the great muddle through - schroders...7 feature iml reasonable capital growth over time resilience...

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The Great Muddle Through

Wayne McGauley – Head of Retail, IML March 2014

2

Agenda

Intro to IML

The Great Muddle Through

Investment strategy

Portfolio focus for clients

Summary

3

Agenda

Intro to IML

The Great Muddle Through

Investment strategy

Portfolio focus for clients

Summary

4

About IML

• Boutique manager established in 1998

• Circa $5bln FUM – retail and institutional clients

• Disciplined and consistent ‘true to label’ value style

• Owned by IML investment staff and Treasury Group (TRG)

• Large investment team with experienced leadership

• Market leading performance over 15 years…

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Investment Philosophy: focus on quality

We seek to buy and own:

Companies with a competitive advantage,

with recurring earnings,

run by capable management,

that can grow,

.......at a reasonable price.

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Retail Investor Needs

Capital preservation

Reasonable capital growth

Income focused

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Feature IML

Reasonable Capital growth over time

Resilience in falling markets

Low volatility

Consistent income

Tax effective

IML - Meeting the expectations of a ‘Value’ Manager

This is what differentiates IML

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The IML experience – capture the ups, avoid the downs

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Portfolio Benchmark

Total Return 1yr to Jan14

Benchmark +10.58%

IML +12.94%

IML Australian Share Fund monthly returns v benchmark, As at 31 January

2014

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10.5 11 11.5 12 12.5 13 13.5 14

Annualized Standard Deviation

8

9

10

11

12

An

nu

aliz

ed

Re

turn

Investors

Mutual WS

Australian

Share Fund

S&P/ASX

300 - Total

Return

Risk/Return Since IML Inception07/1998 to 01/2014

IML 15 year history - looking to smooth volatility

Value Investing

Source: Factset as at 31st January 2014

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Agenda

Intro to IML

The Great Muddle Through

Investment strategy

Portfolio focus for clients

Summary

11 Source: Factset as at 31 Dec 2013

Australian household debt – deleveraging ongoing

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Australian mortgage equity withdrawal….

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Deleveraging ongoing…

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QE = monetary madness

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Australian 10 year bond yields...driving equities

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '132.0%2.0%

3.0%3.0%

4.0%4.0%

5.0%5.0%

6.0%6.0%

7.0%7.0%

8.0%8.0%

9.0%9.0%

10.0%10.0%

11.0%11.0%

12.0%12.0%

4.00

Australia 10Y Treasury Yield

Source: RBC, January 2014

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Looking Back Over History

Calendar

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Dividend

Return 3% 4% 4% 4% 4% 4% 4% 5% 5% 4% 5% 5% 4%

EPS change 6% 2% 4% 19% 22% 14% 9% -15% -12% 18% 4% -10% 6%

PE change 0% -14% 5% 3% -4% 4% 3% -31% 49% -17% -18% 27% 9%

Total Return 10% -9% 15% 28% 23% 24% 16% -38% 37% 2% -11% 20% 20%

S&P/ASX Return Composition

Source: Factset

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PE’s expanded….

Source: Factset

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EPS revisions

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The Great Muddle Through

• US: slow and patchy recovery

• Europe: ongoing sovereign debt issues

• China: slowing to more sustainable levels

• Record low interest rates and large quantitative easing

Lacklustre global economic outlook set to continue,

supported by Central Bank liquidity measures

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Global GDP…….

Source: OECD, CBA

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OECD Composite Leading Indicators

Source: OECD, CBA

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Australian Economy

• Economy patchy

• Consumer and business confidence volatile

• Employment and wage growth soft

• Interest rates set to stay low

• Federal Government – fiscal consoliation

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Misery Index

Source: CBA as at 31 May 2013

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Employment - participation rate falling

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Real savings rate relatively low

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Unit Labor Cost in Manufacturing

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Mining Investment

Sources: ABS; Butlin (1964, 1985); RBA; Withers, Endres and Perry (1985). As at 30 June 2013

0%

1%

2%

3%

4%

5%

6%

7%

8%

1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Mining investment, % of GDP

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Australia’s demographics – working age of population declining

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Australia’s demographics – number of retirees growing

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Overall Outlook

• Economic growth to a ‘muddle through’

• Volatility remains a risk

• Earnings growth for most companies will be much harder to achieve

• Bonds markets driving equity markets

• Very selective environment!

