Kagiso Asset Management FPI Convention Presentation

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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?

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

Why is it necessary?

Returns in the long
-
term vs inflation

10
100
1,000
10,000
100,000
1,000,000
Jan 60
Jan 64
Jan 68
Jan 72
Jan 76
Jan 80
Jan 84
Jan 88
Jan 92
Jan 96
Jan 00
Jan 04
Jan 08
Jan 12
Cumulative asset class returns (
1964
-
May
2012
)
Cash
CPI
Equities
Bonds
Understanding value and price

Value and price through time

Market price

Intrinsic value

Why are equity prices so volatile?

Market price

Intrinsic value

Sometimes:

The environment seems terrible

Company results may be poor

People are overly pessimistic

Why are equity prices so volatile?

Market price

Intrinsic value

Other times:

The environment seems fantastic

Company results are great

People are overly optimistic





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

The long
-
term US equity market experience

*Shiller model

Source: GMO, Standard & Poor’s, Federal Reserve


as of 31/12/2005

Equity risk

It sometimes feels like this…

Or this…

Or this…

Equity risk

Theoretical measures:

Beta, volatility, tracking error…


Neat and mathematical, but not that practical

The main equity risks

Market price

Intrinsic value

Buying when shares are above fair value



ie not having an idea of valuation

Having to sell, when prices are below fair value



ie short
-
term cash need

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

Active managers

-

are they worth their fees?





How has the market done?

Source: Morningstar, INet





How has the market done?

Source: Morningstar, INet





The average manager hasn’t kept up (after fees)

Source: Morningstar, INet





But the best manager has consistently
added huge value

Source: Morningstar, INet





And the top 5 managers have all
justified their fees

Source: Morningstar, INet

Value/price

Time

A philosophy for outperformance

Market price

Intrinsic value

Buy & then hold

Sell & then avoid

Market price

Intrinsic value

A philosophy for outperformance





40
60
80
100
120
140
160
Jun-2011
Jul-2011
Aug-2011
Sep-2011
Oct-2011
Nov-2011
Dec-2011
Jan-2012
Feb-2012
Mar-2012
Apr-2012
May-2012
Imperial (IPL)
Lonmin (LON)
TOP40 Index
The big trade in the Satrix40 last week

Sell

Buy

In summary

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

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
.

Kagiso Asset Management


Unconventional thinking. Superior performance

www.kagisoam.com