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Senate Group Long-term investing, Risk & Asset Allocation Terence Craig - CIO 8 March 2012

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Page 1: Element

Senate Group

Long-term investing, Risk & Asset Allocation

Terence Craig - CIO

8 March 2012

Page 2: Element

Terence CraigChief Investment Officer

B Bus Sc (Hons), CA (SA), CFA

18 years’ industry experience

Allan Gray - Equity Analyst and Portfolio Manager

Taita, Private Equity Firm – Director

Joined Element as Director & Chief Investment Officer in April 2001

Since April 2001 responsible for:

Investment philosophy and process

Portfolio management of all Element funds

Investment team growth and development

Page 3: Element

Agenda

Overview of Element Investment Managers

Unit Trust Fund Overview

Asset Allocation Process

Economic and Market Review

Key differentiators

Page 4: Element

Overview of Element Investment Managers

Independent investment manager established in 1998

Rebranded from Frater Asset Management in 2009

>R20bn Assets Under Management

Well diversified client base

Long-term contrarian value investors

Material focus on downside risk

Leaders in Responsible Investment and ESG analysis

Enhances our analysis of risk

36 staff: > 150 years’ experience in Investment Team

9 CFAs (60% of Investment team), 6 CA (SA)s, 3 Actuaries

Page 5: Element

Unit Trust Fund Overview

Page 6: Element

Element’s Unit Trust Fund Profile

Fund Sector Benchmark Max equity Inception Date

Element Earth Equity Domestic General Equity ALSI_D 100% Oct 2001

Element Flexible Fund

Domestic Asset Allocation - Flexible CPI + 5% 100% Oct 2001

Element Real Income Fund

Domestic Asset Allocation - Targeted

Absolute and Real ReturnCPI + 3% 40% Oct 2002

Element Balanced Fund

Domestic Asset Allocation - Prudential

Variable Equity

Average total return of the prudential variable

equity category75% Nov 2009

Element Global Equity Fund Foreign Equity MSCI World Index 100% Feb 2011

Element Islamic Equity Fund Domestic General Equity FTSE/JSE Shari'ah ALSI 100% Feb 2006

Element Islamic Balanced Fund

Domestic Asset Allocation - Prudential

Variable Equity

Average total return of the prudential variable

equity category75% Apr 2010

Changing to ALSI from 1 May 2012

6 Moving to Prudential Low Equity category

Changing to average of Islamic Equity funds (>1yr)

Page 7: Element

Element: Unit Trust Fund Profile

2% - 4% long term out-performance with lower than

market risk

Reduce risk with combination ofasset classes

Real returnwith material reduction in

risk

Inception to 31 December 2011

Reg 28 Balanced Fund – expected position

Size of bubble = maximum drawdown

Offer investors a choice alonga risk/return frontier

Page 8: Element

Asset Allocation Process

Page 9: Element

Decision making and meetings

Quarterly Asset Allocation (QAA) meeting

Weekly Investment Committee meeting

Weekly Asset Allocation and Income meeting

Weekly Portfolio Managers meeting

Stock specific Investment Committee meetings

Page 10: Element

Top-Down Research/Asset Allocation

Top Down View

SA Economy

GlobalMarkets &Economies

Commodities

CurrenciesInflation &

Interest Rates

Portfolio Risk

ESG

Quants

Via Investment committee: meets 2-4 times per year members present reviews macro variables timing issues potential themes asset allocation 2 full days ½ day follow up

Detailed top-down researchis a material differentiator

from competitors

Page 11: Element

Top-Down Research/Asset Allocation

Day 1 : Analyst Responsible

Introduction Matthew Kreeve

Portfolio Risk: Performance and Attribution Glenda Speckmann

Portfolio Risk: Risk and Liquidity Warrick Erlank

ESG: Politics Danny Stimela

Portfolio Risk: Implementation Log Altaaf Noormahomed

Quants Rene Prinsloo

Day 2:

Commodities Andrew Bishop & Guy Antoine

Currencies Steven Barber

International Markets Johny Lambridis

International Interest Rates and Inflation Jeleze Hattingh

SA Economic Review Graeme Ronne

SA Interest Rates and Inflation Jeleze Hattingh

Day 3:

