investment objectives, financial situation or particular needs. Before you make any decision about whether to invest in a financial
product, you should obtain and consider the Product Disclosure Statement of the financial product.
The information provided by HFS has been done so in good faith and has been derived from sources believed to be accurate at the
time of compilation. Changes in circumstances, including unlawful interference and unauthorised tampering, after the date of
publication may impact on the accuracy of the information. Neither HFS d nor any member of HFS accepts responsibility for any
inaccuracy or for investment decisions or any other actions taken by any person on the basis of the information included. Past
performance is not a reliable indicator of future performance.
Neither HFS nor any member of HFS guarantees the performance of the Funds, the repayment of capital or any particular rate of
return. The performance of any unit trust depends on the performance of its underlying investment which can fall as well as rise and
can result in both capital losses and gains. Consequently, due to market influences, no assurance can be given that all stated
objectives will be achieved.
Investors’ Seminar
May 2009

Goals

Structure

Asset Mix

Specialist Stock-Pickers
But first a quick overview of the
economy and Markets
The current crisis
 Debt – Western Consumers; Deleveraging
 Sub-Prime in US; CDOs–and inter-bank transfers

Fear replaced Greed in Markets
 Banking Crisis – near collapse

Lower Consumer and Business Confidence
 Negative Cycle –Profits Drop; Unemployment
increases; Consumer Confidence drops etc
MARKET STATISTICS
Bottom Up Consensus Earnings Forecasts
AS AT 12th March 2009
PE 2009 (E)
PE 2010 (E)
EPS GROWTH
EPS GROWTH
MARKET
10.6x
10.2x
-18.5%
4.6%
Financials
9.2x
8.7x
-13.3%
5.2%
- Banks
9.4x
9.0x
-14.0%
4.3%
- REITS
6.1x
6.5x
-25.1%
-5.8%
Industrials
10.8x
10.3x
-13.0%
5.3%
Resources
14.4x
13.5x
-29.3%
7.0%
- Div Metals & Mining
12.7x
12.3x
-32.7%
2.8%
Source: Ausbil calculation based on consensus broker earnings forecasts
MARKET VALUATIONS
Dividends at risk – but value evident
AU trailing DY
AU bond yield
18
16
14
%
12
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
2000
2005
AUSTRALIAN UNEMPLOYMENT
Rising expectations
20
%
%
Australia Unemployment Rate
15
20
15
Recessions shaded
10
Consensus
Forecast
10
5
5
0
0
1920
1930
Source: Butlin, ABS, Deutsche Bank
1940
1950
1960
1970
1980
1990
2000
2010
Adam Smith’s Invisible Hand
……very busy at present
Asset
Mix
Australian Shares
Term Deposits
International Shares
Property
Cash
Asset Mix – the
Growth Section
A
X
B
Y
AS
Z
C
D
IS
P
TD
Cash
Specialist Stock-pickers
A
X
B
Y
C
Z
AS
IS
P
D
Fund Manager
XYZ
TD
Cash
Goals
 Short-term goals; Long-term goals
 Realistic Goals are needed. Write them down
Then we can plan the investments
**** Inflation must be considered in goal-setting
Review the Goals.
Ensure all stake-holders know the goals – eg a 90yo
should still set 10 year goals for investments and
ensure beneficiaries are aware of these goals.
Structure and Strategy Issues
Tax, Centrelink…….next Tuesday’s Budget?
Cashflow - Lifestyle Goals
The choice of holding investment funds in
Super vs Outside Super. Preservation Age or
Limits
Choice of Super Fund (Admin and Trustee
Role) – SMSF vs FChoice vs Wrap
Asset Mix - Decision 1
What are the CashFlow Needs for:
 Next 2 Years
 Next 5 Years & Beyond
Need Cash and Term Deposits - this section is
structured to be “Consumed”
Security – eg Government Guarantee
Return of the $ invested at the designated time
Only after “signing off” this section of the bucket do
we then look at LHS of the bucket
Asset Mix - Decision 2
The LHS Side of the Bucket. The Goals are:
 Long-Term Total Returns – 10 Year Targets
 Sub-goal – replenish the Cash
 Logical, Rational Investments
Volatile Returns are not a concern
Income is not a focus – maximising returns is the goal.
A business that reinvests is not any less attractive than
one that pays out all profit as a dividend.
The Hayden Asset Allocation Model
