strategies for positive returns in volatile markets
TRANSCRIPT
Welcome to the netwealth portfolio construction webinar
series
Netwealth disclaimer
About Prime Value
Boutique manager established in 1998
Committed equity holders – Law Family
High conviction, style neutral manager
Consistent business and investment philosophy –
- core belief in co-investment (Building Wealth Together) and stewardship
Well resourced and high calibre investment team
Significant infrastructure and back office resourcing
3
Presenter ST Wong
4
ST joined Prime Value in Dec 2011 and launched the Opportunities Fund in Oct 2012. He became PM for the Growth Fund in July 2013
ST Wong has over 20 years of funds management experience, most recently as Head of Investments at Xantias Financial Management, a national wealth management firm and Australian Fund Manager for AIG Investments, a global investment manager
As an analyst at Daiwa Securities in Australia and BZW (Barclays de Zoete Wedd) in Asia, ST covered a broad range of companies and sectors servicing global institutional fund managers across regional financial centres in Asia, Europe and the US
ST is a Chartered Financial Analyst charter holder
Absolute investing - strategies for positive returns in volatile marketsS.T. Wong; Portfolio Manager and CIO
Part 1 – Absolute return investing
Part 2 – Investing in a volatile market Portfolio construction
Stock examples & key themes
Part 3 – Prime Value Opportunities Fund Prime Value absolute return strategy in practice
PVOF outcomes
Part 4 – Questions & Answers
6
Agenda
01
Absolute Return Investing
7
Absolute return investing aims to produce positive returns over time – regardless of prevailing market conditions
ABSOLUTE return differs from RELATIVE return because it is concerned with the return of an asset
Unlike traditional long only equity funds, absolute return funds are not linked to any particular share market index
8
What is Absolute Return Investing?
Why Absolute Return Investing? Traditional equity funds: references a benchmark such as the
S&P/ASX200 Index and aim to achieve a certain amount over the benchmark
Returns: In a low and unstable economic growth environment equity market returns may continue to be lacklustre and volatile
Opportunities: Benchmarks are inefficient—backward looking and limits investment opportunities
Diversification: Absolute return strategies generally have low correlation to equity markets
Preserve capital: Lower volatility with downside protection
Complements: long only funds and direct holdings
Limiting drawdowns by having a higher cash holding in negative markets is crucial to wealth creation and capital preservation
Focus on finding outstanding companies with good management rather than being under or over weight index determined stock weightings
9
Benchmarks Are InefficientConcentrated and backward looking
10
Dec-12 May-16 PVOF0
10
20
30
40
50
60
70
25 25
12
7 8
4
79
8
22 14
8
Materials Diversified financials Real estate Commercial banks
% of the ASX300 Index
60.4% 56.8%
32.1%
Major sectors in typical indices/benchmarks: Financial and resources
Diversification and OpportunitiesSize isn’t a reason to invest
11
Top 50 companies Mid-cap companies 100-200 Ex 200 companies Cash0
10
20
30
40
50
60
70
80
90
PVOF ASX300 Index
10 stocks
5 stocks
12 stocks
5 stocks
%
Market capitalisation spread in typical indices/benchmarks: Top heavy
Lower DrawdownsMaximum fund drawdown -5.0% vs ASX300 -13.5%
12
Nov 12 May 13 Nov 13 May 14 Nov 14 May 15 Nov 15 May 16-15%
-10%
-5%
0%
PVOF S&P/ASX 300
Prime Value Opportunities Fund vs ASX300 Index drawdown
02
Investing in a volatile market
13
Stock Selection is Half the ProcessPortfolio construction is the other critical half
14
Diversification of equity risk is a key capital preservation feature
Balancing these defensive features, so that the portfolio plays both the diversifying role and investing opportunistically
Focusing on absolute returns and risk is the best way to achieve this balance
Portfolio construction in volatile marketsOpportunities across the market
15
Core (18%)
Specific growth(21%)
Asset realisation/Valuation
(8%)
Turnaround (10%)
Thematic (29%)
• Stable and sustainable businesses
• Long term prospects
• Ability to deploy strong balance sheets
• ORA, CSL
• Operate in high growth sectors or possess products or services in high demand
• Typically smaller companies
• IPH, BAP
• Stable and sustainable businesses
• Long term prospects
• Ability to deploy strong balance sheets
• ORA, CSL
• Trading at discount to peers
• Assets or prospects unrecognised due to shortermism
• MQA, FLT
• Companies expected to drive returns from turning around business model
• Industry structure
• SUN,LNK
• Companies exposed to structural or cyclical themes
• SYD, BGA
Stock examples: CoreSustainable earnings backed by balance sheet
16
Orora share price vs ASX300 Index Orora Ltd: Core• Market leader in Australian packaging
products, largely in F&B. Large US corrugated board and packaging operations. Spun out from Amcor 2013
• Steady and sustainable earnings due to exposure to FMCG
• Management has been delivering efficiencies in business and developing new markets
• FY17e PER 19x, dividend yield 3.4%
What is the opportunity?