SA Economic Review: GFCF Steven Barber

ESG: Responsible Investment David Couldridge

Property Report Jeleze Hattingh

Income Review Rene Prinsloo

SA Equity Timing & Element Positioning Terence Craig

Day 4:

Summary Matthew Kreeve

Page 12: Element

Balanced Funds Investment Process

Balanced Funds

Equity Income Foreign

Bonds ILBsFRNs/ Cash Property

CreditDuration Curve Shape Liquidity

Asset Allocatio

n

Income Allocatio

n

Security Selection

Prefs

Implementation

Page 13: Element

Idea Generation

• Quantitative Measures

• Ranking tables

• Macro factors

• Industry factors

• Professional judgment

Research

• Industry Analysis

• Company Analysis

• Financial Analysis

• Management Meeting

• Valuation & Reports

Implementation

• Investment Committee

• Meets weekly

• Portfolio Construction

• Order Optimisation

• Execution

Maintenance

• Voting at AGMs

• Engagement

• Company visits

• Updating models

• Meet different management

Investment Process

Calendar 2011• Management

• Group - 154• EIM only - 48

• Broker meetings - 875• Result presentations - 209• Site visits - 25• Conferences - 39• Seminars - 26

Page 14: Element

Quantitative

Fundamental Research

(Historical & Future)

ESG & Sustainability (Long term)

Long Term SheetsValue RankingsTiming Analysis

Directors’ DealingsShareholder Analysis

Fundamental ReportAbsolute valuation

(e.g. DCF)Relative valuation

(e.g. TRR)

Corporate Governance

RemunerationBEE

Sustainability issues

Detailed bottom-up in-house Research

Usually 7 reports prepared per company

Facilitates better discussion and risk analysis

Page 15: Element

Economic & Market Review

Page 16: Element

Secular Global Themes

Deficits: budget/trade/savings/housing/taxes

China: Hard/soft landing

Oil price; Commodity prices

US Rates & Dollar as a global reserve

US statistics – “lies, damned lies and…”

Cheap liquidity now - expensive later

Global Security

From Crisis to … Crisis

Govt/CB intervention is distortionary

Page 17: Element

Factors affecting Portfolio Positioning

Global Macro:

Debt, more debt and downgrades– we expect more will follow

Inflation/deflation – fat tail outcomes

BRICs unlikely to support global growth on their own

SA Macro:

Inflation: Upside risks in 2012

Consumer debt levels – still remain high

SA Equity Valuation levels:

Absolute and relative – we do not look cheap

Foreign flows increase volatility

Risk not being priced correctly so risks to the downside have increased

Page 18: Element

“New normal” moves to Paranormal!

New normal: Below average growth with high unemployment and the “heavy-hand of government” evident in markets (PIMCO: May 2009)

“…somewhat slower pace of recovery over coming quarters; downside risks to the economic outlook have increased.” (Fed: 9 August 2011)

“For 2012 investors must lower return expectations.

The new normal is ‘Sub’, ‘Ab’, ‘Para’ and then some.

The financial markets and global economies are at great risk.” (Bill Gross, PIMCO: Jan 2012)

Page 19: Element

US Unemployment – stubbornly high

Page 20: Element

US Inflation – Alternate (Base of 1980)

Effect of changing inflation baskets over time

Page 21: Element

SA Inflation – Effect of CPI reweighting

Page 22: Element

Debt, more debt & downgrades

Downgrade of France results in a rating wedge with Germany (“Core” becoming brittle)

French elections in April 2012 – further risk

Five AAA rated European countries outside EMU:

Denmark, Norway, Sweden, Switz & UK

Only four within EMU:

Germany, Finland, Luxembourg & Netherlands

US Debt remains material long-term concern

US elections – do we believe stats this year?

Remedies: Defaults or currency deflation?

The Economist, June 13th – 19th 2009

Forbes Magazine, 8 February 2010

Page 23: Element

PMIs indicate Eurozone recession in 2012

ExpansionContraction

Page 24: Element

Eurozone sovereign debt is material

Data as at 31 December 2011

3rd largest economy

in Eurozone;€1.9trn of debt

Reinhart & Rogoff

Greece targetFor 2020!

Page 25: Element

Euro debt refinancing in 2012

Page 26: Element

Macro themes playing outHigher taxes and lowerbenefits (austerity) do

not make for happyvoters!