Invest in 3 ways – profit, rent or interest
*************
Inclusions - What is in Hayden AAM– Cash & Term
Deposits; Australian & International Shares; Property
when attractive
Exclusions -What is Excluded - Mortgage Trusts ; Hybrid
Investments; Fixed Interest Pooled Investments; Loans to
Companies or Property Syndicates; Mezzanine Funds;
Second Tier Debt; Hedge Funds; Bond Funds;
Balanced/Conservative etc; Structured Funds; Tax-driven
investments; Alternatives
Stock-Picking - Decision 1
The three choices:
Index Funds
Choose Your Own Stocks
Contract a Quality Stock-Picker
A key question : Are some businesses better than others? Yes
– either in a better Industry or having better Management.
The business must have High Turnover or High Profit
Margins – and this advantage must be sustainable.
Top 100 companies by market capitalisation % returns for the year ended 28
February 2009.
Source: IRESS. Past performance is no indication of future performance.
year ended 28 February 2009
Best stocks
%
Worst stocks
%
Origin Energy
61.52
Babcock&Brown
-98.23
Iluka Res
33.88
ING Industrial Fund
-96.14
Santos Ltd
22.68
Boart Longyear
-95.23
Oil Search Ltd
15.94
Babcock & Brown Infr
-94.58
AGL Energy Ltd
13.88
Goodman Group
-94.07
Arrow Energy
9.43
Asciano Group
-91.26
Foster’s Group
4.75
Macquarie Office
-88.62
Metcash Limited
1.95
Mount Gibson Iron
-86.44
CSL Limited
-1.32
Futuris Corporation
-86.32
Cochlear Limited
-1.40
OZ Minerals
-83.80
Average
16.13
Average
-91.47
Stock-Picking - Decision 2
The aim :
We are buying a portfolio of shares and then
contracting them to Manage it.
We can see the underlying investments. We can
address each holding and ask the Manager why they
part-own that business and what are the key factors that
would lead them to sell that business
What makes a quality stock-picker
Research Process
Fund manager research focuses on the four ‘Ps’
PEOPLE
PROCESS
Background, qualifications
& track record.
Stated investment policies
& strategies.
PORTFOLIO
Do the securities held
reflect stated investment policies
& strategies ?
PERFORMANCE
Returns generated relative
to to the risks taken.
Investment Process - Overview
Value for
Money
Quantitative
Assessment
Score (50%)
Disciplined
Common-sense
Simplicity
Management
Industry
Qualitative
Assessment
Score (50%)
Stock
Score
Portfolio
Construction
“SCOPE”
Investment Process - Quantitative
Financial
Model
Company visits
Profit & Loss
120 EGG Models
Management
Balance Sheet
40 Broker Models
Competitors
Cashflow
Industry Best
Broker Research
By Division
Published Info
3 Year Horizon
Macro-economic
Quantitative
Score
Database
EPS Growth
Low High
Information
+/-
+/+
-/-
-/+
High
Low
Price/Earnings Ratio
Investment Process - Qualitative
Information
Qualitative
Scorecard
Manager experience
Management Track Record
Company Visits
Capital Management
Management
Shareholder Alignment
Employees
Strategic Plan
Competitors
New entrants
Published Research
Power of Buyers
Media sources
Power of Suppliers
Macro-economic
Rivalry of Incumbents
Regulatory Change
Industry Growth Rate
Qualitative
Score
Statistical ranking
Ausbil – Current Holdings
BHP
WBC
CBA
NAB
TLS
QBE
RIO
CSL
WPL
AGK
…Other 27 stocks
Cash
%
11.8
10.2
7.9
6.7
6.5
4.3
4.2
3.3
3.1
3.0
37.8
1.2
100.0
Ausbil - Visually
A
X
B
Y
C
Z
AS
IS
P
TD
Cash
D
Ausbil Holdings
Eley Griffiths and
Challenger Microcap
A
X
B
AS
IS
P
Y
Z
C
TD
Cash
D
Eley Griffiths
Challenger
Cash
Platinum Int. – Current Holdings
%
Microsoft Corp
Mitsubishi UFJ Fin
Cisco Systems Inc
Siemens AG
Denso Corp
Hutchinson Whampoa
Sanofi-Aventis SA
Anglogold Ashanti
Henkel AG & CO
Samsung Electronics
…Other 27 stocks
Cash & Shorts
3.3
3.2
3.1
2.7
2.3
2.1
2.1
2.0
2.0
2.0
37.7
37.5
100
Hunter Hall & Magellan Visually
A
X
AS
IS
P
B
Y
C
D
Z
D
Magellan - MFF
Hunter Hall - GET
TD
Cash
The Buffett Overlay
An ongoing method of analysing our Managers:
We want the businesses that we part-own (via our
specialist Fund Managers) to meet these criteria:
A Good Business must have:
Durable Competitive Advantage
A Good Business will never have Price is the single