Dec 15 Jan 16 Mar 16 Apr 16 May 16 Jun 1680
90
100
110
120
130
OroraASX300 Index
Base 31 Dec 15
Initiated position
Strong market position
Mature industry structure
Weakening competition
Ability to consolidate
Stock examples: Specific GrowthExponential growth in data and devices
17
Telecommunication stocks share price comparison
TPG Telecom: Specific growth• Exponential growth in global data
consumption• Largest fixed broad-band subscriber base
after incumbents Telstra and Optus• Ownership of infrastructure• Grown through acquisitions and
organically
What is the opportunity?• New markets: corporate, SME and
competing with NBN• Leverage scale by being vertically
integrated
Threats• Incumbents introduce price competition• Regulation: ACCC on prices• Integration risks
Jan 14 Jul 14 Jan 15 Jul 15 Jan 1680
100
120
140
160
180
200
220
240
iiNet TPG
Base 1 Jan 2014
Exchanged iiNetscrip for TPM shares
Stock examples: Valuation, Assets UnrecognisedLatent value
18
National Storage REIT share price National Storage: Valuation• Operates 100 self storage centres across
Australia and NZ: 70% residential individuals, 30% business owners
• Generally well located and modern facilities
• Requires low level of capex and maintenance vs other types of properties
• Value in underlying property
What is the opportunity?• Acquisitions: Strong balance sheet in a
fragmented sector: 70% of operators have 1-3 centres
• Organic: Scope for operating cash flow growth improvements with occupancy levels at 73% vs. leading peers’ mid 80%
Jan 14 Jul 14 Jan 15 Jul 15 Jan 1680
100
120
140
160
180
200
NSR ASX300 Index
Base 1 Jan 2014
Established position
Stock examples: TurnaroundResetting expectations
19
Insurance sector stocks share price comparison
Suncorp: Turnaround• Simplifying a complex group: clearer lines,
focus on profitability• Reduced capital requirements• Improved returns on capital
How do we become comfortable with a turnaround?
Oct 12 Oct 13 Oct 14 Oct 1590
100
110
120
130
140
150
160
170
180SuncorpIAG
Base 1 Oct 2012
Initiated SUN position
Management strength deep and focussed
Balance sheet with excess
capital requirements
Insurance industrystructure+ve for
revenues
Positive outlook on Suncorp
Stock examples: ThematicDemographic changes at the doorstep
20
Infrastructure sector stocks share price comparison
Sydney Airport: Thematic• Major gateway but significant proportion of
earnings derived from retail and car parks• Investment thesis: Exposure to the
proliferation of LLCs and in-bound visitors• Management has been active in creating
value in both aviation and other land based assets
What is the opportunity?• International passenger growth• Further asset developments• Second Sydney airport
80
100
120
140
160
180
200
220
240
Sydney AirportTransurbanASX300 Index
Initiated Sydney Airport position
Base 1 Oct 2012
Building Portfolio PositionsPortfolio positions materially different to Indices
21
03
Prime Value Opportunities Fund
22
Prime Value’s absolute return strategy seeks to deliver positive returns by: Focussing on company fundamentals Constructing a diversified portfolio of stocks Having an ability to hold 100% of the Fund in cash
Aligned interests
Avoiding exposure to investing climates that seem less than favourable
Minimizing mistakes
Avoiding losers is just as important as identifying winners
Invest on fundamentals: what do we look for?
Management as operators and investors
Quality of business and ability to grow over time
Transparency of business
Attractive valuations
23
Prime Value Investment Philosophy
PVOF Fund Objectives Deliver attractive risk adjusted returns over the medium to long
term: target >8% p.a.