7

All PIIGS had change ofGovernment in 2011

Page 27: Element

EU austerity will not help create jobs

Page 28: Element

Chinese property developers – possible warning?

EverGrande up 17%, other developers down

18%-41%since Jan 2011

Source: Reuters, Element Investment Managers, 8 March 2012

Page 29: Element

SA’s infrastructure focus – déjà vu

State of the Nation promises by President Zuma:

2009:

“Massive” programme to build economic and social infrastructure

Cost of telecoms to be reduced

2010:

Government to spend R846bn in next 3 years on public infrastructure

Rail network - reliable, competitive and better integrated with ports

2011:

Year of job creation via economic transformation and inclusive growth

Jobs fund of R9bn over 3 years to finance job creation

2012:

Five major infrastructure projects (Rail, Road, Port/Eskom charges)

President to convene infrastructure summit to discuss plan

Delivery remains critical

Source: Times Live, 12 February 2012

Page 30: Element

SA Inflation: Upside surprises likely

Source:ThomsonReuters

FoodRandOil

Page 31: Element

3.0

3.5

4.0

4.5

5.0

5.5

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

Alsi Price, Deflator: CPI

Real Price Trend Price +2SD -2SD

R²: 75%

Slope: 3.2%

ALSI Index in Real Terms

2nd highest deviation above the mean

Source: Inet Bridge, 1960 to 29 February 2012

Start of 2003Bull market

Page 32: Element

0.9

1.4

1.9

2.4

2.9

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

Alsi Earnings, Deflator: CPI

Real Earnings Trend Earnings +2SD -2SD

R²: 67%

Slope: 2.3%

ALSI Earnings in Real Terms

Gold at $800/oz

Gold Index 30% of ALSI

2nd highest level of real earnings ever

Source: Inet Bridge, 1960 to 29 February 2012

Start of 2003Bull market

Page 33: Element

3

8

13

18

23

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

Alsi PE, Deflator: CPI

Price/ Trend Earnings PE Avg P/ Trend E Avg PE

ALSI PE: Trend and Trailing

Historical PE: 13.4

Price/Trend E: 19.1

Source: Inet Bridge, 1960 to 29 February 2012

Page 34: Element

Asset Allocation – Quant Models

Page 35: Element

Asset Allocation – Element Balanced Unit Trust

At 31 January 2012

Net Equity; 39%

Listed Property; 3%

Hedged Equity; 6%Nominal Bonds; 1%

Inflation Linked Bonds,

5%

Money Market incl. cash; 25%

Foreign Equity; 17%

Foreign Income; 4%

Page 36: Element

Asset Allocation – Element Real Income

At 31 December 2011

Net Equity; 20%

Listed Property; 4%

Hedged Equity; 4%

Nominal Bonds; 2%

Inflation Linked Bonds; 11%

Money Market incl. cash; 30%

Foreign Equity; 13%

Foreign Income; 15%

Page 37: Element

Conclusion on current portfolio positioning

Global and local equity markets do not look cheap

Propped up by low interest rates, fiscal deficits and high asset prices – a combination unlikely to be sustainable

SA Equities look expensive on a relative basis

We remain cautiously positioned

Both within asset allocation and within equities

Historical underperformers are trading at levels from where they usually outperform materially

Capital preservation and yield are likely to be key focus areas in markets over the medium term

Page 38: Element

Element: Key Differentiators

1. Our size and our investable universe

2. Excellent long-term performance track record

3. Top long-term risk-adjusted statistics

4. Contrarian style blends well with competitors

Page 39: Element

Size and Shrinking Portfolio Universe

Source: FTSE/JSE All Share (167 companies as at 30 Nov 2011)

Constraints: 1. 5% Equity position 2. < 15% Free Float 3. Trade 30% of market volume

Insufficient resources

Increased portfolio risk

Maintain 3-5 x portfolio universe

advantage

Page 40: Element

Element: Key Differentiators

1. Our size and our investable universe

2. Excellent long-term performance track record

3. Top long-term risk-adjusted statistics

4. Contrarian style blends well with competitors

Page 41: Element

What period should investors focus on?