most important motivating factor in the consumer’s
decision to buy its Product/Service
10 Year Forecasts as at Mar-09
Asset
Dividend Earnings Sentiment Central
PE
Yield*
Growth
Australian Equities
7.3%
1.5%
5.4%
14.2%
9.5 x
International Equities
4.4%
1.0%
7.7%
13.1%
8.4 x
Listed Property Trusts
9.3%
1.1%
2.0%
12.4%
10.8 x
Fixed Interest
4.2%
0.0%
0.0%
4.2%
24.0 x
Residential Property (Syd)
2.3%
4.5%
-0.8%
6.0%
43.5 x
*Includes expected currency gain
Forecast
farrelly’s
Pessimistic 10 year forecasts
as at February 2009
Asset
Dividend
Yield
EPS
Growth
PE
Effect
Pessimistic
case
Australian Equities
6.7%2
-2.0%
0.0%1
5.7%
World Equities
- Currency
3.4%2
1.0%
-1.0%
0.0%1
3.4%
LPTs
7.0%
-3.3%
-2.0%
1.7%
Bonds
4.2%
4.2%
Cash
1.0%
1.0%
1.
PE at 10, 8.5
2.
Divs cut by 30% and then continue to slowly decline
3.
LPT divs reduce by 33% over ten years after further 30%
cut.
farrelly’s
10 Year Forecasts as at Mar-07
Asset
Dividend Earnings Sentiment Central
PE
Yield*
Growth
Australian Equities
4.9%
1.6%
-0.1%
6.4%
16.2 x
International Equities
3.5%
3.0%
0.5%
7.0%
17.8 x
Listed Property Trusts
5.2%
2.2%
-3.1%
4.3%
19.2 x
Fixed Interest
5.8%
0.0%
0.0%
5.8%
17.1 x
Residential Property (Syd)
2.0%
3.0%
0.0%
5.0%
50.0 x
*Includes expected currency gain
Forecast
farrelly’s
Summary - farrellys
1.
2.
3.
4.
5.
6.
7.
8.
Don’t chase past returns
The long term is easier to forecast than the short term
In the short term expect the unexpected
When prices fall, future returns go up
Forecasting can identify good and bad periods to invest
Be wary of residential property
Equities offer good long-term returns
Diversification within portfolio is essential
Are either of these important for achieving our
goals?:
Picking the bottom?
The time-frame to recover
The goal is to never overpay for assets. Buy
them cheaply.
“The market can stay irrational for longer than an
Investor can stay solvent” – JK Gailbraith
The HFS model is fine.
Clearly defined goals for each section of the
bucket.
Avoid the Noise.
Consider the vested interest of any party that
comments.
Specialist Stock-pickers
Some key points:
Concentrated Portfolios – Quality Businesses
Indexes – what relevance: All Ords; MSCI; etc –
basically define the sea in which to fish. We do
not want to own a bit of every business.
Can hold Cash – ie Fund Managers can hold
Cash whilst they are awaiting a better buying
opportunity for a business they want to
eventually part-own.
Australian long term returns
Average annual total returns after inflation
19002007
%
19502007
%
Real bond returns
1.3
0.6
-6.3
0.9
-5.1
2.1
10.1
3.1
Real equity total returns
7.9
6.9
9.0
10.6
-4.2
8.6
9.0
10.2
Real equity capital gains
2.0
1.5
2.4
4.6
-10.6
4.0
4.6
6.1
5.9
5.4
6.6
6.0
6.4
2.6
4.4
4.1
1950s 1960s 1970s 1980s 1990s
%
%
%
%
%
20002007
%
Income compounding
effect
Source: ABN AMRO / London Business School :
‘Global Investment Returns Yearbook 2008’
Past performance is not a reliable indicator of future performance.
Components of a Sound Plan
Transparency
Logical and Rational
Sound plan – historically and theoretically
Contract People with Integrity, Trust, and Mutual
Goals
Long-term Returns are the key goal
For LHS – We need the best strategy for next 10
years. No need to predict short-term (it
determines the path rather than the destination)
Investors’ & HFS’ Decisions
A
X
B
Y
C
Z
D
AS
IS
P
Fund Manager
XYZ
TD
Cash
Switching
Asset Sector Changes – may be small changes needed when
the 10 year return differential is significant;
eg one sector may have run too fast it is time to move to
another sector
Switching of Fund Managers – may be needed at any time.
NB we will be retaining the same asset sector exposure –eg
retaining small-cap shares, but a different Manager
It may be driven by portfolio analysis – eg portfolio held by A
is not as robust as B.
Or it may be driven by better skills or processes to monitor
and re-weight the portfolio going forward
The Boxes to Tick
Realistic Goals
Structure/Strategy (Tax etc)
Super Fund Admin
Asset Mix (1) -Cash/TD needs
Asset Mix (2) –ASvsISvsP %
Stock-Picker Selection