Minimise mistakes and preserve capital
Research process is to build a robust portfolio by selecting appropriate securities without reference to any particular benchmark
Long only, concentrated fund
No gearing or shorting
24
PVOF Fund Characteristics
25
Criteria PVOF Guidelines
No of stocks 10-30
Max weight of any stock in portfolio ≤ 15%
Benchmark 8%
Inception November 2012
Market Cap All Cap
Style Active Style, Benchmark Agnostic
Cash holding Up to 100%
Non Australian equity holding Up to 20%
Fee (ICR) 0.95% p.a.
Performance Fee 15% p.a of performance above benchmark
Building Longer Term Performance15.9% appreciation p.a. since inception, preserved capital in 93% of down markets
26
PRIME VALUE OPPORTUNITIES FUND Monthly Performance Summary
(%) July August Sept October Nov Dec January February March April May June FYFY13PVOF 1.8 1.7 4.3 6.2 -0.6 4.0 -2.2 -1.7 14.1ASX300 Ac Index 1.3 3.3 5.0 5.3 -2.3 4.3 -4.5 -2.48% Benchmark 0.6 0.7 0.7 0.6 0.7 0.6 0.7 0.6 Cash at month end 33.4 31.0 15.2 15.5 13.1 12.9 12.0 10.5
FY14PVOF 4.4 2.6 4.4 5.0 -1.1 1.5 -1.9 5.9 0.2 0.3 0.3 -1.4 21.4ASX300 Ac Index 5.3 2.5 2.2 3.9 -1.4 0.8 -3.0 4.9 0.2 1.7 0.7 -1.58% Benchmark 0.7 0.6 0.6 0.7 0.6 0.7 0.7 0.6 0.7 0.6 0.6 0.6 Cash at month end 8.3 9.9 6.9 8.1 7.3 10.0 11.0 10.5 10.1 9.1 13.0 13.3
FY15PVOF 2.5 1.0 -4.1 3.1 -1.9 0.7 1.5 5.7 1.4 -1.0 0.5 -4.2 4.6ASX300 Ac Index 4.4 0.6 -5.4 4.3 -3.2 2.0 3.2 6.9 -0.1 -1.7 0.4 -5.38% Benchmark 0.7 0.6 0.6 0.7 0.63 0.6 0.6 0.6 0.7 0.6 0.6 0.6 Cash at month end 8.3 11.2 12.1 10.5 9.8 9.7 10.0 10.2 7.7 9.7 9.7 9.7
FY16PVOF 5.3 -3.7 0.1 5.5 1.7 2.4 -3.4 -1.9 3.6 2.3 4.4 17.0ASX300 Ac Index 4.3 -7.7 -2.9 4.4 -0.7 2.7 -5.4 -1.7 4.8 3.3 3.1 3.48% Benchmark 0.7 0.7 0.6 0.6 0.6 0.7 0.6 0.6 0.7 0.6 0.7 Cash at month end 6.1 10.6 11.0 10.0 10 9.0 8 13 10 12 14.1
Since inception of PVOF, in 93% of negative months, PVOF has outperformed the ASX300 Accumulation Index
Building Longer Term Performance15.9% appreciation p.a. since inception (Nov 2012)
27
Performance summary to 31 May 16 (%) PVOF 8%
Benchmark
Relative performance to benchmark
ASX300 Accumulation
Index
Relative performance
to ASX300
Since inception (p.a.) 15.9 8.0 7.9 10.0 5.9
3 years 13.5 8.0 5.5 7.7 5.8
1 year 12.0 8.0 4.0 -2.1 13.9
6m 7.4 4.0 3.4 6.6 0.8
1m 4.4 0.7 3.7 3.1 1.3
Key Stock Performers (last 12 months)
IPH SYD AIO MQA IIN VED CTD BAP AMC APO
28
Important Information
The information contained in this presentation is general in nature and has no
regard to the specific investment objectives, financial or particular needs ofany specific recipient. It is not intended to constitute investment advice or apersonal securities recommendation.
This presentation is not a Product Disclosure Statement (PDS) or an offer of units, and contains a brief overview of the investment only. Any prospectiveinvestor wishing to make an investment in the Fund must obtain and readthe relevant PDS (particularly the risk factors discussed) and complete an application form attached to the PDS. Neither Prime Value Asset Management Limited nor its associates ordirectors, nor any other person, guarantees the success of the Prime ValueFunds, the repayment of capital or any particular rate of capital or incomereturn, or makes any representation in relation to the personal taxationconsequences of any investor’s investment.
04
Questions & Answers
30