100 000.000    

10 000.000    

1 000.000    

100.000    

10.000    

1.000    

0.100    

0.010    

0.001    

0.000    

0.000                1 Hour 1 Day 1 Week 1 Month 1 Year 10 Years 100 Years

Time (log)

Ag

gre

gate

Retu

rn a

nd

Sta

nd

ard

D

evia

tion

(lo

g)

Source: MJ Mauboussin (Chief Investment Strategist, Legg Mason)

Standard Deviation

Aggregate return

Page 42: Element

What period should investors focus on?

110%    

100%    

90%    

80%    

70%    

60%    

50%                

1 Hour 1 Day 1 Week 1 Month 1 Year 10 Years 100 Years

Source: MJ Mauboussin (Chief Investment Strategist, Legg Mason)

Pro

bab

ilit

y

Years (log)

Time and the probability of gain

Page 43: Element

Element Equity: Performance & Risk

Inception (October 2001) to 31 December 2011Current Fund Size R 477 mBenchmark (To be) ALSI

As at 31 December 2011Element EarthEquity Fund

ALSI RELATIVE

Annualised since Inception 19.1% 17.3% 1.8%

Annualised 10 Year 18.8% 15.1% 3.7%

Ranking over 10 years Quartile

Performance 7/32 1st

Sortino 2/32 1st

Sharpe 1/32* 1st * Joint 1st

Maximum drawdown 2/32 1st

Beta (min = 1) 2/32 1st

Page 44: Element

Element Flexible: Performance & Risk

Inception (October 2001) to 31 December 2011Current Fund Size R 459 mFlexible Benchmark CPI + 5%

As at 31 December 2011 Element Flexible Fund CPI + 5% RELATIVE

Annualised since Inception 16.0% 11.3% 4.7%

Annualised 10 Year 15.4% 11.3% 4.1%

Ranking over 10 years Quartile

Performance 4/11 2nd

Sortino 2/11 1st

Sharpe 2/11 1st

Maximum drawdown 1/11 1st

Page 45: Element

Performance – Balanced Composite (Instit)

Inception (October 2003) to 31 December 2011Fund Size R856mBenchmark 60% FTSE/JSE All Share Index, 25% All Bond

