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FPI Convention 21 June 2012

FPI Convention 21 June 2012. Equity exposure for your clients Gavin Wood Chief Investment Officer, Kagiso Asset Management 21 June 2012. Agenda. What is equity exposure? Why is it necessary? Understanding value and price Equity risk Active managers. What is equity exposure?.

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FPI Convention 21 June 2012

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  1. FPI Convention 21 June 2012

  2. Equity exposure for your clients Gavin Wood Chief Investment Officer, Kagiso Asset Management 21 June 2012

  3. Agenda • What is equity exposure? • Why is it necessary? • Understanding value and price • Equity risk • Active managers

  4. What is equity exposure?

  5. Equity exposure = a share, which is a set portion of a business, which generally: is reasonably-sized, is well-managed, has customers and staff has been around & succeeded to make a profit for awhile, pays its shareholders a dividend = a collection of such shares … which is equity exposure

  6. Why is it necessary?

  7. Returns in the long-term vs inflation

  8. Understanding value and price

  9. Value and price through time Intrinsic value Market price

  10. Why are equity prices so volatile? Intrinsic value Market price Sometimes: The environment seems terrible Company results may be poor People are overly pessimistic

  11. Why are equity prices so volatile? Intrinsic value Market price Other times: The environment seems fantastic Company results are great People are overly optimistic

  12. The value of shares is linked to profits and profits are extracted from GDP

  13. The long-term US equity market experience *Shiller model Source: GMO, Standard & Poor’s, Federal Reserve – as of 31/12/2005

  14. Equity risk

  15. It sometimes feels like this…

  16. Or this…

  17. Or this…

  18. Equity risk Theoretical measures: Beta, volatility, tracking error… Neat and mathematical, but not that practical

  19. 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

  20. The main equity risks Investing without a clear focus on valuations - Either as an expert yourself or from the manager who manages your money Investing in equities when you have a short-term time horizon

  21. Active managers - are they worth their fees?

  22. How has the market done? Source: Morningstar, INet

  23. How has the market done? Source: Morningstar, INet

  24. The average manager hasn’t kept up (after fees) Source: Morningstar, INet

  25. But the best manager has consistently added huge value Source: Morningstar, INet

  26. And the top 5 managers have all justified their fees Source: Morningstar, INet

  27. A philosophy for outperformance Intrinsic value Market price

  28. A philosophy for outperformance Intrinsic value Market price Buy & then hold Sell & then avoid

  29. The big trade in the Satrix40 last week Buy Sell

  30. In summary

  31. In summary • Equity exposure is about investing in operating businesses • - aiming to grow profits and pay dividends • Investors need it to avoid inflation’s erosion and to grow in real terms • Equity prices move widely around a stable, growing intrinsic value • Main equity risks: not focusing on valuation • a short time horizon • Active managers can outperform after fees, by focusing on valuations: • Buy (& hold) when prices are low • Sell (& avoid) when prices are high

  32. 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.

  33. Kagiso Asset Management Unconventional thinking. Superior performance www.kagisoam.com

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