Download HaydenFS.Seminar.October.2012

Investors’
Seminar
October 2012
1
Investors’ Seminar
October 2012
Historical Data; Recent Events
Forecasts
Recommended Investments
The 4 steps needed
2
Hayden Asset
Allocation Model
3
The 4 Step Process….1
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FP Framework
1. Goals – realistic cashflow needs
2. Structure & Strategy
Super & Pensions
Tax & Centrelink Matters
Drawdowns and/or Contributions
3. Super Fund Admin
SMSFs vs Wholesale/Retail/Industry etc
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The 4 Step Process….2
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The Segmentation Bar
Cashflow Needs
Peace of Mind
Confidence to let LHS focus on the longterm
Trade-off for security and for long-term
returns
Ability to “stay the journey”
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The 4 Step Process….3
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Cash/Term Deposits
Government Guarantee
Security – Ratings Agencies
Security – Short-term Access
Return of the $, not return on the $
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Term deposit rates
Term Deposit
“Rate Specials”
Forecast
RBA Cash Rate
SFE Cash Futures
Source: RBA, Perennial. SFE as at 22 August 2012
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The 4 Step Process….4
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Investors’ Seminar
October 2012
The LHS = Long-term Investing
Recent Events
Long-term Data and Charts
Forecasts
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How are we
“starting” from here?
GFC – Global Financial Crisis
Sovereign Debt Crisis
De-leveraging
13
The GFC
 Debt – Western Consumers
 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
….then Sovereign Debt issues……………
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The “Euro” family
Euro (mil)
GDP
Sovereign Debt
Source: Eurostats 2010 data
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The debt inheritance
60% of GDP = “healthy government debt levels”
Source: OECD Economic Outlook May 2011
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Long term bond yields
Greece
Portugal
Spain
Italy
Germany
Source: Bloomberg
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Historical Data
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Crisis – What’s Biggest?
Source: AMP Capital Investors
Forecasts
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LHS – Long-Term
Investing
10 Year Investing vs 1 Year Investing
“Rolling Smoothed” 10 Year Returns
Hayden Investment Paradox
Inflation is Crucial. Purchasing Power
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Selecting Asset Sectors
& Specific Investments
The 3 Characteristics of Investments:
1. Regular Return
2. Capital Gain
3. Access to Capital
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Selecting Asset Sectors
& Specific Investments
How important are these characteristics for the 2 distinct investment
sections:
Regular
Return
RHS
5/10
LHS
10*/10
Capital
Gain
Access to
Capital
n/a
10/10
10*/10
N/A
*Best Total Return is the Goal
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Selecting Asset Sectors
& Specific Investments
Investment Alternatives to Eliminate:
• Blended portfolios (eg Balanced etc) – will smooth volatility (over
short periods) but not maximise returns
• Any investment that focuses on Regular Return or on Capital Gain
• Structured Products
• Cash will not win based on “rolling smoothed” returns
• Investments favoured by Speculators & Traders
• Non-productive Investments
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27
28
Shares vs Property vs
Infrastructure
Shares
– Best Businesses
- Industry – Barriers to Entry
- Products & Services - Consumers
- Management – Board and Execs
Property
- Land
- Improvements
Infrastructure – Government Intervention
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Return
Return on
on Investment
Investment of
of $100,000
$100,000 December
December 1979-2010
1979-2010
$80
$80
1800
1800
1600
1600
$60
$60
1400
1400
$50
$50
1200
1200
Capital
tal Valu
Valuee (000’s
(000’s))
Capi
Income (000’s)
(000’s)
Income
$70
$70
1000
1000
$40
$40
800
800
$30
$30
600
600
$20
$20
400
400
$10
$10
200
200
$0
$0
00
80
80 82
82 84
84 86
86 88
88 90
90 92
92 94
94 96
96 98
98
Industrials
Industrials --Dividends
Dividends
Industrials
Industrials --Capital
Capital Value
Value
00
22
44
66
88
10
10
Term
TermDeposits
Deposits --Interest
Interest
Term
TermDeposits
Deposits --Capital
Capital Value
Value
Source:
Source: MLC
MLC
Data:
Data:Industrials
Industrialsrepresented
representedby
byS&P/ASX
S&P/ASX200
200Industrials
IndustrialsPrice
Price Index
Index(All
(All
Industrials
IndustrialsPrice
PriceIndex
Indexused
used prior
priorto
toApril
April2000)
2000)
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Investors’ Seminar
October 2012
Drilling Down – Shares vs Co. vs Businesses
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Shares/Co./Businesses
Dividends +
Capital Gains
Corporate
Structure
Products & Services;
Trade; Supply & Demand
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Shares/Co./Businesses
Shares – a right to future Earnings (Profits)
- some people see them as a collectable like antiques,
art etc….a tradable piece of paper??
