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The Great Muddle Through
Wayne McGauley – Head of Retail, IML March 2014
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Agenda
Intro to IML
The Great Muddle Through
Investment strategy
Portfolio focus for clients
Summary
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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
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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
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