Index & 15% Short Term Fixed Interest Index

As at 31 December 2011 Balanced CompositeBalanced

BenchmarkRELATIVE

Annualised since Inception 18.4% 15.9% 2.5%

Annualised 7 Year 15.4% 14.1% 1.3%

Page 46: Element

Element Global Equity Fund

31 December 2011 Epoch Net Return MSCI World Relative

1 Year -0.60% -5.50% 4.90%

3 year (ann) 12.90% 11.10% 1.80%

5 year (ann) 1.30% -2.40% 3.70%

Since Inception (ann) 6.20% 1.50% 4.70%

Inception (September 2005) to 31 December 2011

Performance of Epoch Global Choice Fund

(ASISA) Foreign EQ GeneralReturn

(Annualized)Peer Group Rank

Element Global Equity 10.23% 3/26

Source: Morningstar, 29 Feb 2012

Element Global Equity Fund

Page 47: Element

Element: Key Differentiators

1. Our size and our investable universe

2. Excellent long-term performance track record

3. Top long-term risk-adjusted statistics

4. Contrarian style blends well with competitors

Page 48: Element

Contrarian stock selection = Good blend

Element Earth Equity % Coronation Top 20 Fund %

OLD MUTUAL 7.1% STANDARD BANK 9.9%

MTN 6.8% MTN 9.9%

ANGLOGOLD 6.4%

versus the Growth Funds

SASOL 9.4%

SASOL 5.8% ANGLOS 8.9%

TONGAAT 4.9% BHP BILLITON 6.5%

REINET 4.7% NASPERS 6.1%

GOLD FIELDS 4.5% NEDBANK GROUP 5.3%

ANGLOS 4.4% MONDI PLC 4.0%

NAMPAK 3.7%BRITISH AMERICATOBACCO

4.0%

BIDVEST 3.1% BIDVEST 3.8%

TOTAL 51.4% TOTAL 67.8%

Source: Coronation Fund Fact Sheet, 31 Dec 2011

Page 49: Element

Contrarian stock selection = Good blend

Element Earth Equity % Investec Equity %

OLD MUTUAL 7.1% SASOL -

MTN 6.8% MTN -

ANGLOGOLD 6.4%

versus the Growth Funds

BRITISH AMERICAN TOBACCO

-

SASOL 5.8% SABMILLER -

TONGAAT 4.9% ANGLOS -

REINET 4.7% BHP BILLITON -

GOLD FIELDS 4.5% VODACOM -

ANGLOS 4.4% CF RICHEMONT -

NAMPAK 3.7% FIRSTRAND -

BIDVEST 3.1% TIGER BRANDS -

TOTAL 51.4% Totalnot

provided

Source: Investec Equity Fund Fact Sheet, 31 Dec 2011

Page 50: Element

Contrarian stock selection = Good blend

Element Earth Equity % Investec Value %

OLD MUTUAL 7.1% GOLD FIELDS -

MTN 6.8%

versus the Value Funds

SASOL -

ANGLOGOLD 6.4% STEINHOFF -

SASOL 5.8% ANGLOS -

TONGAAT 4.9% ANGLOPLAT -

REINET 4.7% ANGLOGOLD

GOLD FIELDS 4.5% SAPPI -

ANGLOS 4.4% JD GROUP -

NAMPAK 3.7% MEDICLINIC -

BIDVEST 3.1% MTN -

TOTAL 51.4% Totalnot

provided

Source: Investec Value Fund Fact Sheet, 31 Dec 2011

Page 51: Element

Contrarian stock selection = Good blend

Source: Allan Gray Equity Fund Fact Sheet, 31 Dec 2011

Element Earth Equity % Allan Gray Equity %

OLD MUTUAL 7.1%BRITISH AMERICAN TOBACCO

11.4%

MTN 6.8%

versus the Value Funds

SASOL 11.2%

ANGLOGOLD 6.4% SABMILLER 9.4%

SASOL 5.8% REMGRO 7.1%

TONGAAT 4.9% STANDARD BANK 4.7%

REINET 4.7% SANLAM 4.4%

GOLD FIELDS 4.5% ANGLOGOLD 4.3%

ANGLOS 4.4% ANGLOS 3.8%

NAMPAK 3.7% IMPALA PLATINUM 3.3%

BIDVEST 3.1% MONDI 2.5%

TOTAL 51.4% Total 62.1%

Page 52: Element

Contrarian stock selection = Good blend

Source: RE:CM Flexible Equity Fund Fact Sheet, 31 Dec 2011

Element Earth Equity %RE:CM Flexible Equity Fund

%

OLD MUTUAL 7.1% SUN INTERNATIONAL 7.6%

MTN 6.8%

versus the Value Funds

DISCOVERY 5.6%

ANGLOGOLD 6.4% OLD MUTUAL 4.9%

SASOL 5.8% AMPLATS 4.9%

TONGAAT 4.9% HARMONY 3.6%

REINET 4.7% HOSKEN CONSOLIDATED 3.2%

GOLD FIELDS 4.5% METROPOLITAN 3.2%

ANGLOS 4.4% OMNIA 3.1%

NAMPAK 3.7% TELKOM 3.1%

BIDVEST 3.1% LONMIN 2.9%

TOTAL 51.4% Total 42.1%

Page 53: Element

Why use Element?

Active Investment process

Voting & Engagement

ESG research

No performance fees

Enhanced Long Term performance

Fiduciary responsibility

Better risk analysis

Equitable treatment of

clients

Contrarian view Blend well

Boutique size Broader universe

Page 54: Element

Thank You

Any questions?

Page 55: Element

Disclaimer

Element Investment Managers claims compliance with the Global Investment Performance Standards (GIPS®). The firm includes all portfolios managed by Element Investment Managers. Element Investment Managers is an independent, owner-managed company.  It provides discretionary investment management services to retail and institutional clients.

Element Investment Managers has been verified for the period 1 January 2003 to 31 December 2009.  Currently being verified to end December 2011. Copies of our verification reports are available on request.

A complete list and description of our composites is available by contacting Ian Jones at +27 21 426 1313, or at [email protected]

Page 56: Element

Thank you

CONTACT DETAILS:• Natalie Smith

[email protected] (083 306 6460)• Ian Jones

[email protected] (071 675 4282)

www.elementim.co.za