Company - Shareholders appoint the Board
- The Board contracts Senior Management
- Big picture and Day-to-Day decisions
Businesses - the ability to trade
- supply and demand
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Australian employment
30%
Australian Labour Force Compostion
1yr ending September 2012
25%
20%
Mining
Jobs Growth
15%
Communication
10%
5%
Electricity
Property
Agriculture
Wholesale
Cultural
Education
Manufacturing
Accomodation
0%
Personal
Finance
-5%
Transport
Government
Health
Retail
Construction
-10%
-15%
-20%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Share of Total Employment
Source: Bloomberg, ABS
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Australian employment
30%
Australian Labour Force Compostion
1yr ending September 2012
25%
20%
Mining
Jobs Growth
15%
Impacted by A$
Communication
10%
5%
Electricity
Property
Agriculture
Wholesale
Cultural
Education
Manufacturing
Accomodation
0%
Personal
Finance
-5%
Transport
Government
Health
Retail
Construction
-10%
-15%
-20%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Share of Total Employment
Source: Bloomberg, ABS
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Australian employment
30%
Australian Labour Force Compostion
1yr ending September 2012
25%
20%
Mining
Jobs Growth
15%
Impacted by Fiscal Policy
Communication
10%
5%
Electricity
Property
Agriculture
Wholesale
Cultural
Education
Manufacturing
Accomodation
0%
Personal
Finance
-5%
Transport
Government
Health
Retail
Construction
-10%
-15%
-20%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Share of Total Employment
Source: Bloomberg, ABS
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Australian employment
30%
Australian Labour Force Compostion
1yr ending September 2012
25%
20%
Mining
Jobs Growth
15%
Impacted by Monetary Policy
Communication
10%
5%
Electricity
Property
Agriculture
Wholesale
Cultural
Education
Manufacturing
Accomodation
0%
Personal
Finance
-5%
Transport
Government
Health
Retail
Construction
-10%
-15%
-20%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Share of Total Employment
Source: Bloomberg, ABS
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A closer look at Step 3 – ICVR stock filters
INDUSTRY
I
Industr
y
Rating
Products
Supply & Demand
Key Macro-economic
variables
Growth Rate
Structure
COMPANY QUALITY
C
Company
Quality
Industry positioning
Barriers to entry
Recurring- revenue
Growth rates
Margins
Return on Equity
VALUATION
V
Company
Valuation
R
Company
Risk
Rating
Barriers to entry
Return on Capital
Government
intervention
Sustainability
Free Cash Flow
Dividend history
Management- experience and track
record
Management- incentives and stake in
equity
Corporate Strategy
Corporate- Governance
Balance sheet- strength
Enterprise Value / EBITDA
Stock Price / Cash EPS
Market Cap. / Free Cash
Flow
Stock Price / Dividend PS
Market Cap. / Book Value
RISK RATING
Key macro-economic & weathersensitivities
Key customers and suppliers
Government influence
Level of recurring- revenue
Barriers to entry
Balance sheet- strength
Free Cash Flow
Corporate Strategy
Corporate -Governance
Market –Capitalisation
Share liquidity
Major shareholders
The gulf between
best and worst stocks
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Sub-sets of Shares
Smaller (and Micro) Companies:
Ability to Sell; Volatility
International Shares:
The $A; need extra knowledge of the
business environment; need specific
knowledge about the corporate structure
40
Do Small Caps Outperform?
• Fama and French (US) 1964
Small Caps vs S&P 500*
Total Returns from 1926 to 2011
Average Annual Return
Growth of $10,000
S&P 500
US Small Caps
9.5%
11.3%
$23.4 million
$100.4 million
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Source: CRSP. Small Caps = bottom 4 deciles of stocks.
Deconstructing International Equities Performance
International underperformance comprised two elements, market valuation +
currency. The following charts deconstruct this underperformance:
S&P 500
Price to Book Ratio
$AUD
1.1
5.5
5
1
4.5
0.9
4
0.8
3.5
0.7
3
2.5
0.6
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Jun-05
Dec-05
Jun-04
Dec-04
Jun-03
Dec-03
Jun-02
Dec-02
Jun-01
Dec-01
Jun-00
Dec-00
De
c -1
1
De
c -0
9
De
c -1
0
De
c -0
7
De
c -0
8
0.4
De
c -0
5
De
c -0
6
1
De
c -0
3
De
c -0
4
0.5
De
c -0
1
De
c -0
2
1.5
Dec-99
2
De
c -9
9
De
c -0
0
•
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Specialist Stock-picker
AS
IS
P
TD
Cash
XYZ Manager
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Specialist Stock-picker
What are we buying?
1. A designated portfolio of shares
2. A contract to manage the portfolio and instigate
changes to ensure best forecast (prognostic) returns
How do we ensure a high quality result
1. Analyse the portfolio of shares
2. Analyse the skill-set and the expectations of both parties
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Specialist Stock-picker
The Top 10 Holdings:
1. Are the portfolios of shares consistent with our stated
goals
2. Industry – is it an Industry conducive to good longterm returns
3. Management – is the Board and Senior Management
able to act promptly and professionally? Can
Expenditure be varied when Revenue changes?
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What Could go Wrong?
The Risks?
Volatility?
The Flight Path – it’s the Flight Path that kills you..
J M Keynes: “The markets can be irrational for longer than an
Investor can be solvent”
However – we are not forced to sell. The LHS maintains a 10
year focus. True long-term investing.
We have clearly defined goals – the LHS expects and accepts
volatility
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What Could go Wrong?
The Risks?
Volatility – it’s not a risk; it’s a certainty
Risk Capacity
Risk Attitude
Longevity Risk
Inflation Risk
Liquidity Risk
Credit Risk; Diversification Risk; Market Risk
Market Timing Risk
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Developments at
HaydenFS
The Book - The Rational Investor
The Fund – Patient Capital Fund
The Websites – RI & FPF
A positive for HaydenFS Investors
– the long-term commitment; mutual agreement
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The 4 Step Process….1
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The 4 Step Process….2
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The 4 Step Process….3
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The 4 Step Process….4
52
Peace-of-mind
for Investors
1. Part-own a lot of great businesses. We
have a portfolio of businesses that is well
diversified across locations, industries
and size.
2. Employing (contracting) some very wise
people to monitor and change our
portfolio of investee businesses when
necessary.
53
The Boxes to Tick
Realistic Goals
Structure/Strategy (Tax etc)
Super Fund Admin
Asset Mix 1 -Cash/TermDeposits
Asset Mix 2–Growth Section (LHS)
Stock-Picker Selection
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