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Agenda

Intro to IML

The Great Muddle Through

Investment strategy

Portfolio focus for clients

Summary

32

Source :IML as at 30 December, 2013

The dilemma of the Australian Market

39%

17%

44%

Sector distribution- ASX 300 Index

Financials

Materials

Other

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IML Australian Share Fund Sector positioning

-1%

4%

9%

14%

19%

24%

29%

34%

39%

Investors Mutual Australian Share Fund Sector Weights

As at 31st January 2014

IMAS Sector Weights % ASX300 Sector Weights %

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Banks PEs historic v today

7

8

9

10

11

12

13

14

15

16

17

Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

Major bank forward PEs

CBA NAB WBC ANZ

Source: Factset as at 30 September 2013

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Banks - Credit Growth

Source : Shaw

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Banks - interest payments to disposable income

Source: RBA & company data as at 30 September 2013

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Banks - bad debts

-

50

100

150

200

250

300

350

400

1988 1993 1998 2003 2008 2013

Bas

is P

oin

ts

Bad Debt Charges

ANZ CBA NAB WBC

Source: RBA & company data as at 30 September 2013

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Resources - focus on quality only

• Supply side not supportive – stockpiles and pipelines

• Demand side lackluster

• Competitive suppliers

• Cost pressures

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Resources - China’s fixed asset investment declining

YTD fixed asset investment

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Resources - Chinese house prices

Source: Factset as at 31st December 2013

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Resources - the supply side…

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The case against cyclicals…

• Earnings expectations too high – downgrades appearing

• De-leveraging ongoing

• Inflation in essential household items

• Fiscal consolidation

• Employment and wage growth not evident

• First home buyers not active

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IML’s focus - very stock specific environment:

• Acquisitions

• Restructuring

• New products

• Contracted growth

• Market share gains

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Agenda

Intro to IML

The Great Muddle Through

Investment strategy

Portfolio focus for clients

Summary

45

Portfolio focus for clients

• Active management – large and uneven dispersion of EPS

• High Quality portfolio (low beta)

• Recurring income and growing overtime

• Portfolio that is resilient

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10.5 11 11.5 12 12.5 13 13.5 14

Annualized Standard Deviation

8

9

10

11

12

An

nu

aliz

ed

Re

turn

Investors

Mutual WS

Australian

Share Fund

S&P/ASX

300 - Total

Return

Risk/Return Since IML Inception07/1998 to 01/2014

IML 15 year history - looking to smooth volatility

Value Investing

Source: Factset as at 31st January 2014

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Risk - there is a meaningful difference…

Source: Morningstar as at 31st

December 2013

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Australia... highest yielding stock market

Country Dividend Yield (Next 12m)

Australia 4.7%

United States 2.2%

United Kingdom 4.0%

Germany 3.0%

Japan 1.7%

China 1.4%

Source: Factset as at Feb 2014

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Income - the least volatile component of investment returns

Source: IRESS

58%

42%

0%

10%

20%

30%

40%

50%

60%

70%

CapitalReturn

IncomeReturn

94%

6%

0%

20%

40%

60%

80%

100%

CapitalStandard Deviation

IncomeStandard Deviation

S&P/ASX300

20 years to Sep 2013 Return Composition Risk Composition

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Income - important & consistent component to returns –

IML Australian Share Fund Income Growth Total Return

1 year +4.34% +8.60% +12.94%

3 years p.a. +5.13% +7.57% +12.70%

5 years p.a. +5.20% +9.46% +14.66%

Since Inception p.a.

(June 1998) +5.00% +6.62% +11.62%

As at 31 January 2014

85%+ of income is underpinned by franked dividend yield

^% Performance per annum. *Fund returns are calculated net of management fees, and assuming all distributions are re-invested. Investors should be aware that past performance is not indicative of future performance. Returns can be volatile,

reflecting rises and falls in the value of underlying investments. **The benchmark for this Fund is the S&P/ASX 300 Accumulation Index.

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Why income/yield is so important…

Income/Yield - Key Attributes

Downside protection – a sustainable yield provides a floor to share prices

Lower levels of volatility – high yielding stocks are inherently less volatile

Immune to investor sentiment – income is the reliable component of the total return

Reliable Cashflow – predictable and growing in nature

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First Rule of Investing …

50

60

70

80

90

100

-50% +100%

-30%

-10%

+43%

+11%

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Outperforming in Down Markets - IML Reliable and Repeatable

Source: Morningstar Monthly returns since

inception as at 31st December 2013

87%

54% 55%

47%

70%

52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

IML Australian Share Value A Value B Value C Value D Style Neutral

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Downside protection – critical for clients

Source: Morningstar Direct as at

31st December 2013

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Downside protection - this is why it is critical

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Agenda

Intro to IML

The Great Muddle Through

Investment strategy

Portfolio focus for cleints

Summary

57

Conclusion

• Low return, volatile environment

• Invest in quality companies that are not heavily reliant on the

economic cycle

• Many cyclical stocks remain unattractive

• Value present in many quality industrial stocks that pay

consistent dividends

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IML Australia Share Fund: Performance

ASX300 IML Outperformance

6 months +5.01% +5.60% +0.59%

1 year +10.58% +12.94% +2.36%

3 years p.a. +7.32% +12.70% +5.38%

5 years p.a. +12.76% +14.66% +1.89%

Since Inception p.a. (circa 15 years - June 1998)

+8.85% +11.62% +2.77%

As at 31 January 2014

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Feature IML

Reasonable Capital growth over time

Resilience in falling markets

Low volatility

Consistent income

Tax effective

IML - Meeting the expectations of a ‘Value’ Manager

This is what differentiates IML

60

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this presentation constitute estimates which have been calculated by

IML's investment team based on IML's investment processes and

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